Lula helps Xi avoid anti-China coalition in technology – 05/12/2023 – World

Paul Triolo was in Beijing at the same time as Luiz Inácio Lula da Silva (PT) and has an advice to the Brazilian president on the ambition of a partnership in semiconductors and technology. “Brazil will have to start small and choose areas with lower entry costs”, says the vice-president for China at the strategic consultancy ASG.

At first glance, leader Xi Jinping seems to have the most to gain. “Beijing sees Brazil as a key ally in efforts to prevent the formation of anti-China coalitions in areas such as technology.”

An engineer with decades of advising US governments, Triolo is skeptical of Joe Biden’s industrial policy for semiconductors and chips. “The US will gain some manufacturing, but nothing approaching a leadership position,” he says.

How do you evaluate the rapprochement between Brazil and China in technology? Beijing and President Xi highly value the independent nature of Lula’s government and see Brazil as a key ally in efforts to prevent the formation of anti-China coalitions in areas such as technology and supply chains. Brazil has a lot to offer China, in collaboration in research and development areas, but mainly as a market for advanced technology companies. Among the Brics countries, Brazil may represent the most important market, due to the sophistication of its companies and consumers.

Lula talks about producing semiconductors. Is there a place for Brazil in the global chip chain? The global division of labor in the semiconductor supply chain is complex, and it is difficult for countries like Brazil to determine where it is best to try to participate, especially in manufacturing. Requires the development of some supporting ecosystem. Brazil would be competing with countries with more developed ecosystems and other advantages, such as India, with strong software and engineering schools.

Brazil will have to start small and choose areas of the supply chain with lower entry costs, such as packaging and testing, and only over time aspire to final manufacturing. There is no change that Brazil can develop towards a fully national semiconductor industry, given the large number of technologies that must be mastered and the engineers required.

Your First Reaction to the “October 7th Surprise” [quando o governo Biden adotou controles de exportação de chips à China] was to claim that “the US has declared war on China’s ability to use high-performance computing”. Seven months later, has Washington managed to contain Beijing, or is it too soon to tell? It’s early days, but early assessments can be made. On GPU restrictions [unidades de processamento gráfico] cutting-edge, it doesn’t seem like an approach that will slow down, for example, the ability of Chinese companies to develop artificial intelligence applications. There are many hardware and software workarounds, and in many cases applications do not require high-end GPUs. In semiconductor manufacturing, on the other hand, the controls had a short- and medium-term impact on the business plans of leaders such as SMIC, YMTC and CXMT. All are scrambling to find alternative, Chinese suppliers.

Regarding the Chips Act [lei de estímulo à produção nos EUA, de agosto], you assessed that, despite the money invested, the US would not recover its position. Have you changed your mind in those nine months? Nothing has changed in my opinion. The overall impact will be limited. The US will gain some manufacturing capacity, but it will not regain anything approaching a global leadership position in any industry subsector. The vast majority of the most advanced chips will continue to be manufactured in Taiwan, South Korea and possibly Japan.

What should be the effects for consumers of smartphones, cars and other products? There are several lawsuits underway that could affect US consumers of products that use semiconductors and other inputs from China, Taiwan and other parts of Asia. US industrial policy will increase manufacturing costs in, say, Arizona by TSMC, which will be passed on. Costs are much higher than in other countries.

The US effort to contain Chinese technology has only grown since then, to the point where you claim that globalization is over. Do you still think so? No. Only some aspects of globalization are under pressure. Large multinationals that make complex products continue to depend on globalized chains. These companies, like Apple, are looking for some diversification of the chains, but it’s more risk reduction. Even Chinese companies are looking to diversify geographically.

Is the militarization of pressure on China a sign that technological pressure is not bringing results? There is a dynamic at play that focuses more on military approaches, driven by people drawing parallels between the Russia-Ukraine and China-Taiwan crises. These parallels are exaggerated, the two situations are very different. One of the differences is that Taiwan is a crucial player in the global technology sector, and the implications of a conflict for the world economy are arguably much more serious.

There is still no clear approach to how the US and allies would consider using sanctions in the event of a conflict in Taiwan, particularly one that does not escalate to full military confrontation. While US technology restrictions have so far had limited impact on Chinese companies, one of the biggest effects is that they have massively encouraged the development of Chinese alternatives in key technology sectors.

Have the US appeals to South Korea and Japan to act in China’s technological encirclement had any repercussions on the Chinese economy? So far US efforts to achieve some alignment with Japan, South Korea and the Netherlands on the October 7 export controls have had mixed results. Governments don’t want to take action that undermines their companies’ ability to operate in China, so they are very reluctant to be seen as part of an anti-China alliance.

On Taiwan, what is your assessment of the repeated bans on exports to China? Restrictions imposed by the US are preventing more mainland Chinese companies from using Taiwanese companies like TSMC to make high-end semiconductors. When Huawei was cut in 2020, the global demand for semiconductors was high, and TSMC was able to replace it with ease. In a more challenging market now, TSMC and others will feel the loss of business hard, especially if more Chinese companies are added to the list.

Do you believe in a war in Taiwan, between China and the US? Risks of conflict are at an all-time high in decades. Both sides see the other as changing the status quo, with actions that run counter to the commitments that govern the complex trilateral relationship, the Three Communiques. [declarações conjuntas que aproximaram EUA e China nos anos 1970]. I advocate considering a fourth communique as a minimal first step that would acknowledge the changes that have taken place, most notably the development of China’s military capability, a thriving democracy in Taiwan, and Taiwan as a key element of the global economy.

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X-RAY | Paul Triolo

An engineer from Penn State, with experience in Silicon Valley, he heads the China and technology areas at the strategic consultancy ASG. Created by Madeleine Albright, who was Secretary of State in the USA, the ASG is influential in the foreign policy of the Democratic government. Triolo is a member of the Center for Strategic and International Studies (CSIS) and the Council on Foreign Relations (CFR).