#233 Trade is too Important to be Left to the Trade Ministers

Economic Nationalism of Chips, and the need for a India-US 3+3 Ministerial Dialogue

Global Policy Watch: Cat And Mouse

Global policy issues relevant to India

— RSJ

You know it is difficult to be an economic nationalist while being a liberal. The Biden administration is finding this out as it plays a long-drawn cat-and-mouse game with Nvidia. The chip maker, founded by Jensen Huang, is the primary maker of GPU chips that power AI engines and large language models of technology companies around the world. The A100 and H100 chips of Nvidia are the most advanced and fastest deep learning GPUs for massive enterprise-grade machine learning workloads. Concerned about the massive strides the Chinese state was taking in building its artificial intelligence capabilities, the Biden administration banned the exports of these chips to China last year. The chronology of events since then has been quite entertaining.

Here’s Reuters reporting on this in September, 2022:

Chip designer Nvidia Corp (NVDA.O) said on Wednesday that U.S. officials told it to stop exporting two top computing chips for artificial intelligence work to China, a move that could cripple Chinese firms' ability to carry out advanced work like image recognition and hamper Nvidia's business in the country. The company said the ban, which affects its A100 and H100 chips designed to speed up machine learning tasks, could interfere with completion of developing the H100, the flagship chip it announced this year.

Nvidia said U.S. officials told it the new rule "will address the risk that products may be used in, or diverted to, a 'military end use' or 'military end user' in China."

The Chinese foreign ministry responded by accusing the United States of attempting to impose a "tech blockade" on China, while its commerce ministry said such actions would undermine the stability of global supply chains.

"The U.S. continues to abuse export control measures to restrict exports of semiconductor-related items to China, which China firmly opposes," commerce ministry spokesperson Shu Jieting said at a news conference.

Score - Economic nationalism 1: Globalisation 0

China is the second biggest and the fastest growing market for global chip makers, and it was unlikely that Nvidia would let a ban come in the way of accessing it. So, it came up with a workaround. 

Reuters on March 22, 2023:

Nvidia Corp (NVDA.O), the U.S. semiconductor designer that dominates the market for artificial intelligence (AI) chips, said it has modified its flagship product into a version that is legal to export to China.

U.S. regulators last year put into place rules that stopped Nvidia from selling its two most advanced chips, the A100 and newer H100, to Chinese customers citing national security concerns. Such chips are crucial to developing generative AI technologies like OpenAI's ChatGPT and similar products.

Reuters in November reported that Nvidia had designed a chip called the A800 that reduced some capabilities of the A100 to make the A800 legal for export to China. On Tuesday, the company said it has similarly developed a China-export version of its H100 chip. The new chip, called the H800, is being used by the cloud computing units of Chinese technology firms such as Alibaba Group Holding Ltd (9988.HK), Baidu Inc (9888.HK) and Tencent Holdings Ltd (0700.HK), a company spokesperson said.

Score - Economic nationalism 1: Globalisation 1

Well, the Biden administration didn’t sit around twiddling its thumb. It worked on another ban. 

Here’s Reuters on Oct 17, 2023:

The Biden administration plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others, part of a raft of measures released on Tuesday that seek to stop Beijing from receiving cutting-edge U.S. technologies to strengthen its military.

Nvidia (NVDA.O) said on Tuesday that new U.S. export restrictions will block sales of two high-end artificial intelligence chips it created for the Chinese market and that one of its top-of-the-line gaming chips will also be blocked.

In its filing, Nvidia said two of its modified advanced AI chips - the A800 and H800 - both of which it created for the Chinese market to comply with previous export rules, would be blocked for sale under the new rules. One of the company's top-of-the-line gaming chips will be restricted, as will the L40S chip, which it announced in August, it said.

Score - Economic nationalism 2: Globalisation 1

It’s not even a month since that Biden administration order, and Nvidia has a response ready. 

Reuters on Nov 10, 2023:

Nvidia (NVDA.O) plans to release new artificial intelligence chips aimed at the Chinese market less than a month after U.S. officials tightened the rules on selling high-end AI chips to China. The chip industry newsletter SemiAnalysis said that the Nvidia chips are called the HGX H20, L20 PCIe and L2 PCIe and that Nvidia could announce them on Nov. 16 at the earliest. Nvidia's shares were up 3.3% in midday trading after the report.

The chips include most of Nvidia's newest features for AI work, but have had some of their computing power measures cut back to comply with new U.S. rules, according to the newsletter's analysis of the chip's specifications.

In a note to clients, Wells Fargo analyst Aaron Rakers wrote that all three of Nvidia's reported chips appear to fall below the absolute caps on computing power, but one of them appears to be in the grey zone and will require a license. "While we would consider an introduction of these three new GPUs as a positive, we would expect investors to question whether (Nvidia) is being a bit too aggressive in its efforts to circumvent U.S. restrictions and could ultimately just result in further (U.S. government) moves going forward," Rakers wrote, noting that Nvidia gets about a quarter of its data center chip revenue from China.

Score - Economic nationalism 2: Globalisation 2

I mean, c’mon, this game can go on forever. That’s because the US state is being an economic nationalist while trying to retain its liberal tag at the same time. It is tough. In other countries that do not care for such niceties, a clear ban would have been enforced by now. Or, there would have been a midnight tax raid or two on Nvidia for GST violations. Or, the Nvidia founder would have been on a non-bailable arrest for some old case dating back to 2012. Even India knows how to deal with such stuff better.

Exhibit A is this, where even a union minister is somewhat unclear on what’s happening.

Maybe as the US slides down further on the scale of economic nationalism, it will learn from the rest of the world. If it is really serious about this stuff, it will send out a strong message to Nvidia to stop going around its ban. It will either make the ban more explicit or make life difficult for Nvidia in a way that a state often can. Either way, it will find it difficult to stay liberal on this matter, which validates a point I have made on these pages in the past. That is, the end state of any kind of nationalism, however benign it may appear at the start, is illiberalism.  

And that brings me to this wonderful book by Marvin Seusse, ‘The Nationalist Dilemma: A Global History of Economic Nationalism, (1776–Present)’ where the author goes back into the history of economic nationalism since the emergence of nation-states during the industrial revolution and the inherent contradictions in pursuing it.

I will leave you behind with a wonderful extract where the author defines the taxonomy of economic nationalists and then establishes the dilemma of an economic nationalist:

What do nationalists want economic policy to accomplish? In an abstract sense, economic rationalism is the belief that the nation and the economy should be congruent. This is a straightforward extension of Ernest Gellner’s well-known definition of political nationalism as the idea that the nation and the state should be congruent. Gellner’s political nationalists strive to create an independent state as the ultimate fulfillment of nationhood. I’m the same way, many economic nationalists want to build an independent economy, one that is populated by co-nationals. They will sees to promote trade and investments between compatriots, and restrict economic contact with foreigners. They will strive to maximise the ownership of assets and employment by fellow nationals at the exclusion of others. In other words, privileging exchange within rather than beyond the nation is a key nationalist goal. 

I call this aim the isolationist motive. 

….

It turns out, however, that many nationalists do not want to identify their nation as ‘backward’. They wish it to become modern, advanced and industrial. There are two reasons why nationalists often champion a ‘modern’ identity for their nation. First, the political nationalist goal of congruity between nation and state is often only a starting point; once achieved this national sovereignty must be strengthened and defended against perceived external threats. Nationalists often see a mutually reinforcing relationship between a ‘modern’ economy comprising industry, advanced technology and financial resources, on the one hand, and political power needed to strengthen sovereignty. This is a feature of western neomercantilist thinking, as well as of Chinese writing on ‘wealth and power’. The message is simple: Growing wealth increases national power. 

Second, nationalists may receive a psychic payoff from a modern identity, because they tend to evaluate the position of their nation relative to that of others….

…….I call this desire to achieve a level of economic development commensurate with a ‘modern’ national identity the ‘expansionist motive’. In their determination to foster economic development, expansionist nationalists have pursued a broad range of policies. While some have relied heavily on state intervention to push investment in the desired direction, others have adopted liberal economic policies. 

…. it is important to note that expansionist nationalism is different from the desire to raise individual utility that is at the heart of liberal economic thought. In fact, many nationalists have explicitly rejected the focus on individual welfare in ‘mainstream’ economics. Expansionist nationalists care about economic growth abt the national, rather than at the individual level. Nationalists further privilege those dimensions of development that are relevant to building military power and political prestige, rather than personal consumption. 

Unfortunately for nationalists, this desire to expand production often conflicts with their simultaneous wish for isolation. 

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Addendum

— Pranay Kotasthane

A related point. I’m quite intrigued by news coverage of the latest chips coming out of China. Every new release by Chinese companies is viewed as a litmus test for American export controls by both the supporters and opposers of these controls. The supporters of export controls argue that controls are ineffective because they are not comprehensive. They argue that the only way out is to bring in stricter and broader controls. Opposing them are export control-bashers who project every new announcement by a Chinese company as a slap in the face of American hegemony.

The latest instalment of this debate played out last week, with TechInsights reporting that China’s leading memory chip producer, Yangtze Memory Technologies Co (YMTC), had developed the “world’s most advanced” 3D NAND memory chip. Notably, YMTC was added to the Entity List (a trade restriction blacklist released by the US Department of Commerce) in December 2022. The two camps sprung into action as soon as this news broke out.

To both sides, I have one suggestion. It’s too early to judge the impact of these controls on Chinese companies. If a company came under the radar of US controls announced on October 7, 2022, percolating these controls to the implementing agencies would have taken a few weeks, if not months. And if an advanced chip is found in a solid-state drive released in July 2023, it would have been produced even before the controls were announced. Before chips make their way into consumer products, they undergo several rounds of reliability tests. All this usually takes months. So, YMTC’s “most advanced” memory chip was—in all likelihood—designed using the tools and people the Entity List aims to prevent.

So, the real effect of export controls on China’s semiconductor industry can only be gauged perhaps another year from now. And most likely, the effects will be negative for both Chinese and American companies. The former is because China collaborates with foreign companies to make all its cutting-edge stuff. On the other hand, American companies will have to find other buyers as they lose out on the lucrative Chinese market due to the export controls. However, international relations are about relative power gains, not absolute ones. As long as the controls affect Chinese companies more negatively than American ones, it is a rational geopolitical move for the US. I suspect that’s where it is highly likely to go. So, next time you encounter another news item about another spectacular chip announcement from China, take it with a dollop of salt.

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Matsyanyaaya: 3 + 3 » 2 + 2

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

India and the US held the fifth ministerial 2+2 dialogue earlier this week. The joint statement carried several reassuring announcements related to defence cooperation. There were also several “we’ll decide on this later” type of announcements—the phrase “look forward” appeared fourteen times in the two-page joint statement.

That these dialogues have happened five times in a row is no mean achievement. It shows how the US and India are getting used to operating with each other despite major geopolitical events on which the two nation-states have markedly different points of view.

Nevertheless, one crucial element is missing from the agenda: trade. India-US trade should be a strategic priority if the two countries want to challenge China’s dominance in global supply chains. It is far too important to be delegated solely to the commerce departments of both sides, which will endlessly wrangle on import duties.

India’s trade with the US in FY23 was at $190 billion, roughly the same as US-China trade in 2001, just when the latter joined the WTO. Today, US-China trade stands at $758 billion.

Given this asymmetry, some of us argued earlier this year that the 2+2 dialogue should be transitioned to a 3+3 format to include both countries' trade and commerce representatives. The two countries should target clocking total trade at $500 billion by 2030 and $1 Trillion by 2040. The 3 +3 format can be a vital process innovation to resolve trade bottlenecks on priority.

These are some other pathways that can take India-US trade to a higher level:

Owing to India's vast size and diverse nature, different states have fostered their unique strengths and advantages. The trade relations between the two nations can be further enhanced through a partnership where groups of states engage in reciprocal visits each year, bolstering trade ties and fostering mutual growth.

The Trade Policy Forum (TPF) must be held every year. It is the right cadence to ensure disciplined action and follow-through on ambitious goals. The institutional memory of the TPF will work to create continuity. The old adage "we overestimate what can be done in one year and underestimate what can be done in 5 or 10 years" is particularly applicable here.

The organic growth in trade between companies on either side needs only the occasional enablement. Trade in technology services, pharmaceuticals, SaaS, industrial goods and many other sectors can continue. It will benefit from forums like the US-India Business Council (USIBC) that seek to remove frictions in the ordinary conduct of business and shine a light on some sticky areas.

[Narayan Ramachandran, Sarthak Pradhan, Anupam Manur and Pranay Kotasthane, “Time to Launch the US-India Trade Relationship into Another Orbit,” Takshashila Policy Advisory 2023-02].

If War is too important to be left to the generals, trade is too important to be left to the commerce ministers.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] Check out this Puliyabaazi with Subhashish Bhadra on public policy institutions in India. His book, The Caged Tiger, is an excellent addition to the public policy literature on India.

2. [Paper] How China Innovates? is a vital question for us in India. Political scientist Yuen Yuen Ang has co-authored a paper that discusses this question. TL;DR: China’s innovation policies are susceptible to manipulation and waste; they achieve scale but are low on productivity. We tried answering this question in another paper here.

3. [Paper] Under what conditions is public shaming morally permissible? This philosophy paper has an insightful five-point framework to answer this question.

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