Silicon Triangle: Mary Kay Magistad on the Future of US-China Competition

>> Kharis Templeman: So what are those futures? Can you walk us through the four quadrants?

>> Mary K Magstad: Sure, absolutely. So the group also comes up with its own names for the quadrants. So the group had a little fun with some of the names. One of them is called the great power Happy hour.

>> Kharis Templeman: Well, hello, everyone, I am Kharis Templeman. I'm a research fellow here at the Hoover Institution, and it's my pleasure to be speaking today with my collaborator on Hoover's new report, entitled Silicon Triangle, The United States, Taiwan, China, and Global Semiconductor Security. Speaking with me today is my collaborator, Mary K Magstad, who is the deputy director of Asia Society's center on US China Relations.

And an award winning journalist who lived and reported in East Asia for more than two decades, including in China for about 15 years, years for NPR and for PRI and the BBC's the World, and also in Southeast Asia for NPR, the Washington Post and other outlets. She has created two critically acclaimed podcasts on China's new Silk Road and whose century is it?

And she has taught international reporting and audio journalism at UC Berkeley. So I'm in the position of interviewing an expert at interviewing. So I'm in a bit of disadvantage here today, and I'll just try to give you the floor as much as possible. But the reason we're speaking here today, Mary Kay, is that you have a chapter in this new report on the semiconductor industry, and it's really kind of the scene setter for the entire report.

And so I wanted to draw out a little bit the motivations for this report in our conversation today. So thanks for joining me again today.

>> Mary K Magstad: It's a pleasure to be with you, Kharis.

>> Kharis Templeman: So to set this up, I thought I'd lead with the idea that China wants to be, according to Xi Jinping, the leader of China wants to be the technological superpower in the future.

So China wants to win the race to dominate the future. And this comes from Xi Jinping. Party documents statements from their own foreign policy, foreign policy experts and others. And the question that poses for us is, what would the world look like if China actually succeeded in that goal?

And second, what, if we don't like how that world looks, should the United States and our like minded partners and allies do about that? And so within that question, the report that we're going to talk about today focuses specifically on the topic of semiconductor chips. And the irony in the US China competition to win the future is that most advanced chips are produced not in the People's Republic of China or in the United States, but in the island of Taiwan, which is a de facto independent state, but recognized not by the United States or the PRC, and claimed by China as part of its territory.

And so the report begins with a question of how to frame the challenge. And Mary Kay's chapter lays out something called scenario planning. So, I wonder if, Mary Kay, you could talk us through a little bit about the concept of scenario planning, why we started with this, and how it's helped us kind of lay the foundation for the rest of our analysis.

>> Mary K Magstad: Sure, so scenario planning is a tool to help whoever's involved in the process think more agilely about what kinds of futures may come. It's not meant to predict. It's not meant to forecast. It's qualitatively different from either of those approaches. So what happens is that the group that is involved with whatever the big question is comes together and works together to think about, okay, what are the driving forces that could shape the future?

What do we see that could matter to what matters to us? In this particular case, the group that came together included very senior, very knowledgeable specialists in security in the semiconductor industry in China, in economics, and more. And so different people were coming with different perspectives about what was going to matter the most.

They came up with more than 200 driving forces and narrowed it down to two. And those two were, this is connected to three main questions, I should say first. So the three questions were, what should the United States do in the near term to reduce current vulnerabilities to semiconductor supply chain disruptions?

And what should the US do over time to create more durable access to the types of semiconductors needed when they're needed? That's number one. Number two is, how can this be done in a way that lets Taiwan and its semiconductor industry continue to thrive and for Taiwan to continue to be self governing?

And then the third one is, how can the United States and its allies guard against any new vulnerabilities that might come as China develops its own semiconductor industry and other technological capabilities? And also, how can the United States and its allies, as a team working together, be ahead of the curve in creating and leading in new critical technologies?

So, with those questions in mind, the group brainstormed, and the two driving forces they decided to focus on were, will the global economy become more integrated or more hived up into blocks? And will the United States continue to lead in technology in general and semiconductors in particular? Or will China take the lead in scenario planning?

What you do is once you have those two driving forces that you're going to focus on, you basically create four quadrants and you walk out in all four of those directions. So in each one there is a pairing of two variables and those create very different futures. What you do when you walk out isn't to say, I like this one.

Let's make this happen. These are all plausible futures. Any one of these might happen, some combination of them might happen. We might move from one future into another and then back again. So you need to be prepared for any of those things to happen. It's just a way of helping the group think about all of these plausible futures and then say, okay, so what can we do that would keep us open to the best possible future?

We want to help us take advantage of opportunities as they come, to be proactive in creating those opportunities for ourselves. And how can we also guard against risks? And how do we know when we're moving into a particular kind of future where we need to take that kind of action?

>> Kharis Templeman: Okay, great. So what are those futures? Can you walk us through the four quadrants?

>> Mary K Magstad: Sure, absolutely. So the group also comes up with its own names for the quadrants. So the group had a little fun with some of the names. One of them is called the great power Happy Hour.

That's where the United States and its partners lead. There's an integrated global economy. It's a peaceful world. Western liberal rules dominate. The west keeps its lead in technologies, including semiconductors. And that happens partly because there's a greater investment and focus on STEM education and research and development, especially, but not only on semiconductors.

The US and its partners in this scenario have a robust semiconductor supply chain and An assured supply of semiconductors. Global sentiment about China has turned more negative in this scenario. US and allied defense spending remains significant, and the west has been able to create better protections against espionage and intellectual property theft.

The second somewhat peaceful scenario is the China dream, where China leads but there's not turbulence, there's not war. China leads in technologies, including in semiconductors. It leads in the global economy. It leads in setting international rules and standards for technologies and other things. And it potentially also leads as a positive example for other emerging economies.

And this scenario might come to pass because the US and its allies have failed to outcompete China economically or in terms of values. Partly because the US internal divisions and strife in this scenario are out of sync with the values that it purports to uphold. In this scenario, Taiwan has voluntarily become part of the People's Republic of China.

Perhaps out of pragmatism, it's accepted the incentives that China has offered, while also recognizing it doesn't have much choice. And this scenario is particularly salient as we're speaking, because as we're speaking, China's navy has carried out its biggest ever deep water military exercises around Taiwan. The defense ministry says at least 35 Chinese military planes flew around the island.

The Shandong aircraft carrier came within 60 nautical miles of Taiwan's coastline. And at the same time, this comes at a time when China's communist party central committee has just issued a proposed plan to turn parts of Fujian province. Specifically Pingtan island, about 68 nautical miles from the southern province, chinese province of Fujian's capital, into which is called Fuzhou.

Into a demonstration zone for integrated development with Taiwan, with more free movement of people, goods and financial flows. So it's kind of this. There are incentives being offered, but definitely there's a stick that's being waived as well at the same time. And so in the scenario that the group talked about, the China dream.

Perhaps Taiwan has gone through some number of these sorts of carrot and stick exercises and decides the world's going in a particular way. Let's do what makes the most sense for us in this scenario, there are also two fairly turbulent futures. One of them was called Cold War 2.0.

In this one, there are trade blocs rather than an open, integrated global economy. And perhaps the trade blocs divide more open and closed societies, democratic versus authoritarian states. There's still some trade across blocks, but it's more difficult and more expensive. In the US, bloc rules based trade continues, but China doesn't necessarily accept many of those rules.

In this scenario, the US and allies compete on their democratic and free market values. China competes by being willing to trade and invest in any country pretty much as it does now. There's an increased fear of war in the South China Sea or in Taiwan, but China hasn't yet seized Taiwan or blockaded it.

It is, however, acting more aggressively and in a more threatening manner. The United States and its allies in response to that, and also because it's in their own interests. Strengthen their direct relationships in the region, including and especially with southeast asian countries and with ASEAN, the Association of Southeast Asian Nations.

And in the last scenario, the downward spiral. China believes the east is rising and the west is declining and that is borne out here but there's significant friction. China has outcompeted the United States and its allies. Its created a new network of global trade and power with China at the center.

And whether it calls that the Global Development Initiative or the Belt and Road Initiative, its the same kind of thing. China has offered loans and investments and is the predominant trading partner for most countries in the world. And the United States and its partners have nothing really responded in a way that's attractive or compelling for those countries.

There have been missteps ranging from internal political polarization in the US and xenophobia and the erosion of us democracy and rule of law, all of these weakening american soft power. And there just haven't been effective responses to China. China, meanwhile, has gotten where it is by being more consistent, reliable and pragmatic, by offering what it calls a win win.

And even if specific countries or many countries don't necessarily always think that the wins are being divided equally, they at least think it's the best deal they can get. So in this particular scenario, the US and its partners are at least partially decoupling from China and they're urging non aligned countries to choose sides, but few do.

>> Kharis Templeman: So you've mapped out four very different scenarios for how the future could look. A couple of those are, as an American, they look really bad and as someone who cares about Taiwan, they look pretty bad, too. If I were sitting in Zhongnanhai in Beijing, I might like those scenarios.

But yeah so I want to ask two questions here. The first is about what are the kind of black swans, or in the chinese parlance, the gray rhinos, the things that we have no idea about right now or we're not paying close attention to. That could really change the tide of the direction that would move us into a different quadrant from the one we're in now.

>> Mary K Magstad: Well, the thing about black swans and gray rhinos is you don't know what they are until they happen. And as you know, many of the biggest shifts in China happened when no one saw them coming. And it's not that the signs weren't there earlier. It's just that maybe people weren't paying as much attention to those particular signs or to connecting the dots in a particular way.

Because there was sort of a confirmation bias, like we think we're going into this future, and therefore let's look for signs that that's what's happening. And I think it's always important as a journalist, as an analyst, as a policymaker, to just be aware to check your own assumptions about what might happen, what might not happen.

But obviously, just to throw one out, if Xi Jinping had a heart attack tomorrow and wasn't around anymore, it may change the course of Chinese policy. There certainly had been before Xi Jinping came into office in 2012 for the party, 2013 for the government, a belief that China was moving in a different direction.

It was still going to be an authoritarian state, but more open to the world, more looking. Basically, it was going to be something like the China that's in the China dream that was able to attract via its own soft power, which China still does to some extent. But certainly not as much as it used to do, partly because of the wolf warrior diplomacy, the sort of more aggressive way of being in the world.

The sort of assumption of China is now one of the. Of the two top global powers, and it can throw its weight around. And a number of countries have voted with their feet by saying, well, you know, I mean, so to speak, you know, not that a country can walk anywhere, but saying, okay, well, we would like to have other options.

We're not saying absolutely no to you, but we want to be able to multi align so that we're not so dependent on you. So were Xi Jinping not to be the top leader in China anymore with so much power concentrated in his own hands, there might be a rethinking of, hm, did this work for us?

What could we do to strengthen our position in the world in ways that matter to us in the long term? Are there certain things that we're doing that maybe we could forego where we're being particularly aggressive right now?

>> Kharis Templeman: Right.

>> Mary K Magstad: That's a possibility.

>> Kharis Templeman: Okay, so that's the China issue.

China is perhaps the most inscrutable of the pieces in this puzzle that we're looking at. The US is in some ways much more transparent, but also more complicated in some ways than the chinese leadership model. And so are there things in the United States, you see that could significantly affect which of these quadrants we end up in the future?

You mentioned a couple, but I want to kind of draw you out on this question a little more.

>> Mary K Magstad: United States became an authoritarian state. That would change the equation very much. There's not a 0% chance of that. You know, there's a non 0% chance of that. So, you know, I think most Americans hope that doesn't happen, but there are political winds that could blow in that direction.

There's at least a minor, minor chance. What else could happen? I mean, certainly on the more positive side, a greater investment in education, StEm research. STEm education and research and development could make a positive difference. The CHIPS Act is already making a positive difference, but that's a first step.

There's a lot more that needs to happen in terms of increasing long term investment in, you know, the very things that we focused on in this report that are important to America's future and to the future of any country that, you know, basically any country in the world that depends on semiconductors in particular, to power so much of what's in our lives.

There are other technologies as well. There may well come to be a technology that supersedes semiconductors. I mean, that's one of the things the the working group considered as it was thinking about plausible futures. So how do we become the country or the grouping with our friends and allies who come up with those technologies, who lead in those technologies.

It has to come through greater investment and a greater commitment to, you know, funding the sorts of efforts that lead to that kind of research and that kind of a breakthrough. Okay, yeah.

>> Kharis Templeman: So it sounds like you're already developing a kind of a set of policy recommendations here.

Right. One is clearly more investment in STEM technology, STEM education, but another potentially is deepening our collaboration with partners and allies, both in the region and globally. And the report, I'll just editorialize here a little bit. The report actually tries to make the case that this is important not just because it's a good thing to do for the world, but it's in America's long run interests in this competition with China, to deepen collaboration with like minded partners and allies, because we actually gain a lot from that in the long run.

It increases our chances of being in one of the good quadrants as opposed to the bad ones.

>> Mary K Magstad: Well, absolutely. I think. I mean, with many of the recommendations that the report did make, and these were included in the final report, there are all kinds of reasons for taking these steps.

Some are just in our own self interest, and some are considering the welfare and what is best for our allies and partners as well. So it's a virtuous circle. We do well for ourselves by doing good for others who we work with. It was also mentioned in the working group that there was a question of, like, will it just be like minded partners working together, or will the US be more pragmatic, as it has been at times in the past and has worked with whichever countries and partners it needs to to further its long term interests?

So that's also a variable.

>> Kharis Templeman: Yeah, so on that note, President Biden was just in Vietnam signing a new agreement for a deepened partnership. And it's not entirely coincidental that a fair amount of taiwanese investment that used to go to the mainland, the chinese mainland, is now being redirected to Vietnam and other places in Southeast Asia.

So there's some already hints of where we might be headed in these four scenarios or four quadrants over the next decade and more. Can I invite you to speculate a little bit on what track or what quadrant we're most likely in now and what, if anything, might knock us off that track?

So first, what quadrant are we in, do you think?

>> Mary K Magstad: It feels like there are a lot of countries and a lot of partners and allies that would like us to be in the great power happy hour quadrant.

>> Kharis Templeman: Right.

>> Mary K Magstad: But it feels like we're kind of close to the middle of the graph right now where the cross is, because there are a lot of variables that could go in either direction in our next election.

The Biden administration has been trying to reconnect with and reassure us allies and partners in different regions about us commitment to them. And I was part of a Southeast Asia working group that we had earlier this year where we met with Southeast Asian policy experts from every ASEAN country at a conference in Singapore.

And a lot of them express skepticism. It's like we'd like to believe you guys are going to be around and that as administrations change, you're going to continue to walk the walk of your values, that you're going to continue to do what you say you're going to do to support us.

But how do we know, right? And so we need to multi align. We need to keep our options open. Vietnam itself, it's not saying we don't want to trade with China. It's not saying we're choosing you instead of China. It's saying we want both. We want balance. And meanwhile, we're going to also keep our ties warm with Russia, with the Soviet Union having played a significant role in Vietnam for decades as well.

And I think a challenge for any US administration is how do you deal with that when a country doesn't want to choose? When a government of a country doesn't want to choose, are you, how much pressure is exerted? Or do you just accept that and lead through soft power, lead through incentives, you know, offer something that the government recognizes is in their interests and so they're going to lean more in your direction?

I haven't actually answered your question. About which scenario we're in right now, other than to say, I think that we're kind of shifting back and forth, probably still in great power happy hour, but there's room for it to move.

>> Kharis Templeman: Okay, so there's a lot of alternative futures out there that are plausible, right?

So we're at potentially an inflection point here. In terms of policy recommendations, the report focuses a lot on the United States and what Taiwan can do. But there's also some discussion of a more kind of aggressive or offensive approach where in addition to trying to run faster in this race ourselves, we try, people have proposed trying to slow China down as well.

What's your own view on that set of policy recommendations? Do you think that's plausible?

>> Mary K Magstad: Well, I think having restrictions on what kinds of semiconductors China has access to has slowed some chinese companies down, has slowed some technological advancement down. The Biden administration, as you know, has said, you know, we're not trying to block China's technological advance across the board, that we're just taking steps, very measured steps, very specific steps to protect us security interests in the world.

And to me personally, that feels like the right kind of calibration. Trying to wholesale keep a country of 1.4 billion people from advancing technologically isn't just bad for them, it's bad for the world. There are a lot of very smart scientists in China, people who can contribute to global knowledge and to global research and development.

And it's not all a net loss for the United States if those sorts of advancements come from China, as long as there's sort of a, there are guardrails in terms of what kind of technology is available to the people's Liberation army. And, you know, how might they use that technology in ways that would be against us interests.

>> Kharis Templeman: So on a related note, I wanna ask about the slowdown in China's economy. And the kind of turbulent period that they've gone through with the COVID restrictions and then the apparently surprising failure of the economy to rebound after that. Do you think that is in our own long run interests, or is there actually some downsides to a slowdown in the chinese economy?

>> Mary K Magstad: Well, there are certainly downsides in terms of whether China gets out of the middle income trap, whether people who are, who haven't yet reached the middle class ever get a chance to reach it. Generally in China, with more college graduates, more people with higher expectations, there's a lot of potential there that isn't being tapped.

And just like India has 1.4 billion people, Africa has more than a billion people. These are a lot of people on Earth who have great potential to contribute to the global economy in a way that's absolutely smack in the center of what would contribute to US interests. What would help quality of life at home in the United States, not just sort of us interest writ large in terms of let's have a better world.

That's important, too. But it's both. Since I started reporting in China in the mid nineties, there has been this story that has been told about how, you know, if China ever hits the skids economically, look for it to act against Taiwan. It'll be a wag the dog kind of thing.

Well, here we are many years later, and that hasn't happened. However, there are more aggressive steps being taken to try to coerce Taiwan. Are these two things linked? You could certainly make the argument that it is interesting that both are happening at the same time, but it does beg the question of might they have been happening if China's economy was continuing to roar forward?

In terms of, in general, is it? Well, let me just add one additional thought on this. There's a secular slowing down of the economy. This happens as an economy matures. But also on top of that, China's population is now shrinking. It's working population has been shrinking for a while, for a few years.

And that presents all kinds of challenges at home, along with the raised expectations that many Chinese in the middle class, Chinese college graduates had about what their lives would be like. What opportunities there would be as they came into the workforce. And so there's a lot for the Communist Party to deal with at home right now.

That could mean that there's less appetite from the chinese government to get into a war that it can't be sure it's going to win. And trying to, for instance, invade an island that's far enough away that you would need a significant amount of support, military support, over time.

And you would be doing this where at a time when the US and its allies in the region, there's a pretty good chance that there would be a response, there would be an economic response that would hurt your economy even more. There would be a soft power hit in the world.

I don't know of too many places that would, or too many governments that would think, great, you invaded Taiwan. Even though, what are there, something like a dozen-ish countries in the world that recognize Taiwan still, 14 or something?

>> Kharis Templeman: 13.

>> Mary K Magstad: 13, so China has been able to use its diplomatic power to get a lot of countries to shift recognition of Taiwan to China over the course of the last 40 years.

And yet there's still a lot of sympathy for Taiwan. There's a lot of admiration of Taiwan as a country, as a place that has emerged as a robust democratic entity, political entity. So there's a lot of risk for China if it were to take that kind of an action.

And the question is, is China's leadership in general, and Xi Jinping in particular, taking into account all those risks?

>> Kharis Templeman: Right, yeah, that's the million dollar question. We debate that here regularly, and it's among China watchers in the security space especially. There doesn't seem to be any sort of consensus on that question.

My own view is, I think, close to yours, where I have trouble understanding why the CCP, if it faces a bunch more problems at home, would want to create a giant new problem with the United States and its partners and allies over Taiwan. And I most worry about a China that is powerful, growing, and very confident that it could take Taiwan.

Rather than one that is insecure and feeling concerned about its grip on power at home. I want to talk a little bit more about Taiwan, actually. We've talked about the United States and what could drive us off the rails. We've talked a little bit about China and what could go wrong from their perspective.

Are there any sort of Surprising or twists and turns in Taiwan that could really shake up which quadrant we're in.

>> Mary K Magstad: Well, a particular kind of Guomindang candidate becoming president could lead to Taiwan deciding earlier than it would otherwise need to, that the pragmatic step would be to just to figure out a way to start integrating with China beyond what's already happened.

And that would be sort of the China dream quadrant. As you know, the majority of Taiwanese have consistently said in surveys over the last 25, 30 years that they would prefer the status quo. Very small percentage in any of these surveys have said that they want to reunify or unify with China.

So there would be this question of how such a leader in Taiwan would bring the population along with him or her. But I could see that as a variable that could shift things pretty quickly.

>> Kharis Templeman: Yeah, and my own view on this is if Taiwan remains a robust liberal democracy, that scenario is very unlikely, at least given current public opinion trends in Taiwan.

But we've talked about the possibility that the US could move in an authoritarian direction if Taiwan were to move in an authoritarian direction. That actually opens up that possibility, and in my view, makes Taiwan a lot more vulnerable to that sort of coercion scenario. Let's talk a little bit about supply chain security now.

The emergence over COVID of supply chain shortages in the chip sector actually kind of drove home for a lot of Americans how reliant we are on overseas supply chains for critical materials. And so part of the goal of this report was to try to explore different incentives and scenarios where that supply chain vulnerability is lessened somehow.

And so in your view, how do you think the United States should go about trying to improve our supply chain security? What are the concrete steps that we can and have, in some cases, taken to improve our overall supply chain situation?

>> Mary K Magstad: So it seems that there are three or four that come to mind right off the bat.

One is to increase spending on research and development and STEM education and bringing more semiconductor manufacturing back to the United States, we had offshored it by and large. The second aspect would be friend shoring, which is relying on reliable allies and partners for various components of the supply chain for semiconductors.

Another one is to become less reliant on China for semiconductors. And that's important because while more than 90% of the world's leading edge semiconductors are currently made in Taiwan by one company, TSMC, there are a lot of other older semiconductors, legacy semiconductors, that are needed for weaponry, US weaponry.

For mobile phones, for refrigerators for all kinds of things that are part of our lives. And if we run out of those, we saw what happened during COVID with unintentional disruptions to the supply chain that happened not because of political action but because shipping was disrupted during COVID.

And the fourth thing is, and we talk about this in the report, figuring out how to support Taiwan. I mean, both because they're our friend and ally, but also because their semiconductor industry is critically important to our economic well-being and to that of other countries in the world.

So it's a web in nexus of various things that need to happen all at once.

>> Kharis Templeman: Yeah, great. So that's all the time we have for today. I want to thank Mary K Magstad for the conversation and to plug her chapter in our new Hoover Working Group report entitled Silicon Triangle, the United States, Taiwan, China, and Global Semiconductor Security.

Thanks again for joining me today Mary Kay.

>> Mary K Magstad: Thanks for having me, Kharis, it was a pleasure.

>> Kharis Templeman: I'm Kharis Templeman, Silicon Triangle is a special podcast series of matters of policy and politics.

>> Speaker 5: This podcast is a production of the Hoover Institution, where we generate and promote ideas advancing freedom.

For more information about our work, to hear more of our podcasts or view our video content, please visit hoover.org.