Scott Wallsten:
Hi, and welcome back to Two Think Minimum, the podcast of the Technology Policy Institute. Today is Tuesday, October 10th, 2023. I’m Scott Wallsten, President and Senior Fellow at TPI. I’m here with my co-host TPI senior fellow Sarah Oh Lam. Today we’re going to talk about the complex and interrelated ways the US, Europe and other rich countries are reacting to China with respect to technology policy and how China is reacting in turn. We’ll talk about the CHIPS Act, which is intended to promote domestic manufacturing of semiconductors, but includes many protectionist aspects and more. Today we’re delighted to have our guest, Xiaomeng Lu. Xiaomeng Lu is a director in Eurasia Group’s geo-technology practice, where she focuses on the interactions of emerging technologies with geopolitics, market dynamics, and regulatory norms. Before joining Eurasia Group, she was the China practice lead at consulting firm Access Partnership, where she helped top US financial and cloud service providers enter China’s market. Welcome to the show, thanks for joining us.
Xiaomeng Lu:
Thank you, Scott and Sarah for inviting me.
Scott Wallsten:
So let’s start at a very high level. What’s changed in the past year or so in the US-China relationship with respect to technology policy?
Xiaomeng Lu:
I think if you look back at the last year or two, Jake Sullivan’s speech on emerging technology was a watershed moment as last fall, around a year ago this time, he made the big speech shaping up a new narrative about US-China technology relationship. He said in the new strategic competitive environment, maintaining a sliding scale approach is no longer feasible. We need to maintain multiple generations ahead of China in the critical sectors such as semiconductor, artificial intelligence, biotechnology, and quantum computing. I think that’s a moment that draw the outline of the Biden Administration’s China technology strategy in front of everyone and a new trend that’s still impacting us today.
Scott Wallsten:
What do you think was the impetus for that, doing that speech then? I know you mentioned when you joined us in Aspen that some of the policies were a response to China 2025, and so what were the motivating factors for him giving that speech then?
Xiaomeng Lu:
I think before he gave that speech, a lot of observers have been questioning Biden’s China strategy. The Biden Administration spent over a year or so thinking about it, but Jake Sullivan outlined the key objective approaches in that approach in that speech last October. I think for a while the Chinese audience have been watching. They’re hoping Biden Administration is very different from Trump, but over a year later they realized the differences between Biden and Trump is in style, not in substance. If you look at the substance, you could argue Biden Administration even plays a heavier focus in the competitive aspect of the bilateral relationship. I think some China watchers in this town have argued that this is not a narrative about competition even, it’s a narrative about rivalry.
I think there’s a sense that us has been falling behind, and in the meantime that the strategic conflict between the two countries are escalating. Particularly a lot of people pointed to what happened in Taiwan last August, when then house speaker Nancy Pelosi visited and definitely provoked a lot of activities around the island, and folks have been talking about that event as one of the incentives that let Jake Sullivan launch the speech, and framing the whole bilateral relationship in the strategic competition or rivalry frame.
Scott Wallsten:
And when you were listening to the speech or reading it, what were your immediate reactions? Was this something that you kind of expected, or was it surprising?
Xiaomeng Lu:
I was somewhat surprised at the moment. I remember, I think internally at EG, we did some assessment before the speech, for example, during the Trump years, some folks argued that was China containment or not, but the speech last October give it a more definitive tone in terms of US strategic trajectory. And this is definitely pointing towards a direction of containing China, maybe in more practical sense, slowing them down, blocking some access. I think that’s kind of the realistic aspect of it.
Scott Wallsten:
And so tell us about some of the ways in which the Biden Administration became more Trumpian than Trump. That’s the wrong way to put it, because obviously it’s not the same style like you said, but how did they double down on the policies?
Xiaomeng Lu:
Yeah. That’s a good question. I think even before Biden Administration decided on this trajectory, I think the US-China bilateral relationship has been deteriorating. For a while, there wasn’t meaningful bilateral exchange. And on the military side, I think even today you could argue the communication has not been fully restored. But really I think during the COVID years, the two sides become more confrontational than before and around Taiwan issues. I think multiple factors have been the driving forces of the worsening and bilateral relationship. And then you could argue the technology aspect of it also plays a role. You look at how Huawei reacted to US sanctions over the years and even more recently, they launched a new phone, and the state media portrayed that as a defeat of US sanction measures-
Scott Wallsten:
Do you think it was?
Xiaomeng Lu:
I will quote Commerce Secretary Raimondo from her capital Hill hearing, on the house sid a few weeks ago. So far US government have not identified evidence that Huawei can produce the new 5G capable phone in scale. I think that’s the status quo. I think the jury is still out in terms of whether that new phone represent a major breakthrough that signals the defeat of US sanction measures the defeat of the Jake Sullivan doctrine from last October. I think what they did at the technical level is that they introduced some of the outdated tool, likely the DUV type of machine. That’s not the high-end stuff. That’s not the ones that design to produce a seven nanometer, five nanometers, three nanometer chips. They tweak that, they push that to the limit, and produce a small number of high-end chips beyond the 14 nanometer threshold that US export controls drew a line on.
And I think that’s why they so far, they have sold about a million of those high-end phones that has seven nanometer chips in it. But whether they can produce in scale, that’s a real question. Like Apple typically sells 3 million phones in China every month. If you only produce 1 million, let’s say every three months, every six months, can you really erode your competitors’ market share?
And then in the meantime, [inaudible 00:08:50] new iPhone 15 already one to three millimeter this year, and then next year they’re talking about two nanometer, So in terms of phone performance, Huawei is still very much lagging behind. Like Jake Sullivan said multiple generations behind. But for average consumer, if you are not a professional gamer, if you don’t use your phone to do artistic piece of work, then maybe it’s not a huge difference if you’re only using your phone to do emails, and do WeChats, and call your friends, that type of thing. I think that’s why the Huawei phone, the Mate Pro 60, sold out overnight, I think there’s definitely a patriotic drive behind the consumer enthusiasm for the new phone. But in terms of pure technical performance, it’s not a meaningful breakthrough from geopolitical perspective, maybe a little bit technical progress in terms of they now have some seven nanometer chips. I think that’s recognizable. But in terms of geopolitical implication, I’m not sure if this means the failure of US policy.
Scott Wallsten:
So I mean this also is kind of an IP issue too. If so many chips at the very top end chips are made in China, how have those companies been able to keep that technology away from Chinese firms that are certainly trying to replicate it?
Xiaomeng Lu:
Oh. You mean high-end manufacturers like Apple?
Scott Wallsten:
Yeah. Yeah. Exactly.
Xiaomeng Lu:
… who use those high-end components? I think because the design and manufacturer process of those chips are highly, highly sophisticated, only if you open the old iPhones, you look at the motherboard, you take every part out, it doesn’t mean that you can replicate each part of the process. I think one of the bigger hurdles is lithography machine. Those are busloads in size and each piece of those machine is hundreds of millions of dollars. You use big containers to ship them, and then you need to assemble pieces in your factory once they’re delivered. It’s a very, very expensive high capital investment piece of equipment. Only one company really conquered that territory, it was that choke point technology. It’s very hard to get around the high end manufacturing process, and I have seen a lot of analysts saying that if China want to create something similar indigenously, it may take them 10 years in a more optimistic scenario and they may never be able to do them completely domestically by themselves.
Scott Wallsten:
Is it also because of how quickly the technology develops? We were talking about three nanometers to two, and it’s just impossible to reverse engineer, because by the time you’ve done it, the technology has moved on?
Xiaomeng Lu:
Yeah. Yeah. Even at the leading edge of the technology, I think it’s highly, highly competitive. You could argue TSMC is the only one who made it so far, Samsung, SK Hynix, Intel, in some shape and form, they’re a little bit behind. And all these companies have brilliant engineers and put in billions and billions. Each factory is like 15, $20 billion. It’s not that they’re not putting in enough efforts for R&D, they’re always in this very brutal competition to see who can make it first and somehow TSMC is the one that cracked the code. Everyone behind them to a certain extent will collaborate with TSMC to produce the leading edge chips. I think that is if you’re talking about the high-end, high-end stuff, but if you’re talking about mature nodes[inaudible 00:12:52], a lot of companies can do it, and I think that’s another argument that you’ll keep the Chinese two, three generations behind In the most advanced equipment market segment, the vast majority of the military equipment don’t use the cutting edge.
They use a 100 millimeters, 60 nanometers-
Scott Wallsten:Wow.
Xiaomeng Lu:
… at most. And fighter jets and smart missiles, they typically are not powered by the most advanced chips. That’s why for example, Russia and Iran, they still have some equipment, they still have some weapons in their hands. Because they could get some of the stuff off the market in the commodity market or in grey market. They are not that well sought after. So to a certain extent the strategic aspect of this perceived competition. I think it’s a little bit questionable.
Scott Wallsten:
So that’s really interesting. So we could be multiple generations ahead at the top end, and have no strategic benefit from it. I think that’s what you’re saying, because most things involving national security are many generations behind. And does that mean that our policy focus on things like the CHIPS Act, which we should get to in a minute, are kind of not focused in the right area if national security is the concern?
Xiaomeng Lu:
Yeah. I think this is never a publicly disclosed information that what type of chips that the highest high-end US weapon system use. You won’t find that information in the public domain, but at the same time, this is a very big part of their argument. I think one of the impetus for both CHIPS Act and the tightening restriction is that what if something happened in the cross strait around Taiwan, and US get into a war with mainland China and then in that scenario, are US chips being used to power Chinese missiles and Chinese weaponry system? And that’s one of the big argument. And also if the supply chain got cut off across the Taiwan Strait, does US weapon system still have enough supply to keep going? I think that’s one of the argument for CHIPS Act. At one point, I think they estimate they need to reshore 25% of the overall production of higher end chips. Right now, over 90% of that is concentrated in TSMC in Taiwan.
Scott Wallsten:
So that’s one of the justifications of the CHIPS Act. What do you think about the CHIPS Act? Is it actually the right mechanism to reach those particular goals and what is it really set up to do, as opposed to what it’s supposed to do? Not that that’s a leading question or anything.
Xiaomeng Lu:
No. The strategic argument has been behind the CHIPS Act for a long time and then I think around the time the Congress was going to pass CHIPS Act, there’s also the supply argument coming through. I think at the time we all observed the global shortage of chips, because during COVID, a lot of the semiconductor factory paused their production or slowed down, because they didn’t expect a lot of demands coming up. And then at the end of COVID, the market dynamic reversed, there are a lot of demands for chips, and particularly in the lower end, so there’s a shortage like cars. Even secondhand cars on the market are very, very expensive. And then at that point, I think part of the proponents community used that as the argument to push the passage of CHIPS Act saying, “We have a sort shortage right now. We should increase our capacity in order to meet that market demand.”
But it’s very opportunistic argument at the point, because you see the market cycle goes up and down and the past year or so we see the reverse, the market dynamic reverse. Again, there’s too much supply, not enough demand. A lot of the CHIP production lines have been idle for a while, and I know when does CHIPS Act capacity kick in, probably next year or the year after next year, you would never know, at what point the real capacity will get back online and does that really match the market dynamic to deal with the shortage or oversupply situation in the market? I think those are kind of two arguments being used way back when to pass the CHIPS Act. And yeah. I think, I can’t say fully on board with either of those, but there’s this sentiment that we need to, there’s strategic importance associated with this sector, and the market dynamic alone is not going to be address those strategic concerns.
The government felt the needs to intervene. At the same time, you look at what the Chinese semiconductor industrial policy has been doing since 2014, they pledged about $50 billion into semiconductor industry and then the next wave I think between Bloomberg and Reuters, their estimate is around $40 billion and there’s a sense that we are competing with them. We should just do the same. I think that’s another factor that gives people pressure and say, “Maybe, well, doing nothing, it’s not the right way going forward and we need to do something. What is the something? And CHIPS Act is the best option on the table at the moment, let’s just go with that.”
Scott Wallsten:
But there’s a lot of protectionism in that too. I think it was you who said that, “Instead of this being a no chips from China Act, it’s a no chips from anywhere except the United States Act.” And that’s not entirely consistent with the rationale for passing it. Right?
Xiaomeng Lu:
Yeah. I think that that’s kind of an interesting argument to the point that if you look at the whole industry of semiconductor, it’s very, very globalized. ASML produced this very sophisticated tool that ASML is the Netherland is a Dutch company. And then some of the chemicals, the very specialized chemicals are produced by the Japanese, and then the leading manufacturer is TSMC in Taiwan. And you look at the lower end of the industry, whether it’s packaging, or assembly testing, a lot of that is in China, in Southeast Asia, Indonesia, Thailand, all that. That’s the natural economic way of distributing the resources across the supply chain. And then I think the government intervention to certain extent distorted these natural flow of technologies, and exports, and resources potentially there’s a strategic justification to it, but what’s the probability of Taiwan Strait crisis that will disrupt the supply chain? And it will have a impact on US military supplies. I think that’s the calculation we need to justify there.
Scott Wallsten:
What about how is this affecting US chip makers investments in China?
Xiaomeng Lu:
Oh. They are stuck in between a rock and a hard place. A lot of these major companies have already invested in China in the past 20, 30 years. Once they put in a fab, a lot of them stay there for 20, 30 years. It’s hard to pull them out overnight, but I think between CHIPS Act and those export restrictions, they need to pull back or at least slowly wind down their operation over there over the next coming decades or so. I think even the Korean company, Samsung, SK HYNIX recently got a little exemption from US government to continue their operation in China. I think Samsung invested over $20 billion in China, in one city in China in their industrial park in the suburb of Xian, and they struggled to comply with US rules. But recently, I think in the past year or so, the US government launched a series of effort to align with the Japanese, the Dutch, and the Koreans, and get them on board. At the same time. They made some concession.
They made some concession and saying, “We understand you have business to do. We don’t want to kill your factory overnight. Let’s just wind them down and to moderate the negative economic impact on you guys in exchange for you getting on board with our bigger strategy.: I think the Netherlands official issued their actual control rules, so they already stopped selling the high-end [inaudible 00:22:15] this machine EUV to China. They never sold one. There was a transaction being initiated, then US government official intervened, and then the transaction eventually just did not happen. And then now they’re moving down a notch. And last October, the US export control rule actually cut off ASMLs supply to China in terms of the higher end EUV machine. So that the mature tools, if it’s a high end, it’s off limits as well.
They negotiate for a long time and then I think the Dutch rule was released a few months ago. I think they will stop shipping those equipment to China starting January 1st next year, but I’m sure before January 1st, there are plenty of Chinese companies are buying as much as they can. Let’s hoard. Let’s hoard as many as we can before the restriction kicks in. I think all these companies are in a very difficult place between if they get any chips at subsidy, they cannot expand their operation in China beyond 28 nanometers for any significant transaction. There’s a specific definition of what significant transaction is, but basically upgrade or maintenance of your existing production line is okay, but-
Scott Wallsten:
How do they define a subsidy? I mean, you can allocate costs in so many different ways. How do you know if a chip is made with a subsidy or not?
Xiaomeng Lu:
Yeah. They have some strings attached. For example, company is not supposed to use the subsidy to boost their stock price directly, and then you cannot just take the money and say, “This is my next quarter profit.” And then there’s a revenue sharing mechanism as well. I didn’t get into the fine print of that, but basically the government will evaluate your performance. If you are performing way above the government expectation, you need to give some money back to the government, and then there’s environmental standards, there’s labor standards. I think there’s one provision I like most. I think for some of the fab, if you get subsidy, you need to build a daycare right next to our factory, or fully reimburse the daycare costs.
Scott Wallsten:
I’m sorry, I shouldn’t laugh. Daycares are actually important for people to work.
Xiaomeng Lu:
I know. I would say that’s my dream job.
Scott Wallsten:
Yeah. Right. Exactly.
Xiaomeng Lu:
Fully reimburse my daycare. Oh my God. I would move to Arizona for that, you know? But I read through the implementation rules of CHIPS Act. I was like, “Wow. This raised a European regulation, so many strings attached.” And then outside of all these conditions to when you apply for these fundings, you have to prove to government it will raise your chance of success if you can prove that you have a local network of suppliers. You already have a support network, and you have an educational institution work with you to foster the talents that the factory needs in the future. So there’s multiple piece of the puzzle you need to put together in order to up your chance of getting those subsidies. I don’t know how small to medium science companies do that.
Scott Wallsten:
Yeah. I so I understand the revenue sharing the reason to want to do it, and the reason to want to get some money back if they’re extra profitable, but I mean I understand why people would want that, but is it such that it will actually create a disincentive to produce above some level, or else reasons to spend money in ways that appear to be costs by yourself, a private jet? Or are these numbers small enough that they were not going to have those distortionary effects?
Xiaomeng Lu:
I read the document I just saw there’s so many details. If I were an applicant, I need a team to track all these details and look at that versus my books and see if it makes sense to apply to the funding. But for I think the very big companies, they already have an army of lawyer in their legal department, and they have the internal capacity to outline all these conditions, and decide if whether this is a good deal or not. I think they are just better positioned to take on a challenge like that. I think TSMC already said they’re pursuing somewhere around like $15 billion of the 53 or $62 billion chips act from them.
Scott Wallsten:
Are any of these other conditions actually related to the goal of having chip manufacturing be here, or are they just social goals that the administration likes?
Xiaomeng Lu:
They definitely have [inaudible 00:27:30]guardrail language saying that if you take on the subsidy, you can’t expand high-end capacities in Chinain a meaningful way.
Scott Wallsten:
Right. Okay. You expect that I guess.
Xiaomeng Lu:
Yeah. And I would assume producing in the US is one of the key baseline in your application. I think I heard over the past few months or so, there’s still clusters in emerging in the US where the conditions is relatively competitive and if not ideal to meet these government requirements. I think Arizona is one of them. Some people say Ohio is another cluster, maybe New York is another one. They already have some sort of industrial base. Already have some elements of semiconductor industry, so the applicants are not working from a blank slate, have to build everything from ground up. And just looking at the potential competitors in the game, I think that those are the popular areas that may have better chance of getting government support.
Sarah Oh Lam:
I mean, do you know about the Chinese environment? I was just in a China, Hong Kong, and their infrastructure, they build a lot really fast. I presume that they don’t have all these conditions or daycares. But not to say that we want to be like that as a country, but if construction and building is the goal, and the money is spent well, a lot of advancement can be made. But a lot of these conditions, I mean you need lawyers, it slows things down. Is there, I don’t know, any kind of comparison there between the Chinese approach? And I mean, they’re doing industrial policy, but you don’t have these social goals attached.
Xiaomeng Lu:
There are definitely less of those softer requirements compared to CHIPS Act. Their way of distributing fund is also questionable. They have a national integrated circuits fund, and the former Minister of Industry and it played a big role in deploying of those funding tool, semiconductor research project, and that guy is being arrested for a corruption investigation. I think it happened last year or so. He’s still being investigated. I think one of the chief manager of that fund also under corruption charges as well. I think for them, they’re also just making those decisions based on personal preferences. The company they’re familiar with, the people they trust, and that sounds like a very subjective criteria as well. Sometimes they work with these entrepreneurs before or they look at someone’s resume, have a few conversations and think, “Oh. I think this engineer has potential and I’m going to give him a chance.” And sometimes that involves under the table dealing too. That’s the source of this corruption as well. There may be some kickback in those decisions, and I think that’s another drawback of this type of big fund initiative.
Scott Wallsten:
So-
Sarah Oh Lam:
Their fiscal situation is not very good. The public debt is almost a hundred percent of their GDP I believe?
Xiaomeng Lu:
Yeah.
Sarah Oh Lam:
So they’re spending a lot of money. I mean, when I was there, there are cranes everywhere. It’s being built up, but it’s all debt funded?
Xiaomeng Lu:
Our China economist, one of my coworkers spent her whole time looking at China’s economy. She took a trip to China last month and had a conversation with some of the key economic policy maker in China. Based on Eurasia group’s estimate China’s GDP growth is going to be between three and 3.5% this year. Even at the beginning of the year their assessment was five, 5%, and our estimate keeps dropping. It was around 4% over the summer and then in the past two months or so, we brought it down even further, and we think that’s an unthinkable situation. There must be a lot of pressure among their decision makers, but the trip revealed, otherwise, Chinese officials seem to be thinking things are under control. They don’t want to push out the most drastic financial or physical policy measures. They don’t want a big stimulus package.
They don’t think the problem today is structural. They think they will weather the storm, and at the same time they don’t seem to be slowing down in terms of injecting more money into the critical sectors like semiconductor. That’s our takeaway from recent trips. Some of their argument has been there’s a lot of local government that’s in China, but people stating are at a much higher level. For example in the US their consumers. I think right now the government struggle a little bit in terms of stimulating late consumer spending, but because people have more saving in their family’s bank account, so they think that’s a bigger cushion, that’s a structural difference than say how the US economy operates.
Scott Wallsten:
I’m coming back to semiconductors though. I mean you said before that there was just sort of some inherent problems with these big subsidy programs, and I guess regardless of whether they’re Chinese or American, I mean, the US has lots of both failed and successful programs in its past. Does the CHIPS Act, is it set up in a way that plays to us strengths?
Xiaomeng Lu:
I’m not sure this is the US strengths. US haven’t done this for many, many years. And there’s so many details, like all sorts of labor issues and environmental issues and how to distribute the funds. I don’t think we’re that experienced in dealing with the industrial policy. Versus if you look at the more top down authorities in Asia, whether Japan, Taiwan, South Korea, China, they have done this and learned their lesson over the past few decades. They’re more experienced with this, and their system is more built in a way that potentially facilitate top-down decisions like this, but I think our system wasn’t structured, wasn’t designed in a way that’s really easy to design and implement industrial policy in a sufficient way. So I think we’ll probably learn some lesson from this round, and see maybe improve-
Scott Wallsten:
I’m not sure we’re so good at learning lessons. But if there were no political considerations, and of course there were, and maybe chips is the best thing we could have gotten, but what would you have done? What would a better policy have looked like? Fully recognizing that it may not have ever been possible to do anything like that.
Xiaomeng Lu:
Yeah. Exactly. I had argument with my husband about this the other day and he said, “All of your suggestions is not feasible. None of this going to happen.” I was telling him why US is trying to do something that it has no experience with, and it doesn’t know how to manipulate different parts of the system to get to where it wants to.
Versus I think in the past, look at how you have succeeded in these industries like Silicon Valley, that’s the name come from the US. I would argue the free flow of capital of human talent and information and data is the most attractive feature of this system. All the engineers growing up in different parts of world, they want to come over to this part of the world, and get educated here, and plug into the network, and understand how Silicon Valley works, and get work experience, and get into the innovation ecosystem in Silicon Valley. I think we should maintain that moral high ground. Or this is how things have been done for ages, and we have done it really, really well. Not because we are good at industrial policy or letting bureaucrats pick what semiconductor project will invest in, because we keep bureaucrats out of the system. We keep the most talented people coming into the country and they will naturally find their places and be very, very innovative and motivated to contribute to the growth of this country.
Scott Wallsten:
Are programs like CHIPS and making it harder for students to come in, do those risks, killing the golden goose?
Xiaomeng Lu:
I think maybe not the CHIPS Act itself, but there’s definitely I think the tension, the US China tension definitely cast a cloud to immigrants. Before we started recording, I was telling you my own experience of getting into the legal immigration system here took me 10 years. And I think for a while the tech industry has been saying that we should reform our immigration system. If you have a PhD in STEM, you should staple the green card with the PhD diploma. That should be a fast track process. That was when I worked on this policy. That’s like 10 years ago, and obviously we moved nowhere since then, right?
Scott Wallsten:
Yeah. No. Our immigration policy is very unfortunate. We’re coming close to the end of the time, but one thing we sort of skipped over were export controls, which are not part of chips but happened about the same time. How do those interact with everything we’ve been talking about? How do they make things more difficult for firms? What are the potential benefits from it? What do you think about them?
Xiaomeng Lu:
I think that’s one of the biggest flashpoints of US China relationship. I was talking to the DCM of Chinese embassy last week, and he was saying that there’s so many extra control measures. You look at how many Chinese companies get onto entity list in the past two year or so. It’s like one company per day. That’s how many companies has been sanctioned.
Scott Wallsten:
Wow.
Xiaomeng Lu:
And then there’s no way out of that, there’s no offering for this. He argued that theoretically commerce department should offer a list of criteria. Some of them may be mission impossible for these companies to meet, but they should offer a list of criteria for these companies to present a case to take themselves off entity list. There’s no venue for them to do that.
Scott Wallsten:
So once they’re on the list, they have no way to get off it.
Xiaomeng Lu:
No. There’s no due process at all. So even for US tech companies, they have been watching the upcoming final rule of last October restriction, last October restriction is the interim rule. And then about I think October 7th, the past Saturday is a one-year anniversary, and we heard rumors that Commerce Department is going to do the final rule, the update version like this week, we haven’t seen it come out, but I think it has been very stressful process for a lot of even American companies as well.
They’re very concerned about their Chinese partners will get on the entity list. Some of them still have joined venture partnership with Chinese firms, and some of them have been in the center of the debate in terms of whether they should be the next entity list designation, and I think this week we’ll see more. It’s just this one way street. They keep expanding, expanding this list.
Scott Wallsten:
Right.
Xiaomeng Lu:
And I think at one point Intel’s CEO went to White House and I think at the Aspen meeting two weeks before our version, he said what he said in the White House two weeks before, which is like, “The more restrictions export controls you put on my products, the more pressure you put on the company and also the CHIPS Act, because the CHIPS Act is there to give the top manufacturers a boost to their production, but once you do that, where do I find my clients?
If all of my Chinese clients are sanctioned, I can’t sell to any of them. What’s the way out for me?” I think he was very frustrated with the situation as well.
Scott Wallsten:
I mean, it was very recent, but any evidence that they heard the complaints, and are willing to do anything about it?
Xiaomeng Lu:
You mean the decision maker for-
Scott Wallsten:
Yeah. Right. He went to the White House and talked to Jake Sullivan. Do you think the administration is at all sympathetic to his concerns?
Xiaomeng Lu:
I think they slow down the pace of rolling out those new measures. That’s what I have seen in the past two, three months or so. They plan to expand export control to cloud service provider as well. There was a lot of chatter about that over the summer. Now the rumor has died down a little bit, but you can never rule out that they just postpone it until the Xi-Biden meeting, which is everyone anticipating to happen on the side of APEC summit in San Francisco in November, so they could just holding off right now who make sure they don’t jeopardize the presidential meet, which is something Biden has been wanting for a whole year. They can roll out something more drastic next year potentially in the political season, there’s more fireworks with China then it’s an environment more conducive to a drastic export control announcement.
Scott Wallsten:
So we really need to wrap up, but just as a final question, kind of an unfair question, but at the beginning you said something about how relations still haven’t recovered from their lows during COVID, but something about the way you said it to me sounded like you were optimistic that they would get better. Now, I know as Yogi Berra said, “Predictions are hard, especially about the future.” But what’s your sense? Are we at a low point that from which we will recover or do we have further to go down?
Xiaomeng Lu:
I think my long-term, hopefully more positive answer is that I hope the US cycle will pass through. I think during Trump years we saw some of the more the darker ages for US-China relations, and I think during Biden years we stabilized the relationship a little bit. And I was talking to a friend the other day and asking, “Do you compare the Trump years to let’s say 1970, the Vietnam War days of US, where when the society is very chaotic and people feel like they’re losing hope of the system? Do we already pass that bottom of historical cycle?” It’s somewhat promising that we are on this recovering trajectory and things will further stabilize beyond 2024. Because if Trump comes back, I don’t know I have much positive thing to say anymore, but I would just say if I want to leave a little bit hope on the horizon, the silver lining is that if the US political system can coming out of this tunnel, I think we may be able see the more stabilizing force driving the bilateral relationship hopefully in the near future.
Scott Wallsten:
Okay. Well, that’s a pretty positive note to leave it on, so Xiaomeng, thank you so much for talking with us. It’s always really fun talking to you. I always learn a lot.
Xiaomeng Lu:
Oh. I learned a lot from your questions. This is fascinating. We should keep doing this.
Scott Wallsten:
Absolutely. Thank you so much.
Xiaomeng Lu:
Of course.
