So I think we’re in a new cold war. Leaders of both parties have become Chinese hawks. There are war rumors about Taiwan. Xi Jinping promises to dominate the century.
I can’t help but wonder, what will this cold war look like? Will this one transform American society like the last?
The first thing that strikes me about this cold war is that the arms race and the economic race are merging. A major focus of the conflict so far has been microchips, the little gadgets that not only power your car and phone, but also conduct missiles and are needed to train artificial intelligence systems. Whoever dominates chip production, dominates both the market and the battlefield.
Second, the geopolitics are different. As Chris Miller points out in his book “Chip War,” the microchip industry is dominated by a few very successful companies. More than 90 percent of the most advanced chips are made by a single company in Taiwan. One Dutch company makes all the lithography machines needed to build advanced chips. Two companies in Santa Clara, California monopolize the design of graphics processing units, critical to running AI applications in data centers.
These bottlenecks represent an unsustainable situation for China. If the West can block China’s access to advanced technology, it can block China. So China’s intention is to approach chip self-sufficiency. America’s intention is to become more self-sufficient in chips than it is today and to create a global chip alliance that excludes China.
US foreign policy has been rapidly realigning in this direction. In the past two administrations, the United States has taken aggressive action to prevent China from getting the software technology and equipment it needs to build the most advanced chips. The Biden administration is cut off not only Chinese military companies, but all Chinese companies. This seems like a logical protection, but put another way, it’s rather dramatic: US official policy is to impoverish a nation of nearly one and a half billion people.
I am even more amazed at how the new cold war is recasting domestic politics. There have always been Americans, going back to Alexander Hamilton’s Report on Manufactures in 1791, who supported industrial policy and used government to strengthen private economic sectors. But this government approach has generally remained in the margins.
Now it’s at the center of American politics, when it comes to both green technology and chips. Last year, Congress passed the CHIPs Act, providing $52 billion in grants, tax credits and other subsidies to boost U.S. chip production. That’s an industrial policy that leaves Hamilton gaping and applauding.
In the coming years and decades, China will pour huge amounts of money into its own industrial policy programs, into a range of advanced technologies. An analyst from the Center for Strategic and International Studies estimates that China is already spending more than 12 times as much of its GDP on industrial programs as the United States.
US leaders will have to figure out how effective that spending is and how to respond in the coming years. Even more than the last cold war, this one will be fought by technological elites. Both sides are likely to spend a lot of money on their best-educated citizens – a dangerous situation in a time of populist resentment.
You can already begin to see a new set of political cracks. In the middle are the kind of Neo-Hamiltonians who supported the CHIPs bill — including the Biden administration and the 17 non-Trumpy Republicans who voted for the bill in the Senate with Democrats.
On the right, there are already some populists who are super-aggressive about China when it comes to military matters, but don’t believe in industrial policy. Why should we spend all that money on elites? Why do you think the government is smarter than the market?
On the left are those who want to use industrial policy to serve progressive causes. The Biden administration has delivered an incredible message number of dictations for companies receiving support from the CHIPs Act. These dictates would force companies to behave in a way that serves a number of external progressive priorities: child care policies, more unions, environmental goals, racial justice, etc. Rather than being a program aimed at boosting chips, it tries to it all to be once.
One would hope that as the Cold War atmosphere intensifies, our politics will become more serious. When Americans went to the polls during the last Cold War, they realized that their vote could be a matter of life or death. It can feel that way again.
Governing in this day and age requires an extraordinary level of experienced statesmanship – running industrial programs that don’t blow up, partially deglobalizing the economy without sparking trade wars, steadily outdoing China without humiliating it. As China realizes that it is falling further behind every year, an invasion of Taiwan could be closer.
Miller Was asked what were the chances that in the next five years a dangerous military clash between the United States and China would trigger an economic crisis comparable to the Great Depression? He estimated the chance at 20 percent.
That seems high enough to focus the mind.