Having defeated Japan’s electronics industry, can the United States “suppress” China’s electronics industry again?

When the United States launches a "war" on a country's high-tech industry, the main historical case that can be used as a reference is the competition between the US and Japan's electronics industry (which began during the Reagan administration in the 1980s).

If we compare the situation at that time with the situation of the Sino-US trade war today, we can find similarities but also great differences.

First of all, we can summarize two differences between China today and Japan at that time.

The first difference:

At that time, Japan's electronics industry was on the rise. Leading electronics companies, including Hitachi, Sony, Mitsubishi, Fujitsu, NEC, Toshiba, and Panasonic, had a complete vertical industry chain and were highly independent, not dependent on the electronics industry in the United States. In 1995, when Japan's semiconductor industry was about to decline, the top ten semiconductor companies in the world included NEC (first), Toshiba (second), Hitachi, Ltd. (third), Fujitsu (eighth), and Mitsubishi Electric (ninth).

Today, China's electronics industry is still catching up, and its strength is not comprehensive enough. If we look at the top ten semiconductor companies in the world in terms of revenue in 2017, Huawei's HiSilicon is not even in the top ten. If we remove the three major pure wafer foundries, HiSilicon's revenue is roughly in the top 20. Moreover, China's electronics industry chain is not as complete as Japan's at that time, and its independence is not enough. The bottleneck incidents have occurred many times.

Today, the most important Chinese ICT companies include Huawei, ZTE, BOE, and SMIC. Even if we add in the much-criticized Lenovo and other companies that are in an important position but lack innovation, there is still a clear overall gap compared with the lineup of leading Japanese electronics companies at the time.

Currently, the size of China's ICT market is still less than half of that of the United States, but its GDP has exceeded that of the United States. As China's broad ICT market has maintained a growth rate higher than GDP, broad development prospects can be foreseen. The key lies in China's subsequent strategy.

The second difference:

Behind Japan's electronics companies are famous Japanese consortiums, which have contributed to its large and comprehensive high-tech industrial chain. Almost all technologies and accessories are provided by its own members, rather than purchased from outside. Moreover, at the national level, the Ministry of International Trade and Industry of Japan has promoted the formation of a consortium of enterprises, bringing together Fujitsu, Hitachi, NEC, Mitsubishi Electric and Toshiba to form the "Super LSI Technology Research Group". By the early 1980s, Japan could manufacture more than 70% of semiconductor manufacturing equipment itself.

So Japan is really protectionist, and Japanese companies are really national industries. The consortium is united against the outside world, the companies are closely cooperating, and the state provides manpower and capital. Compared with Japan, China today is certainly not protectionist, and at the same time, many so-called "national brands" are to be questioned. If China is determined to follow Japan's practice at that time, then the progress and strength of breaking the Wintel and AA systems and cultivating independent technology systems should be far greater than the current reality.

Does it seem that China is in a more dangerous situation today? Not really. Let’s continue with the analysis.

Next, let’s take a look at the similarities and differences between the cards the United States plays against Japan and against China.

First of all, the United States blames the other side.

The United States accused Japan of dumping. At that time, the American consumer market, including televisions, video game consoles, radios and other products, was almost dominated by Japanese manufacturers, but Japanese manufacturers did not rely on American components. This is different from the situation between China and the United States today. The United States has no profit at all.

Therefore, American electronics manufacturers put aside their differences and united to deal with Japan. This was not entirely led by the US government. In 1977, these manufacturers established the Semiconductor Industry Association of the United States. The CEOs of Intel and AMD were both members of the policy group to deal with Japan.

The United States today accuses China of many issues, including intellectual property issues, network equipment security issues, and trade issues, hoping that China will buy more American products and open up its market. Some of these accusations are groundless, while others are consistent with China's reform direction.

American electronics manufacturers have profited from the Sino-US trade. On the one hand, Chinese products contain a large number of American components. On the other hand, Chinese manufacturing serves American manufacturers, and the global supply chain reduces their costs. Therefore, they have no motivation to unite against China. On the contrary, Qualcomm and Apple have sued in China. Even if they finally settled, it is enough to prove that there is a conflict of interest between them. Apple CEO Cook also publicly supported Made in China 2025 and opposed Trump's lose-lose approach of launching a trade war.

It can be seen that today, only a part of the US government is committed to the friction between China and the United States. The goals they hope to achieve, such as trade balance and the return of manufacturing to the United States, cannot be accomplished by a high-tech industry competition without reforming the US's own economic and social system.

Secondly, the US approach is to first talk about theory and then be practical.

The negotiation process is to start with a vague negotiation and only establish issues of principle, so that the other party can easily agree. The ambiguity is then used to lay the groundwork for the United States' selfish interpretation in the future.

At the time, the United States was also trying to get Japan to commit to opening its market in principle. But as mentioned earlier, Japan is a true protectionist and a truly national industry. The glory of its electronics industry has been achieved through strong government promotion and corporate self-sufficiency. Therefore, the United States has actually pointed its sword at the heart of the problem, and can then use its subsequent killer weapons one by one with unstoppable force.

Japan accepted the principles first, and when the negotiations came to details, the United States did not give Japan a chance to bargain by using the principles established at the beginning, from the timetable for reducing tariffs on electronic products between the two countries, increasing bilateral investment opportunities, establishing procedures for protecting intellectual property rights, to Japan's complete abolition of chip tariffs and intellectual property protection.

But Japan will not sit back and surrender. This gradual approach certainly cannot hurt the core. In 1985, Japan replaced the United States as the world's largest chip producer. At that time, Japanese chips were indeed cheaper, better, and more advanced than those of the United States. Intel had just transformed from DRAM manufacturing and could not have imagined that it would become the CPU hegemon it is today. The previous efforts of the United States did not seem to be effective.

Finally, the United States really became pragmatic, and this pragmatism was reflected in the fact that it completely tore off its own free trade disguise. Just like it did with China today, the trade representative stood up.

This is what a U.S. trade representative recalled at the time:

I'll never forget one expert who knew the industry told me, "Don't waste your time on chips. They're done. You should focus on saving the computer industry. That's next." But I ultimately decided that I wasn't ready to make the conclusion that the U.S. chip industry was unsalvageable. And I felt it was a matter of national security, which trumped any economic interests in this case. But I couldn't talk about it publicly because it was classified and because it showed how vulnerable we would be in defense and other areas if the United States became dependent on Japan as a source of our chips.

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To summarize his words, it can be said that national security is higher than international division of labor, geopolitics is higher than economic interests, and great power competition is higher than free trade.

The United States launched a Section 301 lawsuit against Japan, accusing the Japanese electronics industry of dumping in violation of competition principles. Japan has more than a year to agree to the conditions proposed by the United States. Otherwise, the US President (Reagan) has the right to retaliate against Japan in a manner he deems appropriate.

Under pressure from the United States, Japan and the United States formally signed the Semiconductor Treaty in September 1986. Japan not only had to stop dumping, but also encouraged and expected foreign chip manufacturers (mainly the United States, of course including Samsung of South Korea supported by the United States) to expand their market share in Japan. In this way, Japanese companies could not clear out old products at a price below cost when launching new products, and new products could not be launched in time under inventory pressure. Because American manufacturers monopolized a part of the market share (20%), and the United States also dismantled Japan's semiconductor alliance, the cooperation between Japanese manufacturers was broken and unhealthy competition began.

In 1993, the United States replaced Japan and once again became the world's largest chip exporter.

During this process, Japan did resist, for example, it set a unified minimum price for exports to prevent internal unfair competition, but the US government immediately decided to impose import restrictions of up to US$300 million on Japan, forcing Japan to surrender.