So by all indications we are in a new one Cold War. Leaders of both parties in the US are belligerent about the China. Drums of war are pounding across Taiwan. Xi Jinping promises to dominate the century.
I can’t help but wonder: What will this new Cold War look like? Will it change American society like the previous one?
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The first thing that strikes me about this Cold War is that the arms race and economics are merging. A key focus of the conflict has so far been over microchips, the tiny devices that not only power our cars and phones but also pilot rockets and are needed to train artificial intelligence systems. Whoever controls semiconductor manufacturing controls both the market and the battlefield.
Risk of conflict in Asia
Second, geopolitics is different. As Chris Miller states in his book The Chip Wars, the microchip industry is dominated by a few very successful companies. More than 90% of the most advanced semiconductors are manufactured by a single Taiwanese company. A Dutch company makes all the lithography machinery needed to make the latest chips. Two companies in Santa Clara, California have a monopoly on the design of graphics processing units, which are essential for running database artificial intelligence applications.
Left Quote Arrow If the West is able to block China’s access to high technology, it is able to block China completely.
These bottlenecks present an intolerable situation for China. If the West can block China’s access to cuttingedge technology, it can block China outright. Therefore, China wants to get closer to chip selfsufficiency. The US intends to become more selfsufficient in chips than it is now and create a global alliance around semiconductors that excludes China.
American foreign policy was quickly realigned in this direction. In the last two administrations, the US has acted aggressively to prevent China from obtaining the software technology and equipment needed to make the most advanced chips. The Biden administration is not just blocking Chinese military companies, it is blocking all Chinese companies. That sounds like an obvious protective measure, but in other words it’s dramatic: official US foreign policy aims to impoverish a nation of nearly 1.5 billion people.
I am even more appalled at how the new Cold War is reshaping domestic politics. Since 1791, after the publication of Alexander Hamilton’s Report on Manufactures, there have always been Americans who have supported industrial policy: the government’s commitment to strengthening private sectors of the economy. But this line of government generally took place on the fringes. And now it’s at the center of American politics for both green technology and chips.
Last year, Congress passed the Chips Act with BRL272 billion in grants, tax credits and other subsidies to boost US semiconductor production. It’s an industrial policy that would have left Hamilton in awe and applause.
Left Quotation Arrow China is already spending more than 12 times what the US is spending as a percentage of GDP on industrial programs. Right quote arrow
In the years and decades to come, China will invest immense sums in its own industrial policy programs for a range of cuttingedge technologies. An analyst at the Center for Strategic and International Studies estimates that China already spends more than 12 times what the US spends on industrial programs as a percentage of GDP.
Over the next few years, US leaders will need to recognize how effective this spending is and how to respond. Even more so than the last Cold War, this next one will be waged by technological elites. Both countries are likely to spend heavily on their better educated citizens a dangerous situation in times of populist resentment.
We have already begun to notice a number of new political cracks. At center is the race of neoHamiltonians who supported the Chips Act including the Biden administration and the 17 nonTrumpist Republicans who voted alongside Democrats to legislate in the Senate.
There are already a number of populists on the right who are super belligerent towards China on military matters but do not believe in industrial policy. Why should we spend all the money on the elites? What makes you think government is smarter than the market?
On the left there are those who want to use industrial policy to achieve progressive ends. The Biden administration has imposed a staggering number of levies on companies receiving Chip Act grants. These dictates are designed to force companies to behave in ways that address a variety of extrinsic progressive priorities: kidfriendly policies, stronger unionization, environmental goals, racial justice, etc. Rather than being a program focused solely on increasing chip production, attempts it all at once.
Our politics can be expected to become more serious as the Cold War environment intensifies. When Americans went to the polls during the last Cold War, they realized that voting was a matter of life and death. Maybe that feeling will come back.
Governing in this era requires an extraordinary level of statesmanship: executing industrial programs that don’t end up bloated, partially deglobalizing the economy without waging trade wars, and consistently outperforming China without humiliating it. If Beijing realizes that every year is going backwards, an invasion of Taiwan could be imminent.
Miller was asked about the likelihood that a dangerous military conflict between the US and China could trigger an economic crisis equivalent to the Great Depression within the next five years. He estimates it at 20%. It looks big enough to deserve attention. / TRANSLATION BY GUILHERME RUSSO
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