CAUGHT IN THE MIDDLE!

It’s a High-Tech- High- Stake game of brinkmanship between Beijing and Washington, with Asian Middle Powers becoming its unwitting victims!

As Washington tightens the screws on China’s tech supply lines to throttle its race towards technology parity, if not superiority, the ripple effects spread far and wide with surprising outcomes.

Many major economic powers of Asia find themselves at an inflexion point, caught as they are in the crossfire and unable to outrightly align themselves to one side or the other. Overnight, they must carve out their sovereign tech strategy to continue to thrive economically while avoiding getting snared in a competition that is increasingly becoming nasty.

The Asian Tech Battlefield

China and the U.S. are shifting into high gear as they manoeuvre to get the better of each other in a rivalry focused on high-value high-tech segment. This global industry promises the most lucrative payback in terms of profits and geopolitical influence. It encompasses cutting-edge technology like AI, Quantum Computing and Virtual Reality/ Augmented Reality, Robotics, Hypersonic propulsion, and a host of other emerging technologies.

Prosperous Asian middle powers, who have since the end of the cold war enjoyed profitable bilateral trade, economic and geopolitical relations with both competitors, are forced to choose sides.

It is Hobson’s Choice, as whatever they pick, they will end up losing more than what they stand to gain. Unless they are proactive in coming up with new economic statecraft that will enable them to enhance their trade, investment and industrial growth despite an environment of widespread economic and technological sanctions being imposed by the two big players, they face grim prospects.

Primarily, the Asian Middle Powers will seek to reduce their dependence on imported tech IPRs to counter economic coercion, thus ensuring self-sufficiency in core technologies and critical materials that feed their exports.

Both China and the U.S. are making it amply clear that nations must be either with them or will be considered against them- there are going to be no neutrals in this fight! They are coming out with economic restrictions and outright sanctions in case a manipulation of technological sales is detected that is viewed against the interests of one of the warring parties.

Even smaller, less significant Asian states are not immune, as the trade restrictions and the ban on technology transfer extend to all without exception.

Middle Powers like Japan, South Korea and Australia are the worst impacted by this ‘US-China tech war trap.’

Implications For The Liberal Order

In a scenario where the liberal economic order was taken for granted for almost five decades with no- holds-barred trade and investment, the introduction of economic threats and bullying would be a new paradigm; it would be an anathema for globalisation. But when the two strongest engines of globalisation abandon the open global market-based economics, lesser nations have little choice but to fall in line.

Of course, other nations can pin their hopes on multilateral organisations and try to make them independent of the overwhelming influence exerted upon these institutions by the U.S. and China over the years due to their large contributions to their operating costs. A larger number of nations must share the costs if they wish these forums to be independent and truly multilateral.

A new generation Uruguay Round of negotiations is required to find a path through the minefield of U.S. China rivalry. This will ensure that other countries can continue to trade without getting involved in the bitter contest that is only getting more intense with each passing day.

The WTO could be used as a negotiating platform to arrive at accords encompassing a larger number of countries regarding investments and IPRs, and include very specific strategic industries so that the bystanders are not left out in the cold from the rivalry.

This would encourage the cre ation of multiple poles of tech excellence centred around emerging economic and tech powers in Asia, Latin America and Eu rope to diffuse the excessive influence exerted today by the U.S. and China. However, domestic and regional political compulsions are making the creation of such coalitions difficult, if not impossible.

Countries like India are facing the dilemma of joining region-based economic blocs. The most influential grouping is China-sponsored Regional Comprehensive Economic Partnership (RCEP).

India has refused to join RCEP as it is suspicious of Chinese intentions. India sees the RCEP as a notso-subtle subterfuge to expand a captive market for Chinese goods without China making any worthwhile concessions to open its market for goods and services, which are the forte of countries like India.

A rival to the RCEP is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a successor to the Trans-Pacific Partnership and a mega-regional bloc that even China is trying to join, so far unsuccessfully. Considering the very high standards demanded by CPTPP in terms of investments, financial services, IPR, environmental issues and labour laws, it is unlikely the group will accept China.

To match the RCEP, the U.S. launched the Indo-Pacific Economic Framework for Prosperity (IPEF) in 2022, which already has twelve members. Under IPEF, the U.S. is trying to get together its Indo-Pacific allies on sectors like e-commerce, data management, supply chain resilience, climate control measures and curbing cybercrimes.

The emerging trade and tech barriers threaten to change the region’s geopolitics. This is visible when every aggressive Chinese move on the economic or technological front is being branded as a national security threat by the U.S. and its European allies. Asian middle powers face the dire predicament of being linked with security externalities due to their trade ties with China, especially if it involves hi-tech with U.S. or European IPR.

Multilateralism, however, is now expanding towards security-related blocs rather than the economy. The most visible examples in the Indo-Pacific are the Five Eyes (U.S., UK, Canada, Australia and New Zealand) created for intelligence sharing and the Quad (U.S., Japan, India and Australia) that has strong security underpinnings camouflaged under cover of humanitarian assistance, cyber security and pandemics.

During the Cold War, many countries could prosper without throwing their lot with either of the parties by what is called ‘hedging’. However, as the U.S. -China rivalry intensifies, as most experts portend, Asian countries will find it exceedingly difficult to hedge, or in other words, ‘run with hare while hunting with the hounds!’

Avoiding The Trap

Primarily, the Asian Middle Powers will seek to reduce their dependence on imported tech IPRs to counter economic coercion, thus ensuring self-sufficiency in core technologies and critical materials that feed their exports. Japan, South Korea and Taiwan, which are excessively dependent upon China-based supply chains, are now trying to diversify to other Southeast Asian nations and even India.

Critical components like semiconductors have become the currency for geopolitical influence, even though there was such a glut in this industry for a long time that only a few countries risked vast investments in them. Today, the trend is changing, and big and small industrial powers are onshoring their semiconductor investments.

The US CHIPS Act of 2022 is a prime example that other countries, including India, are trying to follow. Japan released a new semiconductor strategy in 2021, setting the goals for tech innovations and a stable supply chain incorporating Taiwan and Europe but bypassing China and South Korea, its historical enemy.

Japan is also investing in Asian countries that it considers reliable trading partners, to subsidise the expansion of their domestic manufacturing capacity that could replace Chinese manufacturing hubs. Countries that stand to benefit are Vietnam, Indonesia, Malaysia and even India and Bangladesh. Under pressure from the U.S. and China, their major trading partners, South Korea and Taiwan are now seeking other bilateral/ multilateral trade agreements, including tech cooperation, to maintain their high revenues from external trade.

Country Wise Strategies

India finds itself in a peculiar situation; to remain competitive in its external trade, it relies entirely on the more affordable Chinese supply chain, and it would take years to develop alternative sources. It has tried to diversify its supply chains while simultaneously creating fresh alignments with other major regional and extra-regional powers like Japan, Australia, Vietnam and Singapore.

Concurrently, it is aggressively trying to reduce the Chinese economic influence on its domestic market while at the same time investing heavily in developing its technological capacity with partners like the U.S., Israel, France and Denmark.

The flagship of this initiative is the Production Linked Incentive (PLI) scheme that focuses on 14 key industries like auto, speciality metals, electronics, batteries, pharma, EVs and drones.

Even more eye-catching has been its $10 billion drive towards creating an indigenous semiconductor manufacturing industry. Having rejected the lucrative Chinese 5G technology transfer option, India has created its own 5G ecosystem.

However, decoupling is not so easy for a country like South Korea. In 2017 when it opted for the U.S. Terminal High-Altitude Area Defence (THAAD) anti-missile system, it suffered a loss of almost $17 billion from the Chinese cancellation of orders in a subtle form of economic coercion.

The recent ban by the U.S. on high-tech items to China, which are based on American IPRs, creates a new set of problems for Seoul, whose most exports to China involve a significant part of American technology.

But South Korea knows it occupies a key position in the high-tech supply chain, especially in sectors like lithium batteries, semiconductors and EVs, which it can leverage to extract concessions from both contesting parties.

South Korean majors like Samsung, SK and Hyundai are investing substantially in the U.S. to shore up American efforts to onshore critical high-tech manufacturing.

Diversification is a key component of South Korea’s economic statecraft- Vietnam has become its third-largest trading partner after China and the U.S.! Without annoying China by exiting Chinese supply chains, it has undertaken various measures to make its supply chains resilient.

South Korea is aware of the strength of its manufacturing base, and it knows that to secure its competitiveness in the upcoming global competition, it must ensure such high standards in the quality of materials, parts and equipment that its potential customer will have no option but to buy Korean. The increasing popularity of South Korean automobiles in a price-sensitive car market like India, where American majors like Ford and GM collapsed, reflects this policy.

Japan got a rude wake-up call in 2010 when suddenly China imposed a ban on rare earth exports consequent to a clash between a Chinese fishing trawler and the Japanese Coast Guard near the disputed Senkaku Islands. With the Chinese weaponising interdependence, Tokyo realised the urgent need for diversification.

The Japanese Ministry of Economy, Trade and Industry immediately identified critical items in supply chains that increased import dependence and looked for their substitutes, either locally or regionally.

The Japanese government was shocked to learn that in value terms, out of a total of 5000 imported items, almost 1200, i.e., 23 per cent, had greater than 50 per cent Chinese dependency! This was much higher than that of even the U.S. and Germany, two major trading partners of China.

The government has put into motion an action plan to support Japanese companies in diversifying and strengthening supply chains by relocating foreign production to Japan and creating alternate supply chains through friendly and dependable ASEAN member countries.

Conclusion

While China’s role as an export and manufacturing giant may diminish in the near future, it would be too early to write off Chinese capacity to grow or prevent its predicted rise to global primacy.

The country has immense potential and industrial depth with a huge domestic market to meet the slack from its exports. As mentioned earlier, it is not economically feasible to divert all supply chains away from China, as India is learning to its geopolitical cost without incurring a high cost in investments and time.

In sectors catering to non-security linked products, Chinese exports would remain the most attractive to even its harshest critics. Therefore, a total decoupling may never happen as it is too exorbitant and time-consuming to relocate the entire supply chain to another geography. However, ‘friend shoring’ and beefing up existing supply chains with reliable partners in like-minded, politically safe countries would occur.

Most importantly, excluding Beijing from the production and marketing of critical materials and technology would be difficult and unreasonable. In fact, a highly protectionist strategy may backfire by forcing China to achieve self-sufficiency in a much shorter time span