Chinese takeovers become a geopolitical frontline

Newport in south Wales finds itself on an unlikely geopolitical faultline. The UK government cited national security concerns to retrospectively block the sale of one of Britain’s biggest semiconductor plants, Newport Wafer Fab, to a Dutch company owned by China’s Wingtech. The UK is not alone: Germany has blocked two similar deals, with its vice-chancellor, Robert Habeck, accusing China of pursuing a “deliberate strategy” of “trying to acquire knowledge” in the sector.

The decisions risk being perceived as China-bashing. The west must try to balance legitimate concerns about strategic assets falling into potential adversaries’ hands with actions that could stoke the idea it is trying to hold back China — or that it is pursuing industrial strategy through the back door.

The pandemic and Russia’s war in Ukraine underscored the need to secure supply chains, as well as the folly of over-reliance on a hostile regime. The UK and German decisions follow sweeping US controls on high-tech chips. US congressmen raised concerns over Newport Wafer’s sale, leading critics to allege pressure from Washington — though that is to ignore the number of China hawks in the UK government.

Wrapping industrial strategy and protectionism in the mantle of national security is wrong. But the role of Chinese companies’ in these deals, and the fact they involve semiconductors, makes the line hard to draw. That is particularly true in the context of a more assertive China and concerns that it could invade Taiwan, which dominates advanced semiconductor manufacturing.

Under a 2017 law, Chinese companies are required to co-operate with Beijing’s intelligence apparatus. That means a mooted Chinese acquisition in another country’s strategic sectors becomes a more loaded proposition. This is not limited to semiconductors: concern has been expressed over Cosco’s stakes in the ports of Piraeus and Hamburg. Beijing can theoretically require the shipping giant to provide support to the Chinese navy wherever Cosco operates.

Semiconductors also blur the definition of a security threat. They power everything from smartphones to cars but they also have military applications. This is why Joe Biden’s export controls — although ostensibly to stop military technology falling into the hands of Beijing — are so far-reaching. Securing even a small role in this global supply chain can itself be a national security concern.

The UK decision has nevertheless baffled many. Newport Wafer’s technology is not cutting edge — though the plant sits within a cluster specialising in compounds that can have advanced uses. The government’s reasoning, beyond a one-page document, is not clear. It does not help that there is no definition of national security in the legislation under which the deal was blocked. The company can mount a legal challenge but much of the government’s deliberations would be classified, making it hard for judges to consider underlying principles. Such murkiness reduces predictability for the foreign investment on which Britain relies.

If a country decides to choke off investment streams for a capital-intensive sector such as semiconductors, it is vital that it then nurture that industry. The US and EU have announced support packages worth $52bn and €43bn respectively to grow domestic semiconductor industries. UK investment, meanwhile, is negligible. An overarching strategy is long overdue.

Trying to differentiate between the national interest and national security is hard when it comes to semiconductors. But a little transparency goes a long way, as would remembering that undue protectionism will inflate costs and exacerbate cross-border tensions.

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