The US is already losing.

The United States is unlikely to win the tech war. There are two reasons for this conclusion.

First, the empirical record consistently shows that rising powers don’t sit idly by when dominant states disrupt their access to critical resources. Typically, they respond by subsidizing industrial development, pushing their businesses to upgrade into high-value positions to become self-sufficient. Chinese President Xi Jinping has urged the country to prioritize “self-reliance in science and technology” and described innovation in core technologies as the key to surviving “intense international competition.” To that end, the Chinese government has supported the development of an indigenous chipmaking industry: Guangzhou City invested $30 billion in initial funding, and Beijing has readied an additional $143 billion in subsidies and tax credits.

Second, the structure of GVCs makes it difficult for the dominant power to coerce the rising power without igniting business resistance at home and easier for the rising power to upgrade its industrial base in response. At the end of the day, businesses will prioritize their profits over national security. However, whether business incentives align with national security depends on a firm’s location in a GVC. In past instances of economic competition, high-value businesses typically resisted the dominant state’s policies to mitigate disruptions and recover lost profits. Low-value companies, by contrast, often collaborated with the rising state’s policies to reap the potential gains from industrial development.

For instance, American businesses have largely resisted U.S. sanctions against China. They continue to sell their designs, software, and equipment to China using legal loopholes, third parties, and dummy companies not on the Entity List. For example, American chip designer Nvidia developed a new advanced chip for Chinese customers that meets U.S. export control rules. Applied Materials Inc. allegedly sent chipmaking equipment to Chinese foundry Semiconductor Manufacturing International Corporation (SMIC) via third parties in South Korea. Some U.S.-based companies, like KLA Corporation, even have contingency plans to “de-Americanize” their operations in the event of more stringent sanctions.

The situation looks different across the Pacific. Chinese businesses have turned to Beijing for support in upgrading their technologies, including stockpiling equipment, building foundries, replacing proprietary data, and recruiting talent. For instance, the Shenzhen and Guangzhou investment funds helped Huawei create a self-sufficient chip network by pouring money into optical specialists, chip equipment developers, and materials manufacturers. Cash-flush start-ups and manufacturers like SMIC are successfully recruiting talent from South Korea, Taiwan, and the United States by offering massive salaries, stock options, and research funds.

As a result, Chinese businesses have achieved significant technological breakthroughs despite U.S. sanctions. Huawei remains, and the company has become mainly self-sufficient. The company stunned Washington last fall with a new 5G smartphone made with primarily Chinese parts and an advanced 7-millimeter chip manufactured by SMIC. Industry experts anticipate SMIC will be able to mass-produce these chips in the coming months, though the Biden administration remains skeptical. Some experts even expect the company to develop more powerful semiconductors. Chinese scientists are filing patents in record numbers to secure their position in the next generation of chipmaking.