January 27, 2023

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Chinese takeovers are becoming a geopolitical front line

Newport in South Wales is on an unlikely geopolitical fault line. The UK government cited national security concerns to retrospectively block the sale of one of the UK’s largest semiconductor factories, Newport Wafer Fab, to a Dutch company owned by China’s Wingtech. The UK is not alone: ​​Germany has blocked two similar deals, with its Vice-Chancellor Robert Habeck accusing China of pursuing a “premeditated strategy of acquiring knowledge in the sector”.

The decisions run the risk of being perceived as China bashing. The West must try to balance legitimate concerns about strategic assets falling into the hands of potential adversaries with actions that might fuel the idea that it is trying to hold China back – or that it is pursuing an industrial strategy through the back door.

The pandemic and Russia’s war in Ukraine underscored the need to secure supply chains and the folly of over-reliance on a hostile regime. The British and German decisions follow far-reaching US controls on high-tech chips. US Congressmen raised concerns about the sale of Newport Wafer, prompting critics to claim pressure is coming from Washington – although that means ignoring the number of China-hawks in the UK government.

It is wrong to cloak industrial strategy and protectionism in the mantle of national security. But the role of Chinese companies in these deals, and the fact that they’re semiconductors, makes it difficult to draw a line. This is especially true in the context of a more confident China and fears that it could invade Taiwan, which dominates advanced semiconductor manufacturing.

A 2017 law requires Chinese companies to work with Beijing’s intelligence services. This means that a contemplated Chinese takeover in another country’s strategic sectors becomes a more tenuous affair. This is not limited to semiconductors: concerns have been raised about Cosco’s stakes in the ports of Piraeus and Hamburg. Beijing can theoretically require the shipping giant to support the Chinese Navy wherever Cosco operates.

Semiconductors also blur the definition of a security threat. They power everything from smartphones to cars, but they also have military applications. That’s why Joe Biden’s export controls — though ostensibly designed to keep military technology from falling into Beijing’s hands — are so far-reaching. Securing even a small role in this global supply chain can itself pose a national security issue.

The British decision has nevertheless stunned many. Newport Wafer’s technology isn’t cutting-edge — though the facility is in a cluster that specializes in interconnects that may have advanced applications. The government’s reasoning beyond a one-page document is not clear. It doesn’t help that there is no national security definition in the legislation under which the deal was blocked. The company can take legal action, but many of the government’s deliberations are kept secret, making it difficult for judges to scrutinize the underlying principles. Such ambiguity reduces predictability for the foreign investment that Britain relies on.

When a country decides to choke off investment flows to a capital-intensive sector like semiconductors, it is vital that it subsequently encourages that industry. The US and the EU have announced support packages worth USD 52 billion and EUR 43 billion respectively to expand the domestic semiconductor industry. British investment, on the other hand, is negligible. An overarching strategy is long overdue.

Trying to distinguish between the national interest and national security is difficult when it comes to semiconductors. But a little transparency goes a long way, as does a reminder that inappropriate protectionism drives up costs and exacerbates cross-border tensions.