SSU Forum “US-China Competition over Innovation Strategies and High-Tech Industry Development Policies: The Current Situation and Implications for the Future”

On the morning of March 8, 2022, the Security Studies Unit of the University of Tokyo Institute for Future Initiatives hosted a public online symposium entitled “US-China Competition over Innovation Strategies and High-Tech Industry Development Policies: The Current Situation and Implications for the Future.” Dr. Adam Segal (Ira A. Lipman chair in emerging technologies and national security and director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations) and Mr. Shingo Ito (senior economist at the Institute for International Economic Studies) were invited as keynote speakers, and Dr. Ding Ke (senior research fellow at the Institute of Developing Economies of the Japan External Trade Organization) was invited as a panel discussant. At the beginning of the symposium, Professor. Kiichi Fujiwara (professor at the Graduate Schools for Law and Politics of the University of Tokyo and director of the Security Studies Unit of the University of Tokyo Institute for Future Initiatives) delivered an opening address. Dr. Ryo Sahashi (associate professor at the Institute for Advanced Studies on Asia of the University of Tokyo) served as a moderator. It should be noted that this symposium was held as part of a research project entitled “US-China Competition and Securitization of Critical and Emerging Technologies: Evaluating Policy-making Process and Impacts on Globalized Economy,” which is funded by subsidies from the Ministry of Foreign Affairs. The summary of the symposium is provided below.

1. Keynote Presentation
Dr. Adam Segal and Mr. Shingo Ito delivered keynote presentations on the current status of and issues surrounding the innovation policies of the United States and China. The gist of the presentations is provided below.

First, Dr. Segal gave a presentation entitled “U.S. Response to the Rise of China as a Science & Technology Power.” In this presentation, Dr. Segal observed how the US innovation system is stressed by China’s rise in the field of science and technology, explained the characteristics of the policy responses adopted up until now by the US government and Congress, and clarified future challenges to be faced by the US.

Dr. Segal first pointed out three characteristics of the US innovation system in the past 70 years after World War II: (1) huge research and development investment by the federal government; (2) promotion of advanced research at universities and human resources development; and (3) commercialization in the private sector. Then, he said that China’s rise is currently putting this US innovation system to the test. Specifically, he pointed out that the following questions are being asked: What role should industrial policy play? To what extent should the US economy be open? What global role should the US play? What relationship should the military have with the private sector? As for the trend in the US industrial policy on the basis of China’s rise, he pointed out that the US has four intentions: (1) to develop faster and maintain its advantages (run faster); (2) to strengthen supply chains in semiconductor manufacturing, etc.; (3) to slow down China’s economic growth (slow down China) through measures such as technology regulations and sanctions against Chinese companies; and (4) to secure the coherence of research, with China’s Thousand Talents recruitment plan in mind. Concerning future challenges to be faced by the US, he pointed out three problems. First, there is a situation where China itself is decoupling from the global economy; in other words, China’s involvement in the global economy is insufficient in comparison with its economic power (an aspect of unfairness in industrial policy). Second, although there is bipartisan agreement in Congress on the need for industrial policy, no agreement has been reached concerning specific legal measures that should be adopted promptly; this is the most worrisome problem. The underlying reason for this is resistance by the opposition Republican Party, which does not want to let the Biden administration score political points ahead of the midterm elections in November this year. On the other hand, during this time, China is promoting investment in its own science and technology base; this might be lost two years for the US. Third, decision makers in the US government agencies and departments and in Congress tend to fall into a perspective based on the traditional framework of industrial policy, and they do not have sufficient policy information that conforms to the present situation. He emphasized that whatever the case may be, the US innovation system is currently in the process of realignment.

Next, Mr. Ito delivered a presentation entitled “The Chinese Government’s Financial Support for the Semiconductor Industry: Further Strengthening Support Despite Dilemma.” In this presentation, Mr. Ito focused on one of the characteristics of the measures for high-technology industry development that have been adopted by the Xi Jinping administration—namely, strengthening financial assistance for manufacturers and doing so “by stealth.” “Strengthening financial assistance by stealth” here means that in addition to reinforcing the Chinese government’s existing assistance programs, which are similar to subsidy systems, more focus is placed on the introduction of private-sector funds (for example, demanding that commercial financial institutions increase medium- to long-term lending). As a result, certain results have been achieved thanks to accelerated development of the high-tech industry; however, as side effects, Japan, the US, Europe, etc. have been voicing criticism over the lack of transparency of the Chinese measures, and problems relating to redundant investments and the creation of too many inferior investment projects. The level of China’s semiconductor self-sufficiency is still low, and its global shares of semiconductor materials, semiconductor production equipment, etc. are limited; therefore, there is a call for extending the industry development measures. On the other hand, there are the above-mentioned side effects. Mr. Ito’s presentation mainly studied how the Chinese government, faced with this dilemma, operates its assistance measures for present financial needs and examined their policy implications.

Mr. Ito then presented views on China’s future developments and their implications for Japan. The Chinese government plans to more actively provide financial assistance to the semiconductor-related industries; the merger of semiconductor-related companies for the purpose of elimination of redundant investments, etc. will be promoted further, but the number of semiconductor-related companies itself is increasing at a faster pace. Under these circumstances, the expected effect is that although the possibility for emergence of an oversupply problem originating from China for semiconductors at advanced technology nodes (10 nanometers or below) is low because exports to China of items required to produce such semiconductors are currently restricted, there is an increasing risk of global oversupply of semiconductors at mature nodes (over 10 nanometers) because not only China but also other countries are actively increasing their assistance to and investment in the semiconductor industry for such semiconductors. Furthermore, the monitoring of what the Organization for Economic Co-operation and Development (OECD) calls “below-market finance” (government-led financing with favorable conditions, investment at low interest rates by banks, etc.) is important in securing fair competition in the semiconductor industry in the world. In addition, the global expansion of competition for subsidies in the high-tech industry with little attention to the World Trade Organization (WTO) rules is not necessarily favorable for Japan and other industrialized countries with limited fiscal capacity; the challenge is to secure consistency with the WTO rules.

2. Panel Discussion
Following the keynote presentations by Dr. Segal and Mr. Ito, Dr. Ding Ke made remarks as a panel discussant. At the beginning, Dr. Ding pointed out that Dr. Segal’s presentation and Mr. Ito’s presentation both analyze broadly-defined industrial policies including US and Chinese science and technology polices, and the presentations mention specific policy targets, methods, and effects. Then Dr. Ding asked Dr. Segal and Mr. Ito three questions.

The first question is what level of cost is acceptable for the US and China for industrial policy aimed at reducing mutual dependence. Dr. Ding here referred to the fact that although Qualcomm, a major US semiconductor firm, saw its share in the Chinese market decline temporarily due to the intensifying conflict between the US and China, the market share in China has tended to increase in the past several years. In other words, he asked whether the government will continue its industrial policy even by disregarding business logic. The second question is how to understand the fact that the deeper the conflict between the US and China, the more active the mutual learning mechanism in the context of industrial policy methods becomes—in other words, the more the mutual imitation of each other’s policy methods occurs. The third question is under what conditions industrial policy functions. As an example, Dr. Ding referred to the tendency observed in the semiconductor value chain in China—namely, that government policy functions more effectively in production of electric vehicles using lithium-ion batteries (a downstream sector) than in semiconductor production (an upstream sector). He asked how to understand this tendency.

Dr. Ryo Sahashi, who served as a moderator, pointed out that Dr. Ding’s comment seems to have brought to mind once again the fact that government-led approaches have both advantages and disadvantages. Dr. Sahashi also presented the argument made by Dr. Mariana Mazzucato of University College London that the government should invest through research and technology development, and this may lead to innovation. Dr. Sahashi said that what Dr. Ding pointed out is interesting because it presents a perspective contrasting with Dr. Mazzucato’s argument.

Then Dr. Segal and Mr. Ito responded to the three questions asked by Dr. Ding.

Dr. Segal stated that the US administration currently seems to have no clear answer regarding the cost of decoupling. He also said that it is true that mutual dependence in the market cannot be ignored, and from this too, it can be assumed that the US government’s support measures for the semiconductor industry will probably be more like a surgical strike than a sledgehammer blow. Furthermore, he said, the US has no choice but to take into account the strengths of Chinese companies, while maintaining its own advantages, and the US will probably be forced to make a tough decision on which areas should be chosen for promoting commercialization. He added that concerning policy tools, the focus is likely to be ultimately narrowed down to areas that are expected to produce explicit results, instead of spending too much time on basic research.

Mr. Ito stated that on the premise that it is impossible to achieve total decoupling, the key is how to select areas that are indispensable for national security, and in this context, studies will probably be carried out on how to develop the country’s own industries while paying attention to national security and accepting certain costs. On the other hand, he said, although dual-use technology is spreading rapidly, it is unrealistic to unlimitedly extend economic security areas, considering factors such as financial constraint, as the importance of a “small-yard, high-fence” strategy is often pointed out; in this context, it is important to set rules based on international cooperation, and the best answer should be found through such rules. Furthermore, he said, as pointed out by Dr. Ding, the particularity of China’s industrial policy may be emphasized excessively, but the Chinese government is being urged to improve transparency; improving transparency is important also to formulate international rules with the participation of China. As for the effects of industrial policy, he said, although it is true that supporting the downstream industry helps develop the upstream industry, there are cases of excessive investment in the downstream sector; therefore, it seems to be necessary to take this factor into account in measuring success and failure of industrial policy. Finally, he emphasized the importance of designing the overall framework of the national innovation system, including human resources development, instead of focusing only on financial assistance measures.

3. Question-and-Answer Session
At the end of the symposium, Dr. Segal, Mr. Ito, and Dr. Ding answered questions asked by the audience.

The questions addressed to Dr. Segal include the following: Is it right or wrong for Japan to participate in the US-led technology alliance, together with other partner countries? To what extent is it possible to slow down China’s innovation? Are there any similarities between the technology competition between Japan and the US in the 1980s and the present competition between the US and China? What policy should Japan pursue?

Dr. Segal responded by pointing out that the US, in cooperation with Quad alliance members, is currently considering implementing measures that would go beyond containment of China, and the focus is placed on bilateral approaches—for example, joint investment between Japan and the US. Regarding this consideration, he argued that investing on a priority basis in areas where Japan and the US have technological or financial advantages, including the 5G communication sector, may help clarify certain choke points. He also said that although he mentioned the “run faster” strategy in his keynote presentation, it is difficult for the US alone to slow down China’s innovation, and after all the key will be a certain type of international cooperation. And, he said, Japan is an ally, not an enemy, for the US, and this is an explicit difference between Japan and China; furthermore, as dual-use technology is spreading rapidly, the cost to put into practice the “small-yard, high-fence” strategy is not small. In connection with this point, he argued, there is a form of mutual dependence that is different from the previously identified one; for example, as seen commonly in the artificial intelligence field, innovation is dependent on Chinese researchers studying in doctoral programs at US universities.

The questions addressed to Mr. Ito include the following: What policy should Japan pursue? Why are the technology and digital fields considered more important than the food and healthcare fields, in terms of national security? Why is the semiconductor field particularly important? What is the current status of human resources development in China?

Mr. Ito responded by emphasizing that as for Japan’s future policy development, the key is to develop human resources who can contribute to innovation. Instead of only inviting foreign semiconductor manufacturers to Japan, he argued, it is also important to develop and supply human resources, strengthen the role of universities in developing human resources, and promote international research cooperation; the importance of these measures is being pointed out also by the industrial world. Concerning the status of human resources development in China, he pointed out that a huge amount of investment is made in human resources development mainly in the artificial intelligence and semiconductor sectors, and from a medium- to long-term perspective, incentives such as large compensation for invention are provided. Furthermore, he said, although food security is still considered to be one of the extremely important challenges for China, the creation of new industries through the use of data, which is commonly referred to as the Fourth Industrial Revolution, has been receiving attention recently; under these circumstances, securing cutting-edge semiconductor technologies is inevitably recognized as a national industrial competitive power, and even as a national security challenge.

A question was addressed to Dr. Ding on why China succeeded in developing lithium-ion batteries. For this question, he explained that one underlying reason for the success is that the Chinese government has adopted a white list system under which the government provides subsidies for purchases of electric vehicles equipped with batteries produced by companies on the white list.

*The conference was organized by subsidies from the Ministry of Foreign Affairs of Japan.

=SSU Forum=