What do US curbs on selling microchips to China mean for the global economy?

The US ban on selling advance computer chips to China is a significant escalation of the two powers’ trade battle. Photograph: Daniel Ceng Shou-Yi/ZUMA Press Wire/Rex/Shutterstock

Washington’s ban on hi-tech exports to China marks a huge gambit for economic supremacy for the next decades

The US has taken unprecedented steps to limit the sale of advanced computer chips to China, escalating efforts to contain Beijing’s tech and military ambitions.

The moves are designed to cut off supplies of critical technology to China that may be used across sectors including advanced computing and weapons manufacture.

The crackdown marks the most significant action by Washington against Beijing on technology exports in decades, escalating a trade battle between the world’s two most powerful economies.

After the export controls, Apple reportedly put on hold plans to use memory chips from China’s Yangtze Memory Technologies in its products. The Nikkei newspaper said Apple had planned to use the chips in iPhones sold in China.

What action has the US taken?

On 7 October, the Biden administration imposed a sweeping set of export controls that included measures to cut China off from certain semiconductor chips and chip-making equipment.

Under the rules, US companies must cease supplying Chinese chipmakers with equipment that can produce relatively advanced chips unless they first obtain a license.

The new regulations also add controls on some semiconductor production items and transactions for specific end-uses of some integrated circuits or chips. The US also wants to increase its export controls to include semiconductor products and software, technology, and other things used to develop and make integrated circuits. In a further restriction, US citizens and green-card holders will also be banned from working on certain technology for Chinese companies and entities.

What products are blocked by the curbs?

The export curbs will include high-end computing chips, such as NVIDIA’s A100/H100 and Intel’s GPU (Ponte Vecchio), according to Brady Wang, associate director of Counterpoint research in Hong Kong. The rules, some of which go into effect immediately, build on restrictions sent in letters earlier this year to top toolmakers KLA, Lam Research, and Applied Materials, requiring them to halt shipments of equipment to wholly Chinese-owned factories producing advanced logic chips.

The US department of commerce said the export controls “restrict [China’s] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”.

How significant are the curbs?

The chip ban was described by the seasoned China analyst Bill Bishop as a “massive escalation” in the rumbling trade and geopolitical tensions between the US and China. “We are all still trying to understand the impacts of the new controls,” he said in his Sinocism newsletter, “and frankly I think many underestimate just how significant they are, both for technology supply chains and future developments but more broadly for the US-China relationship”.

The international research firm GlobalData said the US announcement “transcends the semiconductor industry” and was about nothing less than the leadership of the world economy. “This is about [artificial intelligence] dominance,” said Josep Bori, the firm’s thematic research director, “which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.”

Although they have another year to comply with the restrictions, semiconductor manufacturers in Asia such as the market-leading Taiwanese company TSMC, SK Hynix, and Samsung are also threatened by them. S&P Global Ratings credit analyst Clifford Kurz said: “Many of the Asia-Pacific tech issuers that we rate have the financial strength to absorb the blow for at least the next 12 months. But longer term, the rating implications are clearly negative.”

Can China use locally made chips instead?

China consumes more than three-quarters of the semiconductors sold globally, but produces only about 15% of global output.

Experts say China’s own equipment makers remain four to five years behind their overseas counterparts, making them unsuitable as instant substitutes for equipment lost from US suppliers such as KLA Corp, Applied Materials and Lam Research.

Boston Consulting Group estimated in 2021 that a country would need at least $1tn in incremental upfront investment to build fully “self-sufficient” local chip supply chains.

The new restrictions may spur Chinese chipmakers to try producing advanced chips by using creative engineering solutions with older technologies not subject to the sanctions.

Brady Wang from Counterpoint said: “The most recent US restrictions will greatly slow China’s advanced semiconductor industry and derivative technologies, including AI, supercomputers, training in self-driving etc.” China may be forced instead to concentrate its manufacturing capacity on “mature technologies and leverage the service outside China”.

How has China reacted?

The China Semiconductor Industry Association said in a statement that it hoped the US government would reverse its decision and return to international trade negotiation processes.

The importance of technological self-sufficiency, already a priority for Xi in the past decade, surfaced as a theme at this year’s congress with Xi Jinping emphasizing the hostility of foreign rivals. However, experts said that Beijing may have few ways of forcing Washington back to the table. The ongoing congress meant reaction from Beijing had been muted but Bill Bishop said China’s options were limited beyond restricting US access to the important rare earth metals that China controls. “Their options are limited as many seemingly obvious actions, like targeting Apple, would also do a lot of damage to the [Chinese] economy. Boeing would make sense, but they already are being punished. I would not be surprised to see rare earth weaponized.

What will happen next?

Singapore’s prime minister, Lee Hsien Loong, warned greater decoupling between the US and China would create a “less stable world”.

“The Biden administration’s latest move is a very serious one, I’m sure they have considered it carefully. It can have very wide ramifications,” he said at a press conference in Australia.

All Rights reserved for Martin Farrer Virginia Harrison

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