While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. Audio narration by Ad-Auris. If this post was forwarded to you and you liked it, consider subscribing. It’s free. #220 (China+1) Or (1-China)?Discarding the 'Chip War' metaphor, Analysing BYD's failed investment bid, and Questioning India's economic strategy on China
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Global Policy Watch: The Problematic “Chip War” MetaphorInsights on global issues relevant to India— Pranay KotasthaneMetaphors are everywhere in policy and politics. Evocative metaphors frame policy problems in a manner that it becomes impossible to analyse the issue from another angle or even question the facts that underlie the problem. Deborah Stone’s classic work Policy Paradox features an excellent discussion on the use of metaphors in public policy. Read this, for instance: Thanks for reading Anticipating the Unintended! Subscribe for free to receive new posts and support my work.
One such problematic metaphor has been doing the rounds: chip “war”. The term became popular after the US export controls on Huawei during the Trump administration and went out of control after an otherwise excellent book with the same name hit the stands. It’s now commonly accepted that the US and China are in an outright zero-sum fight over semiconductors. However, this metaphor is both incorrect and unhelpful for the following reasons. First, understanding the underlying narrative is important. The “war” metaphor has more to do with aligning domestic policy vectors rather than achieving foreign policy objectives. When a competition is framed as a fight against another State, many otherwise unpopular domestic policy ideas get unlocked. In this case, for example, the “war” framing has enabled extravagant subsidies for chip manufacturing across the world. The war metaphor also has a special relevance in the American political context. Here’s Deborah Stone again:
Second, the chip war framing ignores crucial facts. The US hasn’t banned the export of all chips to China. The US export controls are indeed broad, far-reaching, and the most aggressive overt government restrictions in the domain that we’ve seen in decades. The new rules increase the breadth and scope of licensing requirements with the explicit aim of restricting the “PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”. In other words, the US will strive—unilaterally and multilaterally—to prevent Chinese companies from deploying a few foundational technologies. Nevertheless, these actions are not complete bans. They are aimed at advanced chips and for specific end-use cases such as high-performance computing for military applications. But for trailing-edge chips, it’s business as usual. There is no decoupling between the two semiconductor ecosystems yet. That’s because American suppliers cannot survive without Chinese demand, and the Chinese semiconductor industry, in turn, heavily relies on incoming foreign flows of materials, machines, and talent. It can hardly be termed a war if the adversarial “forces” are openly transacting with each other for mutual gains. Third, unlike in a war, the victors and the vanquished can’t be clearly identified. Debates over whether China will “win” or “lose” a war are indications that the metaphor has taken root. But the reality in this technological contestation is far more complex. It is likely that the US will stay ahead of China in this domain over the next decade. China might also achieve some breakthroughs, such as RISC-V commercialisation as an alternative to Arm microprocessors, advanced packaging to overcome scaling challenges, and Silicon Carbide (SiC) chips for electric vehicles. However, the US has an overwhelming advantage in this domain, and hence it chose this domain to challenge China in the first place. Finally, while the war metaphor has spurred a “race” for fabs between countries, its usage precludes the solutions that will eventually help innovation, research, and supply chain resilience. Even if we take the US-China rivalry as a given, the war metaphor comes in the way of collaboration between other countries. Plurilateral cooperation in semiconductors is a necessity and not a choice. Companies must work with companies in other countries to build the marvel a complex integrated circuit is. But with a chip war as the dominant narrative, nation-states are incentivised to ignore cooperation in favour of building their own defences and moats, which further worsens the crisis. Despite these reasons, the metaphor has a powerful appeal and is here to stay until the next semiconductor industry downturn forces companies to confront their own governments. When the industrial policy gravy train that companies are latching onto pauses, as it will someday, saner narratives emphasising economics, costs, and comparative advantages, might resurface again. Until then, brace for more martial, escalatory headlines surrounding semiconductors. India Policy Watch: That Old MistakeInsights on current policy issues in India— RSJHere’s a news item that caught my attention this week. From the Moneycontrol website:
And about a week back, we had this. From ET:
In one instance, we have rejected a proposal for a large manufacturing set-up in a promising new area (EV) because of likely security concerns, and in another, a much-publicised joint venture to set up a semiconductor plant in India has unravelled without anyone giving clear reasons for it. Media reports have suggested rising costs of setting up the plant, concerns about protection of intellectual property in India, government interference in wanting an unwilling STMicroelectronics to take an equity stake in the JV and the usual red tape of bureaucracy. India is in an interesting place geopolitically today. The United States and its partners are keen to diversify global supply chains away from China, especially for high-tech and critical technology infrastructure sectors. India has emerged as a ‘natural’ alternative because it is the only country that has the depth of technology talent and the resources to make a fist of replacing China. The joint statement made during PM Modi’s recent visit to Washington had an unusually large share devoted to deepening the technology partnership between the two countries. This covered the initiative on Critical and Emerging Technology (iCET) that was inaugurated earlier in the year, greater cooperation between NASA and ISRO and deeper commercial collaboration in the space economy, semiconductor supply chain partnership and launch of joint task forces on advanced telecom-focused on Open RAN and research on 5G/6G technologies. Similar dialogues are in progress with France and Australia, and other countries will likely follow suit. Such intergovernmental efforts to increase collaboration apart, a quick look at the credit offtake of the SME sector in the past year and export data will indicate that the ‘China+1’ approach of global manufacturers is benefitting the smaller enterprises in getting global orders. Surely, decoupling with China isn’t easy, and the recent visit of Treasury Secretary Janet Yellen to China indicates that it is an acknowledged truth now in US policy circles. They are willing to find common grounds for engagement in trade. But whatever little decoupling has happened so far is already helping Indian manufacturing. The Foxconn and the BYD motors news items, different though they might be, suggest things aren’t as rosy when it comes to setting up manufacturing facilities in India. And there are possibly more such names, possibly of lower profile, who have reversed their decisions to invest in plants in India or have been denied government permission in the past few quarters. So, the question to ask is, what should India do to strengthen this trend and avoid missing this window of opportunity? The first point is something we have made on multiple occasions in the past. Global supply chains for most products aren’t linear or integrated in a manner that you can yank out the entire network to a single location or a country. Anyone setting up a plant in India will have to depend on other countries for raw materials, intermediates, technical know-how and eventually as markets for the final products. India seems to be inflicting two problems on itself here. One, it is shutting out Chinese firms from investing in India across sectors, and it is quite likely China will respond in kind by placing restrictions on exports to India. As much as India would like to believe that the world will decouple from China, the reality is a whole lot of intermediates, machinery, and raw materials for the new manufacturing setups that India is wooing to get will have to be sourced from China. The idea that companies investing in ‘Make in India’ will redraw their entire supply chain to exclude China completely at every step because they now have the privilege to be in India is a bit of a fantasy. Two, India seems to be on an overdrive to raise import duties across a wide range of products in the mistaken belief that it will help local manufacturing of these items. As we have explained a few times before, these import duties will increase the cost of manufacturing for makers in India because they often apply to intermediates that go into the final product being assembled in India by domestic manufacturers. Also, such duties reduce the ability of domestic manufacturers to compete globally because the opportunity to go toe-to-toe against global players in the Indian market is taken out of the equation. So, on both counts, India has some policy calls to make. It should be a bit more specific on what areas it wants to keep China out of, and it must not undo decades of work done by successive governments in lowering trade barriers that have been a win-win for it. The other thing that sticks out from these two news items is how keen the government is to go beyond its role as a facilitator and an arbiter in private commercial transactions. Once you start positioning yourself beyond these roles to an active player who is making these partnerships or investments happen and share the spotlight, it becomes difficult to disentangle yourself when things don’t work out. The whole thing becomes freighted with the burden of the government's image as being a key mover in making these things happen. The Union ministers involved might now claim that the government has nothing to do with two private parties ending their partnership but its own involvement so far bely that claim. I mean, if the government wasn’t involved, then what do we make of the reports that it was leaning on STMicroelectronics to go beyond licensing arrangement and have more skin in the game? The two don’t gel. The additional problem with such setbacks is that the government might now make things even more onerous for future partnerships. To avoid losing face again in future, it might make exiting from such announcements to come with consequences. That’s how the state operates. It will reduce incentives for players to invest in India. The third point to consider is the issue of what constitutes sectors that have a bearing on national security. It appears right now that anything to do with China is a national security threat. It explains the many cases against the Indian entities of Chinese companies across multiple sectors, the apparent pressure on many Indian companies that have significant Chinese investment exposure to pare that down quickly and the freezing of approvals for any proposal that involves Chinese principals or promoters. There are multiple ‘betrayals’ and faceoffs on the Indo-China border to explain this, as also the clandestine behaviour of various Chinese firms that have operated with Indian ‘fronts’ for running their lending operations or setting up manufacturing facilities. But to go to the other extreme and clamp down on everything related to China will turn counterproductive because it still remains the factory of the world. We could possibly benefit from the transfer of EV technology knowledge that BYD Motors was promising to share with Megha. Being clear about what constitutes security risk and drawing a clear boundary there is the more pragmatic way to approach this. The U.S., which has all the incentive to have a check on China, is doing this already. So, while Yellen visited China and made all the right noises, including unambiguously stating that the “world is big enough for both of our countries to thrive”, it is likely that President Biden will sign a presidential executive order soon on controlling the ability of China to get hold of AI programs or LLMs and further restrictions on the export of semiconductors. That’s the only pragmatic way to play this. Lastly, apart from Foxconn, the other two applicants who had got approvals to set up semiconductor plants as part of the government’s incentives scheme have also been stalled for various reasons. The consortium ISMC which was dependent on Tower Semiconductor as a tech partner, has been delayed because Intel’s acquisition of Tower has been delayed by Chinese regulators. While that seems to be as good a reason as any, if this project were strategic to them, they would have found a way out to continue working on it. The other applicant IGSS has requested a resubmission of its application because it possibly underestimated the costs of this project in India. I think the broader point remains that the cost of doing business in India remains unpredictable (if not high). And despite the many efforts and image-building that India has done in the recent past, it will need more fundamental reforms on land, labour and involvement of bureaucracy before the results are seen by those keen on investing in India. There’s still a yawning gap between the many investor summits and the actual realisation of those signed MoUs into projects. India must continue to focus on these fundamental issues rather than make performative gestures that will hardly make a dent on China’s economy. That old Lord Palmerston dictum is a useful reminder on pragmatism in conducting economic affairs - there are no permanent friends or enemies, only interests. Addendum— Pranay KotasthaneThe decision to reject BYD’s investment plan indicates the internalisation of the “tech war” metaphor in economic decisions. This decision shows what can happen when Home Ministry concerns reign supreme over commercial matters. It is quite strange that one of the grounds for the rejection was that the government’s belief that BYD had intentionally chosen a “lightweight” Indian partner. This reasoning is a counter-productive escalation since the FDI policy change in 2020, which was meant to block Chinese investments as a response to the border clashes in Ladakh. Soon enough, the government realised that it was nearly impossible to take advantage of the “China+1” move without some involvement of Chinese players. That’s how Apple was able to secure exceptions from the government for its Chinese suppliers, provided that they entered into a joint venture with a domestic player and gave it a controlling stake. That’s why BYD couldn’t enter India without a domestic partner. And when it did try, the government was still not satisfied with the technical capabilities of the domestic partner. So, now, the Home Ministry also has a new-found superpower of evaluating the technical upgradation capabilities of an Indian business. Who said India doesn’t have enough state capacity? Snark aside, even if the Indian entity's capabilities were the issue, it would have been better to allow entry to BYD and instead support the Indian partner in technology learning and upgradation. Instead, the government has chosen a blunt instrument of banning the entry of an A-class electric vehicle maker. BYD’s entry would have pushed domestic incumbents to become more competitive. It would have benefited consumers. And it would have given Indian engineers and designers a chance to work with a firm that’s making waves in the electric vehicle world. But alas, we’ve chosen the worst option. Ultimately, this rejection is a stark reminder that the Indian government must distinguish between the Chinese State and Chinese companies for India’s benefit. We should keep Chinese entities out in a narrow set of strategic sectors such as nuclear, defence and areas subject to cognitive manipulation. If anything, Chinese investments can give India foreign policy leverage. Economist Swaminathan Aiyar’s recommendation that “massive foreign investment is a bigger risk for the foreigner than the investee country. So, let us attract as much Chinese investment as possible since the main risk will be theirs, not ours,” will serve India better. HomeWorkReading and listening recommendations on public policy matters
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