‘Competition 2.0’ aims at unfair advantage

Challenges in sight as planned bill tries to limit technology flow to Beijing

People shop at Lincoln Market in New York City on June 12. Inflation in the US began to rise in 2021 and last year reached levels not seen since the early 1980s. Last week, the Fed voted to pause its aggressive campaign of interest rate hikes despite "elevated" inflation, while indicating a sharp increase could be needed before the end of the year. (PHOTO / AFP)

Editor's note: The China-US relationship is widely regarded as the world's most important bilateral relations. However, after the Chips and Science Act was signed by US President Joe Biden in August, the country is seeking to further decouple from China by introducing the "China Competition Bill 2.0" to curtail the flow of advanced technology to China. This page takes a look at the proposed bill and the ensuing impact of decoupling on the US as well as its allies.

Over the next few months, the US Senate Democrats are expected to introduce a new bill aimed at limiting China's ability to develop leading technologies by imposing new sanctions and intensifying export controls.

The renewed effort, known as "China Competition 2.0", came one year after a sweeping bill was passed last year to fight off competition from China in semiconductor and other technologies.

The America COMPETES Act of 2022 was drafted and passed by the House of Representatives, and the United States Innovation and Competition Act was drafted and passed by the Senate. Both bills eventually became the Chips and Science Act, which was signed into law by President Joe Biden in August.

The Chips and Science Act authorized a roughly $170 billion increase for US scientific research over the next five years and $52 billion in subsidies to boost semiconductor manufacturing and research.

Last month, Senate Democratic leader Chuck Schumer said the new proposal would broaden last year's Chips and Science Act and he hoped to begin hearings on it in the coming months.

The planned legislation would center on limiting the flow of advanced technology to China, tightening rules to block US capital from going to Chinese companies, and others.

It would also seek funding for additional domestic investments in key technology areas.

The new bill will need Republican support to become law, as Republicans control the House of Representatives. It is possible that bipartisan legislation is possible using last year's Chips and Science Act as proof, Schumer said.

Republicans in the Senate had been supportive of some of the ideas proposed for the package, he said. However, his calls for bipartisanship on the ambitious plan to stave off competition from China are falling flat.

This year, Republicans are balking at spending more on new initiatives as they focus on cutting the federal budget.

Senate Republicans are wary about the details and costs of Schumer's initiative, and say they have not been included in Democrats' discussions.

John Thune, the No. 2 Republican in the Senate, said the new "China competition" initiative would have a hard time getting through Congress, given his party's concerns about spending, the debt ceiling crisis and the size of last year's bill.

Some Republicans also oppose the way the Chips and Science Act is being implemented. For example, they blasted the Biden administration for requiring semiconductor manufacturers who apply for subsidies under the act to provide childcare services at their facility.

And then there's the question of how much the new legislation would cost. As to whether Republicans would back the initiative, Thune, also Senate Minority Whip, told Reuters, "It would be challenging."

He cited Republicans' concerns about "too much spending", "the impact it's had on inflation" and "the way the deficits exploded and ballooned".

The Chips and Science Act aims to boost domestic production of semiconductors, address supply chain vulnerabilities and bolster the US' technological leadership.

It also establishes a new directorate at the National Science Foundation to focus on fields such as semiconductors and advanced computing, and authorizes $10 billion to invest in regional innovation and technology hubs.

So far, much of its focus has been on the $52 billion it provided to ramp up semiconductor manufacturing and research in the US, including $11 billion for advanced research and development.

Although the first round of funding has been secured, critics of the law have raised concerns about distribution.

George Koo, a retired international business adviser in Silicon Valley, doubted if the subsidy would be allocated effectively and lead to desired technical advances. He also doubted the manufacturers' capability of recruiting enough qualified workforce within the country.

While lawmakers have an ambitious vision for the development of the US semiconductor industry, the policy's conflicting goals may pose challenges for state and local governments.

"There's a little bit of goal conflict there," Nathan Jensen, a professor at the University of Texas in Austin, told Route Fifty, a digital news publication covering state and local government news. "We want the cutting-edge technology, but we want to locate companies in rural areas with high unemployment.

"The irony is asking states and local governments to support these projects and have some skin in the game."

Apart from the "chips" part, which authorized $52 billion, the Chips and Science Act also has the "science" part, which authorized about $170 billion for a number of key initiatives to boost research and development. This funding has to be approved by lawmakers each year through a separate appropriation process.

However, lawmakers have already fallen short in appropriating the full amount of funding authorized by the act for science and research.

Neither the Consolidated Appropriations Act for fiscal year 2023 nor the Biden administration's FY 2024 budget request has managed to keep up with the agency funding commitments established in the act.

The total funding for research agencies, including the National Science Foundation, the Department of Energy's Office of Science and the National Institute of Standards and Technology, was nearly $3 billion short of authorized targets this year. Next year's request for these agencies is more than $5 billion short, according to a recent analysis by the nonprofit Brookings Institution in Washington.

US House Speaker Kevin McCarthy speaks in the Rayburn Room following the House vote on the Fiscal Responsibility Act at the US Capitol in Washington on May 31. (PHOTO / AFP)

Bipartisan agreement

Biden and House Republican leaders have reached an agreement in principle to limit federal spending over the next two years in exchange for suspending the debt ceiling. On June 3, Biden signed a bipartisan act that suspends the US government's $31.4 trillion debt ceiling until Jan 1, 2025, and increases the limit to the actual debt level on Jan 2, 2025, averting the risk of an economic catastrophe.

The debt ceiling deal cuts so-called nondefense discretionary funding, including scientific research, for fiscal year 2024.

Proponents of the Chips and Science Act have grown worried that limits on government spending could undercut the law's ambitious goals of bolstering the country's scientific edge and countering China's technological rise.

"It's even harder to be optimistic about the odds of fulfilling the Chips and Science Act's vision of resurgent investment in American competitiveness," the Brookings Institution's report said.

What is called the "place-based industrial policy" in the act is also coming up short, with less than 10 percent of the five-year place-based target funded to date, the report said.

There have been two rounds of proposed or adopted funding policy for chips research agencies, and the results are "mixed to disappointing", it said.

"With these shortfalls at NSF (National Science Foundation) and other agencies, it will be difficult for federal science and innovation programs to have the transformative impact that CHIPS envisioned."

Congress is not the only one to blame — the White House budget also contains "sizable funding shortfalls" for research agencies, the analysis said.

The Chips and Science Act offers both "carrots" to subsidize domestic chip manufacturers and "sticks" to restrict China's ability to purchase US highly advanced chips through export controls.

Schumer has said the new planned legislation would build on that law and further strengthen export controls to make it harder for China to obtain cutting-edge technology.

Since US companies account for 47 percent of global revenue in the semiconductor industry and China is a key market, some major semiconductor companies in the US have taken a hit from the policy.

US semiconductor equipment makers Lam Research and Applied Materials have said their revenue projections this year are likely to be hit between $600 million and $2.5 billion because of export restrictions.

"The damaging blowback from Biden's China policy may not be as obvious as not raising the debt ceiling, but there is a strong element of cutting off Uncle Sam's nose to spite his face that the leaders in Washington seem oblivious to," Koo said.

"The desire to inflict pain on China far outweighed protecting Americans from even greater pain."

Koo gave the sanction of Huawei as an example to illustrate his point.

"Huawei has developed the world's most advanced fifth-generation telecommunication system, which has received acceptance around the world. Because of US fear of being spied upon, Washington not only has refused to buy from Huawei but pressured many of its allies to rip out billions of dollars' worth of Huawei equipment already installed.

"After enduring the US sanctions for three years, Huawei has just announced the complete replacement of operating software based on Western technology. It will now sell to the world without any constraints, while the United States' allies suffer hundreds of billions of dollars from the teardown of already installed Huawei equipment and the huge opportunity costs of not having a state-of-the-art telecommunications system."

Reinvesting in research

To maintain the leadership in science and technology, experts have called on attracting talent from the world and reinvesting in basic research.

On one hand, the US needs immigration reform to ensure foreign talent are attracted to the country and stay in the country and contribute; on the other hand, the US needs to invest in basic research, said Glenn Tiffert, a research fellow at the Hoover Institution of Stanford University, at a recent panel discussion examining the research collaboration between the US and China amid competition.

"It should be easy to do and yet our strategies have mostly been about restricting rather than enabling," he said.

While the US is still "the envy of the world", the nation's per capita research productivity is less than Germany's, the UK's and China's now, said Tiffert.

"We're simply resting on our laurels," he said, adding that the US has not been investing in its higher education system.

"It's about reinvesting in America. I'm deeply troubled by the debt agreement that was signed in the Congress that did not appropriate money that was authorized for basic research and the Chips Act," Tiffert said.

"Just as a matter of inflation, the government support for basic research will shrink next year. It's impossible for us to compete (with China) on those terms," he said.

He said the US' strategy shouldn't rely on China to fail or on the US to throw obstacles in China's path.

"We win the competition by being better versions of ourselves, by being a more welcoming environment, by encouraging people to stay, by creating pathways for them to contribute," said Tiffert.

Agencies and Xinhua contributed to this story.