The bans placed by the US would “not stop China permanently”, they were meant to hobble China to enable the US and its allies to stay ahead
After the visits of United States (US) Secretary of State Antony Blinken and Treasury Secretary Janet Yellen, the question that arises is: Just what are the Americans up to? On one hand, they keep tightening the restrictions on the export of technology to China, on the other they say that this is a narrowly targeted policy driven by national security concerns and does not, or should not, affect the larger relationship between the two countries.
In actual practice, however, the US chip ban is not targeting just military applications, but seeking to restrain China’s development as an economic power, and some have actually likened it to “an act of war”. The US has unveiled an array of steps to that end and has also been able to persuade key allies like Japan and the Netherlands to participate in their action. And now the US is preparing more restrictions on exports of Artificial Intelligence (AI) chips to China with the aim of affecting its ability to build its AI capacity. This move will adversely hit US companies like Nvidia and AMD that manufacture and market such chips. The US is also examining the possibility of issuing an executive order to restrict US investment in China.
China has already acted against the US chip giant Micron Technologies and issued bans on the export of rare metals geranium and gallium which have a range of high-tech applications, including the manufacture of chips.The Chinese are no slouches and are reacting with their own policies which are adding to the growing chaos in the semiconductor market. China has already acted against the US chip giant Micron Technologies and issued bans on the export of rare metals geranium and gallium which have a range of high-tech applications, including the manufacture of chips. On 1 July, China announced the implementation of a new counter-espionage law that expands the government’s investigatory powers. In the recent past, citing their national security concerns, the Chinese have investigated a number of US companies working in China. Through its CHIPS and Science Act, the US has signalled that it intends to establish the most strategic elements of its semiconductor industry at home or in friendly countries. But the very companies that it hopes to attract back, also have huge markets in China which is a major market for chips for cars, smartphones, dishwashers, and computers, and many US companies are dependent on it for their profitability. And as of now, they are not giving up on the Chinese business. Overall, China accounts for a third of the global semiconductor sales. Japan and the Netherlands, whose key companies are involved in making advanced chip manufacturing machines, have been persuaded by the US to put restrictions on China. Bans on China have an immediate impact on US companies. Micron Technologies whose chips were barred by Beijing from being used in its key companies that handle crucial information says that this changed situation could affect roughly an eighth of its worldwide revenue. Micron itself has made it clear that it plans to invest US$600 million in Xian over the next few years to support their product portfolio There are serious doubts about whether controls on semiconductors will change anything. Chips being somewhat small and easily concealed can and are being smuggled in large numbers already. Shell companies set up by Russia and China are able to bypass the somewhat legalistic US restrictions. The Chinese are also innovating through their companies to bypass US restrictions. As a result, the administration is also considering restrictions on leasing cloud services to Chinese AI companies because they have used such arrangements to bypass bans on the export of advanced chips.
Micron Technologies whose chips were barred by Beijing from being used in its key companies that handle crucial information says that this changed situation could affect roughly an eighth of its worldwide revenue.All these steps are being taken despite industry leaders like ASML Vice President Christophe Fouquet saying that it was “extremely difficult and expensive” to decouple and collaboration was the best way in the industry. ASML is the exclusive maker of extreme ultraviolet lithography machines needed for less than seven-nanometre level chips. The chip industry is highly complex and interconnected and relies on a global supply chain that draws on capabilities from different regions—design in the US, manufacturing in Taiwan and South Korea, assembling, packaging, and testing in China and high-end manufacturing equipment from the Netherlands. Self-reliance in semiconductors is, therefore, not an easy task. Indeed, in 2022, a Nikkei Asia investigation has shown that it is extremely difficult to reproduce the architecture of the globalised semiconductor industry in a single country or a region would be very difficult. So, the net losers could be the global industry which depends on semiconductors for a vast range of applications. According to Nikkei, the restrictions only deal with the visible end of the semiconductor supply chains. But behind the production are a network supplying equipment and other items ranging from raw materials, chemicals, consumables, gases and metals which are needed by the hugely complex industry. It cites Morris Chang, the founder of Taiwan giant TSMC, who says “If you want to re-establish a complete semiconductor supply chain in the US, you will not find it as a possible task. Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete.” Beyond chips, there remains a significant US-China economic relationship reflected in the US$ 690-billion worth of trade in 2022. The US is, in the words of the National Security Advisor of the United States, Jake Sullivan, attempting to create a “small yard, high fence” to protect its critical technologies. Protecting its technologies is one aspect of the situation, shaking off the influence of Chinese technology power in other areas is another.
The US is, in the words of the National Security Advisor of the United States, Jake Sullivan, attempting to create a “small yard, high fence” to protect its critical technologies.A case in point is Huawei, which was the first target of American restrictions. While many Western countries have blocked its 5G technology, it is doing well in Africa and parts of Asia like Indonesia. After a massive fall of 70 percent of its profit in 2022 as compared to the previous year, the company, denied Android, has come up with a new operating system. It remains one of the biggest spenders in R&D among global corporates. Recently, Thierry Breton, EU Commissioner for Internal Markets called on more countries to remove companies like Huawei and ZTE from their 5G networks. It transpires that as of June 2023, only 10 out of the 27 EU countries have restricted the company from its networks. Another area where Chinese technology dominance is impacting is in the area of drones. Companies like DJI today have become overwhelming leaders of the global market for civilian drones. In addition, China has also emerged as a major consumer of the drone industries. While at the official level, DJI is banned by the US government, there are still many areas like scientific research, search and rescue, and agriculture where they are used and where their grounding in some instances is causing problems. Many politicians are out to ban them though their replacements would be vastly more expensive. One of the states that has already done so is Florida, whose governor Ron DeSantis is seeking the Republican nomination for next year’s presidential election. An assessment published in the New York Times last week noted that if there was one country that could overcome the challenges in high tech, it would be China. In fact, the one danger for the US is that the restrictions could actually “spur long-term growth.” Forcing China’s US$-400 billion annual chip imports inward could be the final catalyst in helping Chinese semiconductor industry to catch up. The controls would “not stop China permanently”, they were essentially meant to hobble China to enable the US and its allies to stay ahead. Whether or not that will happen only time will tell.
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Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...
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