The US export controls might push China towards an impetus for a strong domestic semiconductor industry
The Biden administration has taken a serious view of the long-term threats in the tech sector from China. The use of export controls to blunt China’s competitiveness in the technology sector has been consistently employed by the US administration and has grown since 2017. These restrictions have affected the exchange of technology across various sectors between China and the US. The Bureau of Industry and Security (BIS), U.S. Department of Commerce is at the heart of this tech shift in US policy. The US Entity List brought out by the BIS, which contains names of individuals, companies, businesses and institutions which require specific license for the ‘export, reexport and/or transfer (in-country) of specified items’ has considerably expanded in the last five years. The Trump administration’s trade war with China had already seen many new names being added to the Entity List. Notably, the Biden administration has doubled down on competition with China, resulting in a four-fold increase in Chinese companies in the Entity List from 130 in 2018 to 532 as of March 2022. Most of the prominent Chinese companies related directly or indirectly to the chip and semiconductor industry have been put on the US Entity List. Importantly, the BIS has also added some important companies to the list even though they deal with non-sensitive product manufacturing, making any circumvention to export controls by China extremely difficult. Apart from the expanded list, the latest export control measures by the US are punitive, as opposed to being just restrictive earlier. What makes the latest round of export control restrictions by the US extraordinary is the extension of the ‘foreign direct product rule’ to almost all Chinese companies in the semiconductor, supercomputing, quantum computing and related fields, making it almost impossible for Chinese companies to avail technology imports from other leading global companies in the field. The foreign direct product rule stipulates that manufacturing outside the US, which makes direct use of US software or technology, may be subject to US re-export control laws under the Export Administration Regulations (EAR) as ‘foreign-direct products’. The impact of this great tech-decoupling between China and the US is expected to be felt in China across a range of sectors for two main reasons: First, Chips are China’s biggest import at close to US $400 billion, even more than crude oil. As such, the export control restrictions will force China to look inward for filling the gap in the chip industry and related technological sectors that are dependent on these imports. However, any prospect of developing such capabilities commensurate with the gigantic domestic demand in the short term remains remote. Second, behind China’s massive import of semiconductors underlies the interconnectedness of these imports with other related sectors, which has scripted China’s phenomenal advances in technology in the past decade. As a result of the export control implementation, the use of Artificial Intelligence (AI) and automation is expected to slow down in China. It is assessed that other sectors that are going to be impacted as a result of the latest US export control measures include research and development in the drug industry, cybersecurity, medical imaging, advances in climate science, autonomous vehicles, hypersonic weapons, and supply chain automation, among other fields.
The Biden administration has doubled down on competition with China, resulting in a four-fold increase in Chinese companies in the Entity List from 130 in 2018 to 532 as of March 2022.
The US-China competition is, perhaps, at the peak of a cycle involving measures and countermeasures in the tech-security interface. China has so far shown a muted response to the Biden administration’s export control salvo. However, a calculated Chinese strategy to tackle the incoming technological crisis should be anticipated. China could use a combination of external influence and domestic capacity building capacity building to in its attempt to overcome the crisis. The US is expected to work with its other partners to sustain its global leadership in the semiconductor industry and increase the tech-gap with China.
The export control restrictions will force China to look inward for filling the gap in the chip industry and related technological sectors that are dependent on these imports.
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Vivek Mishra is a Fellow with ORF’s Strategic Studies Programme. His research interests include America in the Indian Ocean and Indo-Pacific and Asia-Pacific regions, particularly ...Read More +