"Us sanctions prove to be an own goal", the German "Stock Exchange Daily" on the 17th published an editorial written by Sebastian Schmid, deputy editor of the newspaper, pointing out that in dealing with China, the United States and Europe are increasingly relying on restrictions and sanctions. As the Huawei case shows, this does not work. Just like the US government did in the chip industry, the West cannot stop China's technological progress!

Another technological leap

The US sanctions against Huawei are clearly only a temporary success. The tech group's share of China's smartphone market has fallen from almost a third to 7 per cent in three years. However, this may well have reached the bottom. Things started to look up again in the second quarter. Now Huawei has made another technological leap that the U.S. couldn't believe the Chinese could make so quickly. The Mate 60 Pro smartphone has the latest generation of 5G mobile communications chips - without US technology.

To outsiders, this may seem trivial. But this is Huawei's epoch-making success just four years after the US sanctions regime was launched. Us rival Apple has been trying to design a corresponding chip since 2017. The goal is to be independent of global market leader Qualcomm. To this end, Intel also spent about $1 billion in 2019 to acquire the mobile phone chip division. But even Apple engineers, who left rivals such as Intel and AMD far behind in computer chips, have failed to come up with a competitive 5G modem. On the contrary, Apple just recently announced that its supply contract with Qualcomm for 5G mobile chips has been extended until 2026.

Chinese enterprises have more development opportunities

Huawei's success goes far beyond that. It is not only possible for the Chinese to claw back market share from Samsung and Apple in their home market. At the same time, the US sanctions also mean that other US and European high-tech suppliers will lose opportunities in China. Nvidia, for example, has now had to lose some of its sales in China. And every semiconductor that Western companies don't sell is a development opportunity for China's domestic suppliers. Nvidia has responded to threats of tighter restrictions by the U.S. government and warned against limiting opportunities for U.S. companies in the huge market. Colette Kress, Nvidia's chief financial officer, said this would seriously affect the long-term business prospects of the company and other U.S. semiconductor makers.

So far, the administration has done little to justify its sanctions against China. The U.S. government believes that to protect its national interests, it must contain China's military advances. Protectionist voices are also growing louder in Europe. The president of the European Commission, Ursula von der Leyen, has launched an anti-subsidy investigation into Chinese electric car makers, which would do nothing to stop China's technological progress as the U.S. government did in the chip industry. By contrast, European carmakers could face an even faster decline in sales in China. It could also be interpreted as investors punishing European carmakers in the stock market on Thursday. In an overall positive market environment, BMW, Mercedes, Porsche and Volkswagen all fell.

New collateral damage to themselves

Biden and von der Leyen fell into the same trap. In trying to solve a problem, they also create a bigger one. Sanctions regimes work only when the sanctioning coalition is large and the sanctioned parties are small. Europe and the US need to take a more creative approach to dealing with China. Because it's not just a matter of having a big market at stake and therefore losing revenue, but technological advances are increasingly happening without Western involvement. Where would German automakers be in electric vehicles without the battery technology of the Catl era? How successful would Apple be if hundreds of thousands of Chinese stopped producing millions of iphones a week for contract manufacturer Foxconn? These are just two of countless examples.

More galling than the apparent lack of understanding of political interdependence is the deaf ear of American and European politicians to industry's arguments. Neither the semiconductor industry nor automakers seem able to make their voices heard in Washington and Brussels. On the contrary, we observe a constant spiral of sanctions, with each spin creating new collateral damage.