School of War - Ep 154: Ben Noon on the U.S.-China Chip Wars

Episode Date: October 22, 2024

Ben Noon of the Vandenberg Coalition writes about US-China rivalry and geopolitics. He joins the show to discuss the critical fight for semiconductor dominance. ▪️ Times      •      01:38 Introduction      •      02:15 Semiconductors      •      05:49 Legacy and advanced chips     •     09:47 China’s chip script     •      14:21 What’s the big deal?      •      19:20 Trade policy     •      25:11 Containment     •      28:10 Ratcheting up tensions Follow along  on Instagram Find a transcript of today’s episode on our School of War Substack

The strategic competition with China is one of the themes of this show, and you can't talk strategy without taking stock of your essential resources. That's why today we're going to talk about semiconductors, computer chips, as you might have said once upon a time. It's more relevant to questions of war and warfighting than you might think, as my guest today, Ben Noon will explain. The specific FD paper we spend the episode addressing isn't out yet, but if you want to preview, you can check out Ben's recent prize-winning piece, at China Talk, winning the next phase of the chip war. Let's get into it.

We shall never surrender. For more, follow School of War on YouTube, Instagram, Substack, and Twitter. And feel free to follow me on Twitter at Aaron B. McLean. Hi, I'm Aaron McLean. Thanks for joining School of War. I'm delighted to be joined today by Ben Noon, who is with the Vandenberg Coalition. He's also the author of a new report called Completing Chips Containment that's come out through the Foundation for Defense of Democracy. and we're going to discuss semiconductors today

and what they have to do with war in geopolitics. Ben, thank you so much for joining the show. Thanks for having me. So I guess, Ben, let me ask a really, really big picture question to launch us. This show is called School of War. We've done episodes on everything from Native American warfare up through discussions of the defense budget.

Computer chips, semiconductors, call them whatever you want, seems superficially like an odd topic to discuss on this show, but when you and I were chatting about this episode, it seems sort of natural to both of us to do it. Why did it seem natural to you to come on to a show about strategy and military history to talk about semiconductors of all things? It's a great question, and thanks for asking you. I think that the way to think about this is to consider that centconductors are effectively the foundation of our modern economy, and that any state that is or is not able to do well in production or a secure purchase of advanced or legacy chips

will be basically left behind the modern economy. So from legacy chips that are required for everything from cars to planes, medical devices, you name it, including everything at DOD, if a country is unable to securely access those chips, they will basically be left behind in the natural competition from here all now. That also includes advanced chips as well. If you consider the the fact that Open AI, all of their success thus far, is predicated principally on the production of Nvidia chips in Taiwan. These are these advanced chips that are only really one company can design and only one company can produce TSM in Taiwan. That, you know, if you're trying to have this to war, the idea is if you want to be able to have a warfighting capability, you must

be able to have access to the chips that the foundation of your entire economy. I know this is a very historically minded podcast. So one way I think about it is trying to be able to be able to have to compare sector to other inputs of economies of the past. So it could be compared very broadly during the Industrial Revolution to steel and iron. So one reason why the British Empire became so important in the 19th century was because it was the first country to produce at scale steel that could be used on the battlefield immediately thereafter. And that same effect is the case here where if you don't have access to produce or to purchase

these chips securely, you will not be able to be able to. will they use them on the battlefield either. So let's just stick with definitions for a moment and make sure we all understand what we're talking about. So I'm looking around the room that I'm sitting in. I mean, I'm speaking into a microphone here. I've got a laptop in front of me. I've got some fancy noise-canceling headphones on the table that I become addicted to. And I don't know how I lived my life before I had them.

Elsewhere in the room, there's a TV. There's lights, which I guess the light fixtures themselves and the light bulbs don't have chips in them. But I guess we don't have to go maybe even in the house. But certainly once we get to the grid, there's chips. involved in that. So these are all what you're referring to as legacy chips and they are like just the lifeblood of everything we take for granted essentially. What's the distinction between, I guess can I ask like a really dumb question? Like what are they? What is it that we're talking about

even at the legacy level? And then what are these higher end chips that you talk about? What distinguishes them for these higher end tasks? Yeah, happy to do that. So the distinction between a legacy chip and an advanced chip is a bit imaginary. But, The idea is to try to separate between the chips that will become determinative for economies of the future from here on out that are required for artificial intelligence, quantum computing, and the most advanced weapons. First is the chips that are required for basically everything else. So if you imagine any micro-electronic good, like you mentioned, the mic that I'm speaking

into, the mic that you're speaking into, they both require legacy node logic and memory chips. These are chips that are, you know, if you go all the way back to the beginning of the, information revolution requires transistors to do these basic computation that are the basis of our modern economy so you have to have for all of these goods what's a transistor oh it's a slow kid in the back of the class which is me to be clear needs to understand what a transistor is yeah so in in the 50s or so the into the information revolution or sorry into the information economy basically allows for the shift into being able to determine when basically electrons can either go or not go, which is the allows for bits between zeros and ones to calculate anything, which is, you know,

very, very basic, but it expanded out infinitely into what is the entire industrial and information economy today. So to distinguish more, about 80% of all chips in the world require or our legacy chips. That's like I said, chips. for cars, for planes, for microphones, for lights, for everything in our economy, and the rest are advanced chips. And the way can distinguish them further is by how U.S. policy thus far has been addressing both of them. Now, advanced ships have been on the agenda for Washington and the United States for the past five years or so. By far as an basis, both Republicans and Democrats have been worried about China getting a dominant hand in the production of the most advanced

ships in the world. Those ships required for artificial intelligence produced by a likes of of SMIC in China and designed by Huawei, you know, Washington's great enemy in China. Those are the advanced chips. And basically since 2018 or so, the United States has been trying to contain China's access to those chips. It began when the Trump administration first sanctioned Huawei in 2019 and then SMIC smic in 2020. And then expanded greatly in 2022 when the Biden administration applied these categorical

export controls on the most advanced ships, so NVIDIA's and AMD's most advanced chips to China, and the machine tools, these gigantic, very complicated tools that are sold into China to be able to produce the chips themselves. That's the first half of the policy agenda, that being a well-established four or five years, this idea of trying to stop China from dominated production of these chips. And that's primarily an export control issue and one that we were thinking about for a long time now. The other half the agenda is on the legacy side. So that side's been mostly untouched by U.S. policy thus far, but it's growing in importance. I can get it that more if you'd like, but just to touch right quickly. China is comparing itself to be a dominant producer

of his legacy chips, which could give it an unacceptable leverage over the U.S. economy in the coming years, which could be excessive dangerous for national and economic security moving forward. So this will be a confession. I've already confessed my technological incompetence. Now I'm to confess my policy, naivete. About 10 years ago, I'd been in the Marine Corps. I came to D.C. I was working in different roles, and I eventually joined a Senate staff. Precisely at the time, you talk about these sanctions imposed on Huawei. I found myself right in the middle of that issue. And I was kind of shocked. This is the naive part. I had been, you know, paying attention to China on some level, writing about in certain aspects of U.S. China competition, focused more, I think, on the purely military

side of things, maybe to some extent on the diplomatic side, a very big picture economic questions. And I was struck when I got to, you know, an element of the U.S. government that was actually in the thick of policy debates, how much those debates really were about chips and tech. And that that was the domain in which the most intense aspect of China competition at the time and maybe we would say today, too, was actually occurring. Like, that's where serious people were focused. So it was sort of an education for me. And I've obviously paid attention to it since. You talk about these American policy measures with the high-end chips and, you know, we're going to talk about legacy chips in a bit.

Presumably, you know, the Trump administration did not wake up one day, followed later by the Biden administration and say, we need to go to chip war with China. We're responding to something. What has been happening on the Chinese side of this equation? What is the Chinese strategy with regard to chips that finally provoked this American response? Yeah, great question, Aaron. I think that the best way to think about this is to imagine semiconductors as the crowned jewel of China's industrial policy strategy for the past couple of decades. If you look closely

enough at all of the supply chains that China has come to dominate over the past three decades or so, there comes to be a very simple script that one can find and understand quickly. It begins with China bringing in foreign capital, foreign technology, and foreign talent, and then the idea being to produce multinational firms' goods within China, that being either Tesla's or chips or what-a-have-you. It doesn't matter what it is, but in every single industry, then once that foreign good, that foreign competitor is inside of China and producing that stuff inside of China, the goal then is to try to spin off a local competitor that is Chinese and based almost

entirely only technology of that foreign company through, you know, this massive IP theft and by copying of industrial practices. And then once you have those competitors inside of China, the goal then is to subsidize and support those firms as much as humanly possible to then annihilate the American or the Western competitor inside of China. Then after they have dominance inside of a Chinese market, the goal then is to try to become the number one player in the world. As Marxists, as those in the Communist Party are in Beijing, they understand the means of production.

And their goals, industrial policy, is for China to become the, number one player in the production of goods across the techno-industrial sphere. They're trying to become the number one player across every major good they believe will be central to competition in this century. They've done so across multiple different industries. Can name them here, steel, shipbuilding, pharmaceuticals, critical minerals, electric vehicles, electric vehicle batteries, so are panels. And now semiconductors, because it is the most important supply chain for the economies of our century, that if they can succeed in becoming the dominant player, either at the advance of a legacy node, they will achieve extraordinary benefits,

both economically and strategically over the United States and as allies. And I think what happened in both the Trump and Biden administrations, they watched this happening in live time and realized that this script is playing for the umpteenth time. And if they were to win in this, the, the danger would be just so much higher. And they also noticed at the same time that there was an ability that Washington actually had its allies to try to prevent that from happening again. I don't know how much listeners are familiar. To what extent listeners are familiar with just the scope of Chinese industrial espionage and the strategic approach that China takes across these different business sectors, strategic in the core sense, that is to say, in the sense of

global domination in warfighting capacity, not strategic in the sense of business strategy. My favorite, I may mingle the details here because I'm doing this for memory, but it doesn't actually involve chips, but a couple of Chinese nationals who were graduate students in Arkansas, may have been the University of Arkansas. I can't remember exactly. Arrested at the airport, I think at Memphis, with experimental rice that they were smuggling out of the country, which, you know, it's sort of, it's like chuckle-inducing when you first think about these guys are stealing the rice. But actually, it would be. You think about rice production, food supply, and if you can get like a fraction of a percent

advantage in terms of resistance to this or that, challenge, like, you know, water availability, whatever, you know, that's a pretty significant deal. It's a lot of money and potentially has, you know, survival significance all its own. You can see why they're up to it. So they're literally stealing the rice. And when it comes to semiconductors, as you put it, the challenge is acute. Can I ask you like, it's almost a philosophical question. So, you know, feel free to tell me this is unfair.

But I'm curious to know your answer. You sort of ended your remarks with, you know, the danger will really be acute if China were to achieve its goals in the semiconductor space in particular. I mean, why? Like, why do we really care that much? Our economy is still going to be pretty big. We've got nuclear weapons. You know, there's the Red Dawn scenario is not realistically going to play out where we're going to wake up to find, you know, Chinese troops parachuting into, into be callic American high school athletic complexes. So China runs the table on a bunch of different markets.

Like, why do we really care? What's the big deal? It's a great question. I'm really glad you asked it. I think there's two reasons to think that it would be very important if China were becoming the dominant player in production of chips, either in legacy or in advance. Let's just start in legacy chips. So if legacy chips are the basis of the market economy has been saying repeatedly,

and China will become the dominant producer of those chips, as they might do in the next coming years. So right now, China produces about 30% of all legacy chips, and they're slated in the coming decade to increase that dramatically, maybe to 50% or so, we could say. If that were to happen, they would get a stranglehold over our economy and have basically a hand on our economic neck that would make it impossible for us to act independently of Beijing.

What that would effectively mean is twofold, two things. One is it would encourage, first of all, it would, enable and then encourage China's economic coercion on the United States on a much, much broader scale. So until now, Washington has observed one by one its allies be

bullied by Beijing, whether it's Japan or rare earth minerals or it's Australia because they asked for an investigation in the origins of COVID. Beijing blockaded all Australian goods or Lithuania when they had a they opened up what's called a Thai water representative office. The same thing happened.

or when South Korea accepted American defensive systems and fad, they had their tourist sector destroyed, but the Chinese are attacked by the Chinese. These are all instances of behavior that actually hasn't really happened to Washington yet. Because China knows because they don't have enough leverage over our economy to try to so blatantly and brazenly coerced the United States. I think that if China were to grab another critical supply chain

in legacy chips, that calculus might change. They already produce all of the inputs required for our pharmaceuticals. They already produce all of the solar panels that we install. They already produce all of the critical minerals that are required across our economy. If they were to add another massive piece in the industrial policy strategy, that could change their calculus very simply in a very big way. I think that we couldn't imagine it today,

but the way that Beijing would treat us might change very fundamentally, if that were to change. That's one. And then two, to make it even worse, I think that it would actually increase China's odds of attacking Taiwan by a significant degree. You know, remember in 2022, one reason among many

that Vladimir Putin decided to invade Ukraine was he believed that because Germany and France and the rest of Western Europe relied so much on Russian oil and gas, that they wouldn't dare do anything to stop him in his invasion of Ukraine. No, that logic didn't actually play out for Putin. to be hip than he actually expected it to, but he Chinese

might believe that too. And he has much more leverage over our economy than Putin ever had over Germany or the rest of Western Europe. So I think it's a, you know, philosophically, I think it is a really big deal. Yeah, thanks. That's really well put. You mentioned the Chinese going after the South Korean tourism industry. I was actually there for a few days in the midst of that particular episode. And I don't mean to downplay it. I mean, China obviously is a huge source of tourism revenue for South Korea. So when they cut it off, that really hurts people. It's a lot of money.

It hurts, hurts a pretty significant sector of the South Korean economy. That said, it was very amusing to be there at the time because Chinese tourists throughout East Asia kind of have the reputation that the quote unquote ugly American tends to have abroad. You know, you picture sort of us Americans with our, you know, American flag tank tops and our cameras shouting loudly, you know, around the Eiffel Tower. Like that's the, that's the vision that other Asians have. busloads of Chinese tourists. So it was very funny at the time, because as much genuine pain as was being caused, the sort of average Korean on the street found the humor in it and would say things to the effect of, oh, no, no more Chinese tourists.

God help us, please, you know, what will you do next? Ban them forever? You know, it was, it was amazing. So, okay, so let's come back to American policy then. As you point out, there have been several rounds of policy measures introduced, whether involving the Congress or the executive, designed to go after China's ability to dominate the market in high-end chips, chips that would allow you to, you know, work in AI. I'm going to make this out of quantum, you know, all this sort of very cutting-edge stuff that involves very complicated

data problems. You can tell from the direction that sentence is going that I need to cut it off because at a certain point my understanding cuts off. But you, in this report, in some ways, this is what's novel about it. You want to draw our attention to the stuff that makes the microphone work and the dishwasher work, the legacy stuff. What's next here? What's the new frontier of this competition and what world do the legacy chips play in it? Yeah, thanks. Thanks for that.

I think what's so different about the legacy chip problem is fundamentally the policy outlook that Washington can take on this issue is totally different than what Washington's be able to do on advanced chips. So on advanced chips, the solution until now and probably will be for the future has been export controls. Because back in 2018, all the way until now, I'm continuing through now, China requires foreign technology to make those super advanced chips. Even today, Huawei still uses machine tools that were produced in the United States

and in the Netherlands and in Japan to make their super advanced chips. And the agenda there will continue to be, how can we stop China from using our technology to accomplish this goals and advanced chips? On legacy chips, the story is actually very different because China already has technology on a scaled basis to make those chips at home. For two reasons. First of all, because China has been, to an eye-watering degree, been stockpiling American and foreign technology to make those chips for the past three or four years or so. Since 2020, China has been by far the number one purchaser of machine tools and technologies required to make these chips.

And that's entirely because they know that at some point we might target those. technologies and therefore it's going to buy as much as they possibly can of it. You know, months by month, that number actually increases. And right now, for all of the main technology producers required to make chips, China is about half of the entire market for all of those companies. So ASML, the very famous Dutch firm that makes the most exquisite tools required to make advanced chips and legacy chips, that company, half of all their sales good at China. That's because they bought all of this stuff they already need to make these chips already.

That and also because China's starting to very quickly actually build up a domestic source of those technologies so they can build their own firms to make those chips in their own effectively. The point of them is to say that export controls for legacy chips simply wouldn't work. Okay, if that doesn't work, what happens then? Where we go from there? The next place that people might naturally want to go to would be subsidies, right? So we had a Chips Act in 2022 that subsidized the production of American chips at home. that would be a debt chips primarily. Why not make another chips act that would just do the exact same thing,

subsidizing legacy chips as well? That might be and probably should be part of the policy mix here, but alone it almost certainly wouldn't work. That's because, like I said before, China's industrial policy strategy, in essence, it is mercantilist. And the idea and the design for it would be to try to annihilate all of the American benefits on price,

of producing chips at home. The best example here we can turn to would be acting the solar sector. So back a couple of years ago, the Biden administration passed the Inflation Reduction Act, which was designed to basically supercharged community revolution at home. A key pillar of that was for solar panels, meaning that to try to purchase as many panels as possible and install them, and also to build them at home as well. At the beginning of that time in around 2022 or so, there was an opportunity for the administration to actually tariff Chinese solar panels that were being funneled through Southeast Asian countries. The administration declined voluntarily so that we don't want to apply those tariffs because we want to accelerate the purchase of those panels first,

and then we'll also incentivize producing them at home as well. Two years down the road, just a month or two ago, the administration decided to actually apply that tariff because they realized that the prices of these Chinese solar panels were so low. that there was no actual incentive or an effective incentive for producers even subsidized to make solar panels at home. And now we're two years in and the U.S. production of solar panels was way behind what it was supposed to be. The message of that simply is that subsidies alone can't work because China can flood the U.S. market with artificially low-priced goods. The solution then brings us all the way to hear of something that has been anathema in Washington

for a long time, but the solution simply is. is trade policy and market protectionism. The logic effectively is that only if you block goods containing Chinese-made legacy chips in the U.S. market, only then will there be an incentive, a proper incentive, for producers to make chips outside of China. That's the idea there. That is the logic. It's a little bit complicated.

I can get into it if you'd like, but the idea effectively is to apply either tariffs or reject outright Chinese chips from our market. No, let's get into it. think it's, you know, I think it's something we all need to wrap our minds around, which is that the dream, I think, and frankly, at a headline level, I think people have, is just what does it mean? But that the dream of, you know, a liberalized level international economic playing field, the sort of free trade dream, appealing as it is, simply cannot function with China as a member because of all the reasons you've just outlined for the last 25 minutes, that China takes those rules and cheats, not to make a buck necessarily. not as their primary goal, their commies, after all, but for geopolitical dominance. And by the way, they are making plenty of bucks, depending on how you want to count it. So no, please, let's talk about what a trade agenda that tackles this particular issue would look like in more detail.

And I guess, I mean, just to state the obvious, like, the issue is if there was economic coercion that cut off legacy chips to the United States, I mean, that is just, that is a catastrophic weapon that could be employed, right? I mean, at core, that's the stakes. That's right. Yeah. So I think that the agenda here, as I said a second ago, would be to try to deny entirely goods that contain Chinese-made chips. Now, it's not actually a simple-

That's a lot of stuff, right, Ben? I mean, that's a lot of stuff. I haven't done an inventory of this room that noise-canceling headphones or Apple headphones, so I'm guessing they're implicated. So now you're going after like Core McLean interests or national interests of my day-to-day life. pleasing dates. That's right. Yeah. So to break it down very simply, when people tend to imagine a trade war or trade measures, the first thing you imagine is you just apply a tariff, say, on a Chinese car. A Chinese car may not enter the U.S. market, where if they do,

they have to pay a 100% tariff where it'll be double the cost effectively. That approach, unfortunately, wouldn't work in this circumstance because of the way that chips are importing the U.S. market. So there actually already is a direct tariff on Chinese-made legacy chips. Currently, the Trump administration first supplied those in 2018. It's a 25% tariff. Biden actually increased that tariff in May to 50%, but the effect has actually been pretty negligible, at least in the issue we're talking about right now. Because when you import a Chinese chip, it's not as such. You don't go on and just purchase a chip and get shipped here. It comes in a broader good. So the thing about it this way.

When you purchase a television from China, that might include a Chinese-made chip, whereas in the past, it might have included a foreign chip. Now it would include a Chinese-made chip. That would, U.S. policy necessarily would have to target those goods as well, or else it simply wouldn't work. The implications of that would certainly be very broad, but in my view, it's better to act on it now than later. As I mentioned right now, American reliance on Chinese-made chips is negligible, if very, very

low and it's almost had to increase dramatically in the coming years. So why not do it now when it costs almost nothing to do versus doing it in five or 10 years when it would cost, you know, it would the inflationary cost to that would be almost unimaginable to do that. We wouldn't even caught it by doing it. So why not do it now when it costs very little instead of doing it later, we're not doing it at all. So last question for you here, Ben, and you sort of address it just how you close this most recent answer, but I want to sort of attack it head on. I could imagine critics of what you just outlined coming at you in the following way. And I could imagine this coming from the left or the right, for that matter. What's your saying, what's your proposing is

highly provocative. When we have so much to worry about, we have tensions in the Western Pacific. We've got sort of real hard power, hot war considerations. Why do we want to ratchet up tensions in this particular economic area of competition, why wouldn't we seek accommodations where we could rather than going to war over things that power, you know, are televisions? What's your response to that? The idea in this is to try to save our skin for later,

that when China, in my view, tries to calculate whether or not it will economically coerce a country, it conducts a kind of balance of leverage of how much power economically does China actually have the other country. And if it hits a certain degree, it might conclude that, yes, we actually can do that. A good example of as a look at actually not very well-known case, but a very important one, is in Micron in China. A couple of years ago, American firm called Micron, which produces memory chips in China, was targeted by Beijing, and their chips were effectively banned across a broad swath of their sector. Basically, anything to do with the Chinese government,

you couldn't purchase those chips for. The calculation there wasn't simply that Beijing wanted to say, we all left an American company and therefore we're going to butt you out. It was based on, in my view, a very hard and very smart calculation of the balance of leverage of how important micron actually was for Beijing. That means, but my point is, is that China doesn't actually need micron because they had their competitors in South Korea, Samsung, and S.K. The reason why I'm explaining all is to say that the longer that we wait to do all of this,

the more the balance of leverage will tilt more and more in Beijing's favor and against us. And so if we aren't to take these certainly in the very short term to stabilizing measures to try to secure our economic security, that in the longer term, it will be have pretty immense consequences for our, you know, security and our relations with China. And I think that it will have a long-term stabilizing effect over the relationship, actually, and not a destabilizing one. Ben Noon, author of Completing Chips Containment, just out from the Foundation for Defense of Democracies. Really, really interesting conversation on a really important topic that people should understand more about than I think on average they do if they want to understand the nature of the competition between the United States and China. Thank you so much for making the time today.

Hey, thanks, Aaron. This is a nebulous media production. Find us wherever you get. your podcasts.