Sharp Tech with Ben Thompson - Questions, Concerns and Unknowns after the China Chip Ban

Episode Date: October 18, 2022

The narrow purpose of the latest US export controls, the broad attack the Chinese government will likely perceive, why heightened American attention to Taiwan could be dangerous, and a variety of unknowns as the world awaits the next steps.

Hello and welcome back to another episode of Sharp Tech. I'm your host, Andrew Sharp, and on the other line, Ben Thompson. Ben, how you doing? I'm doing okay. I'm doing okay. As long as there are no missiles flying overhead, everything is good. A day at a time over there. It's a big week, to be honest with you. I mean, we've got the NBA season kicking off, and we've got earnings right around the corner.

So you're about to have a lot more fun with the daily up. I mean, it's all happening here. We made it. Made it where? I'm not sure where we're going. You know what? We made it to the NBA season and good luck. All our thoughts and prayers are with you throughout the earnings season. No, our thoughts and prayers are with the Milwaukee Bucks to win the title. So let's be clear on our part of this. Let's channel all our positive karma out to Janus and Chris Middleton. We are going to start today with China in the course of. Metaverse week last week.

We all got carried away celebrating the photo realistic avatars and avatars with legs. And we did not get a chance to talk about what's a pretty massive story. The latest. Yeah, I do have to give a pitch. Our dithering today, actually,

we did an extra Metaverse episode, an extension of Metaverse week. And I think I actually have a more developed take. So everyone should go listen to that. But after you listen to this episode. episode. So that's my pitch. There you go. Well, we'll update you guys on the scene in China and the implications of the most recent Biden regulations and then go check out dithering. But as far as what's in play, for anyone not familiar with the story on Friday, October 7th, the Biden administration

published a sweeping set of export controls that will effectively bar the export of chips, machinery, components, and IP that's essential to the growth of China's semiconductor industry and particularly its AI capacity. And I'll read two excerpts just for additional context. First, the New York Times provides a good summary of the way these changes have been viewed by people inside tech and outside of tech. They write, technology experts said the rules appeared to impose the broadest export controls issued in a decade. While similar to the Trump administration's crackdown on the telecom giant Huawei, the new rules are far wider in scope affecting dozens of Chinese firms, and unlike the Trump administration's approach, which was viewed as aggressive but scattershot,

these rules appear to establish a more comprehensive policy that will stop cutting-edge exports to a range of Chinese tech companies and cut off China's nascent ability to produce advanced chips itself. Is it nascent? I always thought it was nascent. Oh, my God. We're learning so much about your pronunciation struggles here. The adventure continues.

Absolutely. Nassant. Oh, my God. All right. And then a Twitter user named Tanner Greer had a giant thread on the implications for the U.S. China relationship and how this might be perceived in China. And so I'll read part of that thread.

He says, here we are not declaring our intent to probably stop the CCP from achieving its historical mission in some far away future where they might take the worst path for doing so. No, we are actually stopping the party in its tracks today. This isn't hypothetical. It isn't ambiguous. It isn't about something they might do one day, which is a. of course, a reference to Taiwan. They have the goal to make China the leader in 21st century

technology, the cutting edge of science and industry. They view this aim as both central to the historical mission of making China great again and to preserving the security and safety of their people. It is at the center of all their plans and dreams, military, economic, even demographic and political, really. And that cross-linkage is, of course, why we made the decision to clamped down in the first place. They were the first to fuse it all together, so we have followed the thread back to its center and declared war on the future of China, its future military capacity, technological advance, and economic dynamism. We are now officially, openly, in the business of making sure China will not rise higher. If this must be done, better to do it sooner than later. Perhaps we

are too late in doing it, but that is what we were doing. were closed this week, doors that may not open again for decades. And then there was also a Chinese analyst who told Bloomberg, there's no possibility of reconciliation after these rules were implemented. I also saw the term industry-wide decapitation thrown around. So obviously, there are a lot of heated reactions to what the Biden administration did about 10 days ago. What's your prevailing reaction to where we are right now? I mean, it's a big deal. It really is a big deal. First of, I highly recommend Tanner Greer. He has also a great site called Scholarsstage.org. There's a hyphen in there to search for it.

Very insightful sort of observer. I actually met him in Taiwan years ago. So I wrote a piece earlier this year after the Russian invasion of Ukraine called Tekken War, that, sort of drew the connection directly to China because it was very much, you know, is China going to support Russia? Are they going to oppose them? It was sort of up in the air. I think it sort of settled that they're not explicitly breaking sanctions because U.S. sanctions are extremely powerful and can really, you know, break a company as we've seen with Huawei. And I think that's an important point we can get to. But in that article, I got to some of this chip stuff. And it's like, well, how is the U.S. going to think about what really is their biggest lever sort of over China and the Chinese economy broadly?

There's a short-term sort of hammer where you sort of set China back. There's a medium-term, you know, long-term competitiveness. But then there's a long, you know, the long-term, when and if China develops their capabilities independent of the West, then there's like no more sort of check on on them from a Western perspective beyond a military one. And I think the most important takeaway from a U.S. perspective is that the decision has been made. Like I do think this is the closing of a door. It's very clear that there is not going to be an attempt to sort of offer a carrot in terms of China needing access to the sort of high-end technological. capabilities and saying, hey, you know, let's all row in the same direction.

Let's be broadly on the same team. Let's work towards the worldwide system, you know, of economic growth that has greatly benefited, you know, China in particular. And it's sort of setting the U.S. in direct opposition to China. I just don't think there's any way to escape that. And it is very interesting to think about the motivations of the different parties. the U.S., and we'll probably get to this a little bit,

but the U.S. has, I think, attempted to craft these more narrowly that they're being portrayed. Like, this is really about sort of high-end AI capabilities. And so this is definitely in line with some of the stuff we've been talking about. And I think a lot of the talk you've heard this week about, you know, U.S. companies or all companies completely barring U.S., you know, their citizens from working with Chinese companies. I think that's going to be a million a fair bit. I think the U.S. has every intention of allowing these companies to support Chinese

manufacturers in trailing node sort of manufacturing. Like the stuff that goes into dishwashers or cars or even, you know, computers and smartphones to a certain extent. And it's saying, oh, hey, you can do all the stuff up to now, which, by the way, is by far the largest volume of chips and is important to the U.S. in a couple ways. important, number one, that U.S. companies make a whole lot of money selling the stuff to China, like a third of the revenue of a lot of these sort of companies. And then number two, chips go into a lot of the stuff that's made in China that we consume in the U.S. And so I think the goal

from a U.S. perspective, the administration perspective, is to allow that stuff to go on and just limit this sort of this AI capability on the high end. I think the challenge, though, is, is that may be your intent, but that's not how it's necessarily going to be taken or interpreted. And it's always hesitant to speak with any sort of authority on China or how China views things or thinks about things now more than ever. That, you know, there's fewer and fewer people in China. Even when people are in China,

I think it's very difficult for people in the West, particularly Americans, to understand China. And I absolutely put myself in that category. I think I know more about China and understand China much more than your typical American, but that's like saying, you know, like a low bar, six, yeah, a five foot 10 person's taller than a five foot four person. You're not playing NBA basketball regardless, right? Just sort of like, you know, tie this back in the beginning here.

But I do think the way this will be interpreted in China is a sort of declaration of economic war. And I hesitate to use those terms. But China does have one very queer sort of economic weakness. It's this sort of super high end, high precision manufacturing. And there is no higher end and higher precision manufacturing than semiconductors. And the U.S. has basically said, nope, you can't have it. And we are going to do everything in our power to make sure you don't get it. And there's lots of questions as to how effective this will be, like,

if it will matter in the long run. But I think the important takeaway is exactly Tanner's point. Like this is, if the Trump administration put their hand on the door, they're like, look, we can do this. We can cut you off from this. But I think, you know, Trump in general is a very sort of transactional sort of, you know, that's the best way to understand a lot of the stuff that he's done.

And I think the intention maybe there was, look, we could give this back. We could like do what we say. we can negotiate this. And the Biden approach is much more sort of categorical and like, no, there is no negotiation. The door is closed. Well, yeah. And correct me if I'm wrong here, but because this was so categorical and decisive, the way I read it is that all of that is indicative of real national security concerns. And this is not necessarily about gaining an economic advantage over China or using this access as leverage to get China to do what everybody wants them to do. It just seems like I don't know what intelligence this is based on. I wonder whether

the threat of militarized AI is further along than we know or whether the U.S. has intelligence that says China's AI efforts are further along than we previously thought. But if they were trying to use this as leverage or trying to give themselves a leg up economically and industry-wise, I'm not sure it would have made sense to just rip the Band-Aid off and ban everything like in one fell swoop. And so it's going to be really interesting to see how China responds because it does seem like there's no coming back from the decision on October 7th. Yeah, I mean, I think you're right. The only justification for this sort of extreme measures, which again, don't just hurt China. And they hurt China

militarily, but also economically. But they also really hurt U.S. companies. Exactly. Like this is, and it runs the risk of retaliation that can hurt the U.S. further, is a sort of national security concern. And what it comes down to is a basically decision and evaluation. by the Biden administration that China is the enemy. And therefore, military national security considerations should outweigh economic considerations, should outweigh the impact on U.S. companies. It should outweigh basically the globalized order that China came up in. And, you know, China has benefited significantly from coming up in the globalized order.

That's why they could be the sort of manufacturing base for the world. in China is still extremely export oriented. I think over half their GDP is still in exports. And that's been to the benefit. But the tradeoff has been as they focused on these areas, I think we talked about this a few weeks ago, on, you know, starting with labor intensive areas. But China at this point is far beyond having a labor cost advantage.

Like their labor is quite expensive, actually. But they have all this entire infrastructure base. Yeah. capacity is their advantage these days. That's right. What capacity and just like they know how to build stuff like the U.S. kind of doesn't for a lot of stuff anymore as we've sort of been discussed at nauseam the last few years. And that's a reason to build stuff there. But they could focus on that and not focus on things like semiconductors because they could just buy them.

They could just buy that from the U.S. And so China, you know, I think China similarly feels very stuck because they never did. develop these sort of capabilities. And so they now have to go and figure out not just how to make chips, but how to make the equipment to make the chips, right? Like, like, this is the most difficult sort of stuff, sort of known to man. I think, you know, there's so many angles to take this. But one of the big questions and unknowns is how long is it going to take China to figure out

how to make this. Right. It's a real unknown. Like, like how on one hand, they know what is possible, right? It's a lot easier to build something that you know that's possible. versus sort of invent something completely new. And that's always an advantage for a company, for a country, I should say, that's catching up as opposed to sort of inventing the future as it were. So they know it's possible.

Number two, they are building lots of stuff on older equipment and they have the equipment in hand and they can take it apart and they try to figure out a backwards engineer it and do all these sorts of things. And then number three, there is a high motivation to figure it out. And this motivation bit's interesting. The government has had it, the Chinese government has had as a priority to figure this stuff out for a long time. But there's a big difference between the government pushing you to do something versus a real sense of life or death. We have to figure this out or we're screwed, right? If you're a 10 cent or you're an Alibaba or you're sort of a large, you know, Chinese company, your motivation, Huawei certainly has this, has this now. your motivation and drive to figure this out when your very sort of livelihood and ongoing

capabilities as a company are under threat is a lot different than a government bureaucrat telling you to do X, Y, Z, and here's a bunch of money to do it, right? Money is not the limiting factor in so much of this stuff. It's really drive and motivation and the cultural expediency to figure it out. This is why startups beat big companies. Like startups are flexible. they are they are are not limited by bureaucracy

they can sort of and they have to figure it out or they're going to die. Big companies have lots of money we see that again and again that's not actually what matters like that's why they sort of fail all the time and all of Chinese industry

is now sort of in startup mode when it comes to figuring out silicon and how to manufacture it and how to move further down the capability. Yeah well and I think they've been throwing a lot of capital at this particular problem over the last 10 years as well. So it's not.

Right, but to not to not much effect to be honest. Totally. Because capital is not the issue. And I think this is something that's hard for government in particular to understand. People in government tend to think that they like to be in government. Listen, we just did it in this country. The chipsack were throwing billions and billions of dollars at a problem and assuming that's going to solve it.

And it probably won't, at least in the near. term, but everybody, that's the solution that makes the most sense to every bureaucrat in the world, whatever the system of government might be. That's right. This is not like a communist thing or a democracy or whatever. It's a reality of business sort of thing. Like you figure stuff out when you have no choice but to figure it out. The incentives are very aligned for every entity in China to figure this out.

today, you know, up until October 7th, you could envision a future where, yes, the U.S. says, okay, you know, we're going to sell or sort of go back like, we're going to sell things, XYZ. And the Chinese government is like, no, you already pulled this with us with Huawei. We're going to push our own thing. But all the big Chinese companies where all the best talent is and all the people that, you know, want to sort of, you know, build great companies, they're like, look, we get it. We're going to have our team over here that's going to work on building their own thing.

But in the meantime, we're going to buy machines from, from WAM research. We're going to buy from ASML. We're going to buy from, you know, we're going to buy chips from Intel and, you know, get a made at TSM. Look, as soon as you guys catch up, for sure, we'll definitely buy your stuff. But for now, we're going to buy the best stuff. And now that, like, that's, that's no longer, that sort of fuzziness is gone. Yeah. And buying the, the China made stuff is almost like a tax for doing business.

over there. I just wonder, you know, in addition to blocking the components and the machinery, they're talking about barring U.S. persons from supporting Chinese chip development without first obtaining a license. Who knows how difficult it will be to actually obtain a license. But U.S. persons covers U.S. citizens, permanent residents, people who live in the U.S. American companies, according to the Wall Street Journal. And that feels pretty drastic. And when you're trying to learn how to do really anything in an industrial sense, frequently the solution has been to import people from other countries who are good at it, who can teach you. And we're trying to do that with our semiconductor industry in this country. And so I'm very curious how serious that

ban on U.S. persons is going to wind up being because that seems like it's a key component in what the administration is trying to do here. Yeah, an important thing to understand about all this sort of stuff is the semiconductor, you know, sort of manufacturing is highly, I don't want to use integrate because integrates just one company. It's highly collaborative, I think is the word that I'm looking for. So you have a TSM, for example, that is manufacturing, chips and they have machines from from asML right to do the lithography and they have land research to do sort of the etching and they have like all these different components that go into it and you're so much on the cutting edge that this stuff sort of barely works right and so you have

people on site who are fiddling with the machines who are making it work who are solving problems and remember the key to doing all this economically is you have to get high yields right right you can't really afford failures. And that's why, you know, you don't, you're either extremely profitable or losing a lot of money. Because if your yields are crap, you're just not getting the return necessary to justify the hundreds of millions of dollars these machines cost. And so when it comes to a TSMC, like the ASML is heavily involved. It's not like you make a machine and throw it over the wall. There's like there's ongoing support.

There's people on site. It's people who understand how it works, adjusting things, tuning things. tuning things, solving problems, and it's an ongoing thing. You don't just get it fixed once and it works forever. Like you're constantly sort of fixing problems. And this gets a lot into sort of the late knowledge that it's so important to manufacturing semiconductors, while you can't just buy your, you can't just go to ASML and buy a machine and land research and buy a machine and throw them together and now you're making semiconductors.

Like there's a lot of know-how that goes into making it work. So there's a few issues with this sort of women on U.S. persons. Number one is there are high-end machines that have been sold to Chinese companies that are still under warranty that come with sort of support contracts that now are like orphans. Number one, it's kind of crappy from just a contractual perspective that, you know, these companies bought $100 million in machines and now they can't operate them because the company that sold to them is violating their warranty and violating their service contract. So that's that's sort of one angle. number two is the way you're going to get around that is you're going to have to really train up locals to local engineers. And this happens all the time for sure. I mean, TSM is notorious for really wanting to in-house a lot of this work.

They don't want to be paying a ton of money over time. For foreigners. Yeah, I mean, like one of the reasons why TSM was sort of very aggressive with ASML is ASML was more willing to. to let the Taiwanese sort of do their own support and train them up. Whereas the Japanese companies were the other big companies in lithography, they're more black box offerings. It's like, look, no, here's the thing. Our employees are going to service it.

We're going to take care of it. You're not going to figure out how it works. Like, like, like, and, you know, ASML is far ahead because they figure out EUV and the Japanese companies didn't. But one of the reasons why they could move down the curve when they were behind the Japanese previously was in was a partnership with TSMC, where TSMC was heavily invested in ASML, in PARCA's ASML was willing to bring the Taiwanese along and help figure out how to do it. So what I'm driving at is there is a knowledge transfer aspect here.

And the reality for a lot of U.S. companies is they're going to need to accelerate knowledge transfer if to support these machines that are there, which in some respects is accelerating Chinese understanding of how to sort of do this stuff. Now, the U.S. sanctions are a real thing, right? there's all these companies in response to this order basically banned all their U.S. Like I was talking to someone here who can't even conduct email with anyone in China. Wow. Like just like no context allowed at all. Now, I actually think that's an overreaction, but it's an overreaction driven by the fact that U.S. sanctions have real, have real team to them.

And so I think that's the better. That's going to be unwound. Like there's going to be, it's going to be finally, the idea is to get this finely tuned. Yes, you can service these other things. Oh, you're not in the core line of stuff we're trying to limit X, Y, Z. But like, so it's going to get better. But, you know, the goal is to, I don't know. I don't know is going to be like the word of the day on this podcast.

Nobody knows exactly how this is going to play out. But I will say reading the Wall Street Journal reporting about this particular provision, for many senior executives at Chinese companies, the rule will likely force them to decide between their jobs and their U.S. citizenship or permanent resident status, Mr. Chmorrow said. The rules require all U.S. persons to apply for a license to continue working in Chinese advanced chip development. So reading about what some of these American executives may face was the first time I stepped back and said, okay, so we consider China like an enemy enemy here and we're not messing around. But it sounds like there may be more middle ground here. Like when you say it's an

overreaction to say that all of these people face like a do or die choice as far as their American citizenship is concerned, it sounds like it will be softened over time, is your prediction? Well, I think the Americans working for Chinese companies are probably going to face a choice along these things. Where there's probably going to be a softening is people, people, who work for U.S. companies servicing. Or like an American at ASML in the Netherlands is going to be able to email with Chinese colleagues? Well, about something about older machines, not necessarily about about newer ones. And this gets into a lot of, like, this is, there's a real forest and trees aspect to this.

And my, I wrote, I've written about this twice now. My initial piece, I was really trying to focus on the forest bit, which is there's lots of details in the trees here. And I imagine, I haven't spoken to in the U.S. administration, but I would imagine the idea here is, look, we're trying to take a scalpel to this. And we're just trying to limit this AI capability. Of course, we want you to sort of be able to sell to China. And we know that China, like, we need chips for lots of U.S. products, X, Y, Z. and so we're just focusing on this, not this other stuff. And I think that is, that that's missing the forest for the trees.

The forest here, and it doesn't just matter what you want to do and what your intentions are. What matters is how those actions are going to be interpreted. And I think the way they'll be interpreted in China is, look, you're trying to lobotomize us. And I don't think they're wrong. I don't think they're wrong either. I don't think they're wrong. And I also would be shocked if the Biden administration or officials speaking on their behalf, like, I can't imagine somebody saying with a straight face,

these are narrow regulations that are designed to achieve one or two things that are very important to us. But we're not trying to set back the entire. To be clear, I'm not saying that they're saying that. Right. Like they've been pretty clear. We want to limit this sort of force multiplier. I think is the word that they're using. But I just, there is a motivation to not kill a bunch of U.S.

companies sort of in the process. And I think that's that, but I just look at the regulations and see, all right, we're banning the machinery. We're banning the parts that are used in these silicon microchips. And we're also banning the people who know how to use the machinery from being in China and working for Chinese companies. It just, none of it feels that narrowly tailored. Like this is a real shot at their.

Well, they are. they are banning the stuff that's for this super cutting it stuff. They're not banning the stuff that's for dishwasher. Again, the vast majority of chips in the world are not cutting edge. The goal is not to ban that stuff. But again, all this stuff pales in the forest is the big deal here. And to go back to the national security point, there's some, there's a story that just came out in Bloomberg like an hour ago that, you know, U.S.

is Blinken says China wants to cease Taiwan on a much faster timeline. Number one, it'd sure be nice to see some evidence about this. And I think this goes back to a discussion. We've definitely had offline. I can't remember we've had it on the air where my perspective as someone who's been in Taiwan for 20 years is I've always been aware of the China threat. My evaluation of the China threat has definitely increased recently. But you have all these people in America who three years ago thought Taiwan was Thailand. going from zero to 100 and like, oh, like Hong Kong today, Taiwan tomorrow,

and not really understanding the reality of the situation, which is there's geographic issues, like Taiwan is an island, and Hong Kong wasn't. Hong Kong was a part of China. Taiwan in all sort of practical senses is not. And there's also this sort of U.S. mindset. This sort of gets the difference between, I mean, again, I am hesitant to wage two. deeply into fundamental cultural differences. But just the Chinese mindset and the U.S. mindset is very, very different.

Taiwan's in this place where it's completely unacceptable to the Taiwanese to be a part of China. It's completely unacceptable to China for Taiwan to be independent. And so we're in this weird middle ground where it's like, well, we're going to pretend you're a part of China in like international bodies. You can't be in the U.N. And you have to go to the Olympics. You're going to be Chinese Taipei, all of which, you know, Taiwanese hate.

but at the same time it's like, well, we really don't want to be invaded. We don't want a war. We're de facto independent. And I think there's a real ease with this sort of absurd status quo that I think comes more naturally to people here than it does to most Americans. Americans are like, look, we need a resolution to this. Like, are you a part of China or are you not? And I think that's just such a mistake.

Like the best outcome is that it just stays. Keep it where we've been. Just stays fuzzy. That's right. Just keep it where it's been. And I do think there's like the worst thing in many regards to happen from, from Taiwan is for it to become front and center in the U.S. conscious. Because when they're front center of the U.S. wants a resolution. And it feels like the administration with this move and with a statement from blinking, it's like, look, hey, China started sending more airplanes after Pelosi.

visit they're definitely going to invade soon it's like are they what are they really yeah like like like it kind like and i it makes me very uncomfortable and concerned that the possibility that actually both china and Taiwan are kind of okay for pretending like stuff is going somewhere and just kind of staying about where it is that's not even a possible outcome from the u.s. perspective it feels like it feels very binary and binary is the worst possible approach to take to Taiwan. Yeah, absolutely. And not because there's no good outcome. And there's no intent on either of our parts to be glib about the situation in Taiwan when

we say just keep it the way it's been for the last however many decades. That's the Taiwanese perspective. Not only that though, the alternative, there are no good outcomes if you choose the alternative path and try to force some sort of resolution on either America's terms or the Taiwanese terms or China's terms, like there will be a conflict that doesn't end well for anyone involved. And that's important to keep in mind as we're charting a path forward here. Is that, do you disagree with any of that?

No, I completely agree. And there's this bit, it's like, I mean, the U.S. can be so sort of solipsistic in its view of the world. I hope I pronounced that right, but it's one of my nailed it. So I'm going to stick with it. Which is, it's like, oh, well, you could just not invade Taiwan. And it's like, look, if the U.S. was, had one coastline, not two. And off that coastline, there existed a large island that we thought was allied with our mortal enemy, like China or whatever, like we would find that intolerable. I mean, we flipped out about Cuba and

being communist, and Cuba was sort of like down in the corner. It's not like Cuba was positioned from a national security perspective to cut off our entire supply and access to energy and to world trade. I think if you can put yourself in leaving aside any philosophical points or issues about Chinese governance or human rights or whatever, just from a sheer sort of national security perspective, you can understand why Taiwan being nominally allied with the U.S. U.S. is sort of a problem for China. Like it kind of is. And given that, letting Taiwan sort of float along in this weird world where is it a part of China, is it not a part of China? But we're not going to war. Is it independent? It's not appended. That's a pretty good alternative to going to war. It really is. And it really concerns that the U.S. is just incapable of operating in this

level of gray and nuance, which is the only way to operate. in the context of Taiwan. And is China really about to invade Taiwan? Or has the U.S. convinced itself that China is about to invade Taiwan? And therefore, if that were the case, by all means, let's pull all the stops. Let's let's let's let's let's let's let's let's let's let's let's let's buy them as soon as possible. But are we sure that's actually that's one of the things I find fascinating about this

story as you described at the top the Chinese government is opaque and unknowable in many different respects. And we don't even really know how they will respond to any of this. We can have some educated guesses, but it's really, time will tell on that front. But the U.S. here has been also pretty opaque and unknowable. Like, we haven't seen that much about why these regulations happen now and what the imperative actually is. Like, is it Chinese capacity in AI? Is it the Chinese intent to seize Taiwan on a much faster timeline? And we just don't really know. And like, we don't necessarily know whether the State Department and the Department of Commerce and, you know, have they gamed out scenarios for different Chinese responses and like

thought two or three steps down the line and what might, what this might turn into? I'm not sure they have and I don't know that we're like entitled to assurances from anybody if this is truly like a national security effort first and foremost. But from the outside looking in, it just feels like a pretty dramatic escalation that I expected to happen in maybe five to 10 years. I mean, on the China podcast, we recorded a month ago. We were both saying it feels inevitable that there are more regulations coming. I just wasn't prepared to have them have them be quite this dramatic in this one sector that everyone knows the Chinese are very sensitive about and very invested in going forward. And we just, we kneecap them as comprehensively as we could. Yeah. And I think one thing

just to note is there is a problem in a lot of Chinese commentary that becomes, to use my favorite word again, very solipsistic where everything is the U.S. is up to the U.S. The U.S. does XYZ. Good point. Offended. China's hurt. China has absolutely has their own volition. Like they can decide like Chinese, China can decide to not be offended. And not only that, China wants to destroy us and us.

I'm speaking as an American, like we spent 25 years trying to make this relationship work and trying to make globalized trade the new reality for everybody. and she is just not dancing to that tune. And it is really ratcheted up the rhetoric. And so responses from the Americans are, it's not a surprise or shouldn't be a surprise to anyone. Yeah. And I think there definitely has been, to your point, an unfortunate shift in China to push out their point of view outside their borders. And we saw this, you know, sort of the Internet, right?

the U.S. sort of naively believe, look, like, good luck locking down the internet. You know, free trade is going to, you know, it was such a self-serving thing. Like, look, we can trade with China because it's going to lead to democracy. It's like we can have our cake and eat it too. Like it just so happens we're going to make tons of money along the way. Wouldn't that be great? And it's like, well, maybe that's actually not the case. And oh, by the way, the internet means that China can push out its point of view outwards, right?

And you have U.S. organizations dancing to the China tune because China, because China will hold their market hostage. And, you know, China does not trade fairly, right? Like, the worst, you know, they drastically limit access to their market and control things and favor their own companies in a way that we don't to them. So, like, it's all true, all, all fair and good, all things that are worth pushing back on. And I think there was a need for a reset in sort of U.S.-China relations. That noted, I don't think there's anything China has done that it.

is nearly as provocative as what the U.S. just did to China. If from China's perspective, the concern is, it's not that China's going to invade Taiwan to seize TSM. Like what the reality of a fab is it's so delicate that any sort of conflict is going to destroy it. And then two, there's so much of, of the human aspect that's going to be making this work that you kill few engineers or the years flee or whatever. it might be.

You're not going to just walk in and make this stuff work. Like we sort of talked about that just a few minutes ago. At the same time, the concern I had back with Huawei, and one of the reasons why it made me very uneasy the way the U.S. just, you know, sort of wiped out Huawei was if we cut off TSM from China, that decreases the cost to China of TSM being destroyed. It's like, well, if we already don't have access to the leading foundry in the world, who cares if it's destroyed? Right. And there's a, and this sort of goes along with it.

There's a, this decreases the cost to China of some sort of overt action. And one of the reasons why I was always skeptical of there being war over Taiwan was this idea. and I think we talked about this a few episodes ago, but a mutually assured economic destruction. And that is definitely still the case. Like a war between the U.S. and China or even just drastic sanctions on China of the sort that have been applied to Russia

would send the world economy into an absolute spiral. And the U.S., this would be worse for China than the U.S. That's the big gating factor. I mentioned earlier China's a huge portion of their GDP is still exports. Their internal market is not nearly as developed. At the end of the day, the U.S.'s biggest advantage is we have the biggest market in the world. And we can figure out the manufacturing stuff if we absolutely had to in the long run with massive amounts of pain and displacement and a great depression sort of outcome. But we could manage it.

China would be hurt worse. Like the tradeoff is China makes all our stuff, but we employ half of the Chinese economy, right? And all those people out of jobs, not so great for internal stability for China, X, Y, Z. Like definitely a real issue. And that's still why I'm, my working assumption is that nothing is going to happen. But we're decreasing the costs sort of steadily. And that does make me concern. Like now it's mutually assured economic destruction, but it's no longer mutually assured technological destruction

because we're proactively, preemptively destroying them technologically. And so that, like, and any time you have a situation, where there's a mismatch and capability that's fundamentally unstable because the entity that is, you either have total domination where you hold them under your thumb or you're inspiring, incentivizing them

to fight back to level the playing field. Yeah, well, and that's one of the things that makes me wonder what the basis for some of these rules were, are doing it now, doing it this drastically, because obviously we are doing, decreasing the cost of short-term, caustic, aggressive responses from China, be it in Taiwan or elsewhere.

And, you know, this is a dramatic escalation the way you described. And so it's just, I really wonder why now and what is the driving factor here. Yeah, I mean, I've heard definitely the, I think the U.S. was very upset by the reaction to Nancy Pelosi's visit. Well, and not only that, I think they were really upset by the Chinese reaction to the Ukraine invasion and the sort of buddy-buddy relationship between Xi and Putin. But still, like, we've known all of that for a while. And so maybe this is. Well, I mean, it's hard to escape the Chinese critique that the U.S. thinks it's the boss of the world.

And we are. And just kidding. No, they are. I mean, that's the craziest thing about this. One of the biggest question, one of the things we have to be open to is that this works. That it turns out that the ability to build this stuff is so difficult and requires so much collaboration and so many different entities working together that China really will be set back, not by a few years, but by decades. and that the U.S. is going to develop this AI-powered military capability that basically means no one can step up to us. And, you know, yeah, I mean, but, you know, just to go back to the Chinese critique, you said before that China also wants to sort of take over the world.

I think China is first and foremost motivated by self-preservation, the Communist Party in particular, and sort of the leadership. And I do think they have been quite aggressive in Asia in particular. You see the border conflicts with India, for example. They've militarized the South China Sea. You know, they've made sort of, you know, threatening, you know, saber rattling against Japan. There's definitely an aspect there. But you can also, and I hate doing this. I think people tend to give China too much credit, but I'm sort of doing the same thing.

You can see that from a self-interested viewpoint why they would want to do those sorts of things. And you can also understand the critique that, look, the U.S. doesn't want to protect its borders and its near term waters. They want to run the world. And that sort of, it's kind of hard to, like, escape that sense. Yeah, well, and I think the correct formulation is not necessarily that China wants to run the world. But China does not view itself as like a good faith partner arm in arm with the United States. Yeah, in the U.S. the economy.

Like, that's just not the way they see it. And, you know, you talk about the effectiveness. And I could be, like, I am absolutely an American. But I could, I could be sympathetic to that. Like, like, I can understand they don't want to be wetter on my U.S. Absolutely. And, you know, I could also be sympathetic to the American government saying you've been stealing IP for 25 years.

You've banned all sorts of companies from doing business in China. you've banned media organizations from doing business in China. Like, this is not okay with us either. And so obviously we've seen here. The relationship is devolving, unfortunately. But you talk about actually enforcing these regulations and what it might look like if they are effective. That was a question I had reading about all this over the last couple of days. Like a read from a great piece by Gregory Allen, he was summarizing what we've learned

from these regulations, and he wrote, The United States believes that China is willing to take extraordinary measures, including but not limited to spending hundreds of billions of dollars, hacking U.S. companies, and creating networks of shell companies, in order to evade export controls and free itself from dependence on U.S. semiconductor supply chains. So if China has already shown itself to be proficient in corporate espionage and creating shell companies all over the world.

I don't think we should take it as a foregone conclusion that the American government is going to be totally effective at choking off all these different supplies and shutting this industry down or at least short-circuiting any progress. Like there's a massive administrative challenge baked into all of this. Yeah, I mean, a couple of points on that. I mean, one, like, yeah, of course China's doing that. I mean, like, is there an expectation that they just roll over and take it? But number two, one of the challenges here with this specifically and is, I think it was from this article,

sort of like there's an analogy to weapons of mass destruction, specifically nuclear weapons, right? And there's not that many things that like this stuff can be used for. Yes, it's using medical imaging and it's used for power and things on those lines. But at the end of the day, it's kind of like one of the obvious use cases. is making nuclear bombs. And so there's a much easier sort of causal line to draw from acquisition of XYZ to application. The problem with semiconductors is there a bit more like oil in a way?

They're kind of fungible. Like what differs one semiconductor from another? The entire reason why the economic model works to spend hundreds of millions or billions of dollars up front to build these fabs is because at scale, you're producing millions of identical chips. Yeah. Right?

Because that's how the economics sort of work. And so if there's millions of identical chips out there, how do you trace them? How do you keep track of them? All these sorts of things. That's number one. And then number two, these things have real use outside of military applications. They power everything around us. There's, I'm sitting in this office.

I'm probably surrounded by hundreds and hundreds of chips. I probably didn't even count all them. And again, a lot of them are low power, not necessarily super. for advanced, but some of them are and some of them are very useful, sort of in that regard. And that makes the enforcement mechanism, both those points, the fact that all this stuff's identical and fungible, and number two, that there are real legitimate applications and uses, it's going to make it very difficult to take a sort of nuclear regulatory approach and be effective, you know, and.

Well, and is that one of the reasons the rules? are written as broadly as they are right now. Yeah, that's a reason to focus on the, a lot of the machine, like, it definitely is the machinery to build this, the machines that actually do this sort of stuff, is much more limited. Like, there's not very many of them built every year because they're, they're very complicated and seemingly expensive, I'm sure. Right. And definitely there's a bit about limiting sort of know-how and knowledge transfer and things

along those lines. Like, look, this is going to be a huge handicap for China. There's, there's no question. There's two big questions, like very large. Number one, how long will take them to catch up? And it might be years, it might be decades. I think it's kind of hard to know at this point. You know, because all these talks about Chinese, you know,

oh, look at they did a 7-an meter chip or they did this, you know, super high-end flash memory. That was all done with U.S. components, with U.S. equipment. And yes, we talk a lot about chip fabrication specifically not being in the U.S. but that doesn't change the fact that all the bits and pieces that go into chip fabrication. And there's a software angle, too. The software that does all this is all U.S. It's all U.S. stuff.

And so there is a angle in a leverage point of U.S. control. And that's the question of one. The second China is self-reliant than they become much, much harder to control. And they have room to pursue all sorts of different offensive measures if they want. Is that the fear? So that's the bit right now is suppose China is just building this stuff up on their own. We're also supplying them. So on one hand, we're making their military more capable because they have access to our high-end tech, high-end tech.

Definitely a real fear. And I think that's sort of the motivating fear here. On the other hand, by selling them tech, you're delaying the day to which they become self-reliant and sort of operate independently of our control. What this has done as accelerated the day in which it's China ought to act like they are independent today, even if they're not because the U.S. has de facto said you're going to be independent. Like the U.S. has sped up the date of independence. Even though China is not truly independent, they also don't have access to U.S. stuff. So they might as well act like they're independent. And that gets into the decrease in leverage.

We, like, we now have less leverage over China today than we did yesterday or last week. The near term chances of China invading Taiwan are higher today than they were two weeks ago. And they, I'm sure the U.S. government knew that was going to be in the case and decided to do this anyways. And yeah, I mean, just there's like a general feeling of uneasiness as I read about all of this. Yeah, to your point, I'd like to see some evidence about why does the U.S. think that the invasion of Taiwan is more imminent than it was previously. I would like, I would like to see some degree of evidence here. Because if that's absolutely true, and by the way, the U.S. government in its projections of other countries' capabilities and actions has not exactly

had a stellar record, uh, as of, you know, over the last 20 years, uh, that's the only, I don't want to say it's the only, but that's, that seems to be a clear motivating factor here. and it is frustrating. We don't see. Yeah. There's just not a lot of transparency into how this decision was made. And from the outside, it makes sense to adapt our foreign policy to what China is and not what we want China to be, which is where we were for about 20 years or so.

But at the same time, there was a need for a reset for sure. I completely agree. Yeah. But at the same time, this escalation is so aggressive that I find myself wondering what China is going to do in response here. And maybe it's nothing because China at this moment in time can't afford to further erode its own economic base and they're just not in a position to go tit for tat. But at the same time, I don't like not knowing.

And that's part of it. Well, the COVID zero stuff is kind of interesting in this regard because there's kind of two interpretations of it. One interpretation is what, China is willing. to sacrifice its economy to do policy X, Y. Because that's clearly happening. Take number two is, look, the Chinese really don't want to die. Like, they're not going to make the sacrifice for a big war.

Whereas the U.S., we don't care, right? We just demonstrate that with COVID. So I do think the increased, clearly the Xi administration is much more ideological. and much less sort of pragmatic and economically driven than China has been recently. And like she is definitely the wildcard here. Like if he was not in charge, if we had Zhang Zemin in charge or Hu Jintao or whatever it might be,

I don't think any of this happens. I think China would sort of continue to just keep growing the economy by their time. She definitely has accelerated things to a huge, huge extent. And it deserves, you know, he's ultimately the culpable figure in a lot of this stuff going sideways. But no one, I think, really knows what he's going to do or what his motivations are. Like he, he clearly is, has, you know, visions of grandeur of him being this sort of great momentous Chinese leader. And one way to do that is to bring Taiwan back into the fold. And that's why I'm uneasy is you just never know when the power is so concentrated like that.

and from the outside, everyone's sort of guessing. I mean, you said that at the beginning. Right. Logic has not been the governing, the governing. Logic and pragmatism has not felt like the governing principle for China, particularly over the last year. Yeah. Well, it's going to be an adventure.

And I'm sure we'll continue to discuss this going forward. Do you have any final thoughts? I have one note at the end of this, but any final thoughts on where things stand? I mean, we're also going to have to work. work pretty cooperatively with countries like Amsterdam and South Korea and Japan. Sorry, not countries like Amsterdam. Oh, I know. I was waiting to come in and say, look, I don't know how to pronounce words, but at least I

know what a country is. Okay. You win the geography round here. No, for the record, you've corrected your pronunciation like five times an editor-in-out-or-rearing- this episode. It's very unfair. You're just hanging me out to dry. Listen, man.

All right. I was in Amsterdam less than two. months ago. So I've got Amsterdam on the brain. I do think that's another challenge that I am curious about over the next couple of years. Well, there's an aspect like ASML is full of U.S. technology. So at the end of the day, like the U.S. can call the shots. Utilize a stick here. Okay. They're going to be taking hits along with some of the American companies. And it's a delicate process to manage. Yeah, with South Korea and Japan, like South Korea has made a huge investment on manufacturing

in China. Like, they're pretty screwed. The U.S. has already granted waivers to them. But I think there is a broader issue of, look, if you're, any further investment in China is, is. Yeah, bad idea. Right. Yeah.

I mean, Apple's obviously the, the big sort of elephant in the, you know, the, the big sort of elephant in the room here, you know, there's a real issue. Like, from what I understand, Apple was as committed to China as ever as late as six months ago. They had this, this huge memory deal they're winding up with YMTC, the sort of Chinese manufacturer, which was sort of a classic Apple deal where, you know, YMTC was was not competitive. They're the state-owned company. And Apple is basically going in and training them up and saying, look, here's how you make memory. We're going to help you do it. We're going to help you figure it out. And then they basically have this captive supplier who's undercutting all of the mostly Korean, also American micron company, uh, in memory and

giving Apple this sort of huge, you know, cost of damage. And that was, you know, Apple was all in on China. And from what I understand the Shanghai lockdowns is what finally broke through with Apple, uh, where they're like, oh, maybe we have a problem here where we're, we're so dependent on this country. And now they've had to abandon the YMTC thing because one of the restrictions is basically YMTC can't make the sort of memory that Apple wants them wants them to make. But so Apple is going to need to stop doing this for one. Number two, they're going to need to diversify.

But the more that Apple diversifies, the more attractive of a target for retaliation, they become from a Chinese perspective. Right now China is motivated to not retaliate against Apple. because they don't want Apple to diversify. And Apple employs directly or indirectly millions of Chinese. That's the last passion of our mutually assured economic destruction where decoupling hurts both sides equally and we'll see how long that lasts. Because honestly, like after the last two weeks, it doesn't seem like this relationship

is going to get better. Yeah, I mean, the Apple, the Tim Cook doctrine, we have to control our most important technologies, you know, kind of forgot about that. and as far as manufacturing goes. And they're stuck because to get out will be extremely expensive. It will risk what they have. There's this, you know, you can imagine a future or Apple manufacturer somewhere else. And you can see where they are right now.

And there's this long valley in the middle where they're tremendously vulnerable. No, no. That's okay. They're more than anyone. Their new ad business is going to carry them through that valley. They'll be just fine, not worried of. about Tim Cook. I want to close out with one note from John Oren at the Sports Business Journal. John is a Wizards fan. Shout out to John. He reports that TNT signed all four of the inside the

NBA crew to 10-year deals this week. And that news is important for two reasons. First, because it builds on our cable versus streaming conversation and particularly our conversation about the NBA on TNT and the various incentives that Warner Bros. Discovery was going to have to bid and keep the NBA rights on TNT. And most importantly, as the NBA season kicks off, even as the rest of the world is slowly coming unglued, we've got another decade of inside the NBA to look forward to. Of Charles Barkley, the ultimate takes on. Charles Barkley, Shaq, a lot of great things. I've still upset about countries like Amsterdam. It's a throwback to our first ever episode when I confused Silicon and Silicon. So it's an adventure for both sides of the mic on this one. But I look

forward to coming back later in the week. And listeners, if you have questions, comments, or takes, email at sharptech.fm. And we'll be responding to them on the next mailbag. Until then, Ben, I will talk to you. Hopefully. Yeah. Day at a time. That's right.