Micron Probe May Hurt China’s Efforts To Attract Foreign Investment

Beijing today wound down its latest large-scale military exercises in the waters around Taiwan but overall tension between the U.S. and China remains high. China’s moves followed a high-profile meeting last week between U.S. House Speaker Kevin McCarthy and Taiwan President Tsai Ing-wen in Los Angeles criticized by mainland leaders that claim sovereignty over self-governing Taiwan.

On the commercial front, the semiconductor industry remains an elevated point of stress. Beijing earlier this month announced a cybersecurity review of U.S. chipmaker Micron aimed, it said, at protecting the country’s information infrastructure and national security. The probe comes at a time when China has been seeking to boost foreign investment to accelerate its economic recovery from “zero-Covid” policies that slowed growth.

What’s next for U.S.-China ties and also for the CHIPS Act, the U.S. law enacted last year aimed at reversing the declining American share of global semiconductor production?

To learn more, I spoke on Saturday in the Philadelphia area with Terry Cooke, a senior fellow at the Foreign Policy Research Institute, a think tank focused on U.S. national security and foreign policy. Cooke, a former career U.S. senior foreign commercial service officer with postings in Shanghai, Taipei, Tokyo and Berlin, currently leads ReGen250, a non-profit that focuses on U.S.-China green energy collaboration as well as environmental regeneration initiatives in the tri-state Greater Philadelphia region.

Cooke believes China’s move against Micron will have “a chilling effect for potential foreign investors — definitely on the U.S. business community” at a time when it is trying to win new foreign investments following the end of “zero-Covid” policies at the end of last year that had harmed economic growth. Beijing high-profile efforts to pressure Taiwan militarily may also be counterproductive if Taipei successful builds itself up as “an important force” in a larger, more influential network of democracies. Edited excerpts follow.

Flannery: What do you make of the military exercises around Taiwan this month?

Cooke: There are two ways of looking it. One is that going into the Tsai-McCarthy meeting, the decision had already been made (in Beijing) that this is the new normal, that whenever there is an uncomfortably high-level contact between the U.S. government and the Taiwanese government, we (the Chinese government) are just going to keep demonstrating our ability to militarily squeeze Taiwan through maneuvers of this sort.

There is, however, another way of thinking about it: the way the McCarthy-Tsai meeting was conducted may, in fact, have been the determinant of the maneuvers. Beijing may have been in a wait-and-see mode. They of course issued their standard and predictable verbal denunciations in advance of Tsai’s transit stops.

I think they were waiting to see how low-key the meeting in L.A. with McCarthy would prove to be. The entry through New York was very low-key. The State Department utterances for most of the trip also kept things low-key. And there was ample precedent for this given Tsai’s previous six transit visits to the U.S. so the State Department position was that there was no reason for Beijing to make an issue out of it.

But the optics of McCarthy meeting – with all the diplomatic trappings of a government-to-government meeting save for flags set up on the table – made it look very much like an official meeting. And I don't think that went over well in Beijing. That could have triggered the decision to trot out the military.

Flannery: So what's next?

Cooke: Just as the U.S. is maybe on its back foot with the new realities in the Middle East, I think China may be on its back foot in terms of the game of diplomatic recognition when it comes to Taiwan. Yes, Taiwan just lost Honduras on the eve of Tsai’s U.S. trip. Now, Taiwan is down from 14 to 13 countries that it has diplomatic recognition with.

But I think there's really a more important game in town now than adding up the number of formal diplomatic allies. This new game in town probably started around February 2020 with the Biden administration moving into the White House. To many people’s and particularly Beijing’s surprise, Biden kept Trump’s tough China policy. He also introduced into his speeches and policies a clear and consistent autocracy-vs-democracy contrast.

Within the context of this U.S.-led “reframing” of the global picture, Taiwan now has the opportunity to reposition itself within the team democracy global network of supporters in a way that it's not strictly about formal recognition and UN membership. It's about being recognized, and in some ways, held up as an important force in this network of democracies.

Flannery: How will Taiwan’s presidential elections next year affect these three-way ties?

Cooke: From the U.S. governmental standpoint, the outcome – whether it is a victory for Tsai’s Democratic Progressive Party or the opposition KMT party – will change hardly at all. This is because the U.S. government’s official position – whether it involves the outcome of an election in Taiwan or changes to the cross-strait status quo initiated by China – is that what the 24 million people of Taiwan choose for themselves is what the U.S. government will support. I don’t think our basic diplomatic posture and our support for Taiwan would change unless there was some evidence — which I would not expect at all — of some malfeasance happening with the election.

Flannery: What do you make of China’s probe into Micron?

Cooke: We can dissect it into several elements. One is a desire for reciprocity and being seen on an equal plane. And so with Biden’s CHIPS Act, and the singling out of TikTok and a lot of different Chinese companies in U.S. security investigations, it's to be expected that there is going to be some reciprocal action that China is going to want to take to be seen as for purposes of a peer power demanding reciprocity.

That diplomatic posturing is understandable but it does have a chilling effect for potential foreign investors — definitely on the U.S. business community. Close allies in Europe and elsewhere notice it, and it doesn't help China's post-pandemic effort to show a welcoming face to foreign investment.

I think there is also a third element of it that is interesting: perhaps as another data-point showing a lack of coordination in Chinese policy and messaging that we see from time to time. And we're living in a world where nobody is a paragon and the U.S. has its own challenges with coordinating its message. But in China, as we saw recently with ‘wolf-diplomacy’ and the balloon incident, people lower in the governmental hierarchy vie to please their superiors, and end up getting out in front of the intended policy and in front of what would be an optimal coordinated policy for China. And I’m wondering personally whether Micron might be an instance of that.

Flannery: Speaking about both semiconductors and Taiwan, does the U.S. rely on Taiwan too much for chips?

Cooke: It's actually in almost everyone's interest at this point to have a greater degree of global diversification. It's outright dangerous to have close to 90% of production of the most advanced semiconductors taking place only 90 miles away from the Chinese mainland.

Flannery: Does the CHIPS Act go far enough in striking a new balance?

Cooke: Before the CHIPS Act, TSMC was already taking steps (to diversify from Taiwan). There are currently moves afoot in Germany for automotive chip production — not the most advanced chips in the world — but also with Japan for consumer electronics and with Arizona for an advanced generation of chips. (See related post here.) For the foreseeable future, production of ultra-advanced chips will stay in Taiwan. But I think a lot of production capacity for quite advanced chips is being pushed out of Taiwan to these other global nodes.

The CHIPS Act is to my mind pretty fascinating. As a response to China’s Made-In-China-2025 ambitions and its military upgrading, it’s a bulls-eye in my view. But, as a policy undertaking in the U.S. domestic context, it is something of a potential third rail in the sense that just as a country, we've never been comfortable or particularly skilled at industrial policy. And it is clearly industrial policy.

Interestingly, I think there is enough bipartisan support right now that the industrial policy-political debate on Capitol Hill is not the traditional debate of “no industrial policy” versus, let's say, the Clinton era’s “auto industrial policy for Japan.” Nobody at this point seems to be openly challenging the need for an industrial policy response to China’s advantaged technology challenge.

So the debate currently is one about “clean” industrial policy versus industrial policy with a lot of social agenda items folded into it, like childcare support for workers. (Either way) it is important as a signal to the market about us government resolve.

Flannery: Is it enough? And if it's not enough, what's the next step?

Cooke: If in version one, the sum had been significantly higher than $52 billion, it would have been almost setting itself up for failure, because there are so many things that can go wrong in operationalizing and implementing something like this.

By analogy in the military sphere, we have put in a very robust sanctions regime against Russia following the invasion of Ukraine. But it was kind of uncharted territory. There's been a lot of analysis about what's been working and what hasn't been working. We’re groping our way forward and want to keep some powder dry.

The CHIPS Act is similar in the commercial sphere — kind of uncharted territory. One of the things it is going for is that Commerce Secretary Gina Raimondo is an astute leader of the process. In the current political environment, any sign of dropping the ball would be pounced on. What is actually more important than the amount of money is the fact that it has happened in an initial iteration. There can be subsequent iterations, but it's important to operationalize the first iteration as well as possible and to learn from that process to inform a potential second iteration.

Flannery: There is controversy about social goals being attached to it.

Cooke: The Act was passed by Congress last year, and it went into a kind of holding period where no one knew what the process was going to be for a company to apply. When the guidelines were only recently announced, it became clear that there was quite a lot of conditionality put to the ability of a company to apply. One set of conditions has to do with an applicant limiting its China business for a 10-year period. Another quite different set has to do with an awarded company providing childcare for its employees.

I think the criticism about these conditions is a fairly predictable output from the Washington DC political meat grinder. Because these are tax-payer dollars, the back-and-forth is highly political. Placing limitations on future China business for awardees makes sense to the average American voter. However, those limitations raise serious concerns for the CEO of a sizable company that doesn't want to decouple from the China market, but does want to accessing CHIPS Act support. On the separate issue of childcare, this requirement is meant as an incentive to help overcome the problem of a shortage of chip production workers in the U.S but it obviously becomes a red meat talking point for politicians who position themselves as anit-woke in U.S. culture wars skirmishing.

This goes back to what we were talking about before with Micron. China is currently unable to respond in a meaningfully reciprocal way when the U.S. does things like put Chinese billionaires onto an entities list. They just don't have a global finance tool that is anywhere near as sharp and strong as is found in the U.S. Treasury toolkit. For the U.S., putting companies on an entities list works— it catches the attention of targeted individuals and there is an important and broad public messaging dimension to it as well. Of course, to make sanctions really bite, there's a lot of operationalization that needs to happen, but frequently doesn't happen.

What I personally believe is: China’s main effort now is to try to knock the dollar off its post-World War II throne. Others have tried and failed and it will be a hard thing for China to pull off. But I believe that's this the main thrust of their effort and the primary aim of a long-term, patient strategy.

See related posts:

More Than Half Of Americans Lack Confidence In Biden Ability To Deal Effectively With China — Pew Research

U.S. Businesses Look To De-Risk, Not Decouple, Their China Ties

U.S.-China Collaboration Could Cut Development Time, Cost For New Cancer Treatments

TSMC Will Triple Arizona Investment To $40 Billion, Among Largest Foreign Outlays

Taiwan’s Biggest Silicon Wafer Maker Eyes U.S. Solar Industry Investment

@rflannerychina