The cold war of chips

In early October, the US Department of Commerce adopted a complex (over a hundred pages) limitation of exports to China of some leading American technologies, especially in the field of manufacturing the most advanced semiconductors (chips). It represents the most important step to date in the spiral of Washington’s economic war against Beijing, which began with Barack Obama, was reinforced by Donald Trump and has been amplified by Joe Biden. The goal is to block China’s access to these cutting-edge chips, in order to maintain the US’s strategic advantage in key security technologies and applications, but it goes much further. It is about suffocating China’s progress in essential areas such as artificial intelligence or supercomputers, among others. It is a much more radical decision than the measures taken by the Trump administration against Huawei and other Chinese companies. It seeks to reshape the future of the world’s intricate semiconductor industry and could put Europe, Japan and other countries in a sticky situation.

Under announced new export controls, semiconductors made with high-performance US technology will only be able to be sold to China with a US export license, something that is said to be difficult to obtain. Washington will also have to specifically approve the cases of citizens or entities of the country that wish to work with Chinese chip producers. Exports to China of chip-making technology and tools that Chinese companies can use to make their own equipment are restricted.

Chips are a highly globalized and interdependent industry. Those who design them (USA in the first place) are not necessarily those who manufacture them (Taiwan and South Korea, in the lead), or those who provide decisive tools for it (such as the Netherlands with ASML lithography). Using cold war legislation that was not intended for this, the Biden administration advances in the “militarization of interdependence” (weaponised interdependence), as they already qualified in 2019 Henry Farrell and Abraham L. Newman.

Introducing the new National Security Strategy, Jake Sullivan White House National Security Adviser, said the administration is not seeking to cut off broad technological and economic exchange with China, or aim for a deep separation (decoupling) of its economy, but to erect barriers around technologies that the US considers strategically important.

These controls, which those affected are studying in detail – their true impact will depend on the intensity with which the US applies them – are the toughest introduced by Biden in the framework of what is a war for technology, and for the economy. He shows that the US administration wants to curb and condemn China to the fate of middle-income countries. For now, the objective is to stop a Chinese military development that can surpass that of the US, from nuclear weapons, to hypersonic or space weapons. If the measures against Huawei entered the trade war, they go further.

There are many important Chinese companies that are going to be affected, such as the Semiconductor Manufacturing International Corporation (SMIC), which manufactures chips for computers, or memory manufacturers such as, among others, the Yangtze Memory Technologies Corp (YMTC), which can also be seen affected in less advanced chips by other supplementary measures. Apple is going to manufacture in China for the Chinese market some iPhones with less powerful chips than its latest M2, while it will increase its manufacturing in India, which gains from these restrictions, for the rest of the world. That is, separate markets can be created. It is the cited and feared (by China, but also by Europeans) decoupling.

These measures have costs for the US. The controls will have a major impact on US exports of chipmaking designs and tools, or the advanced chips themselves. China accounts for, for example, 27% of Intel’s exports, or 33% of those of the company Applied Material, which may see a loss of 6% of its sales, something similar to the impact on Nvidia, which will not be able to export to China its more sophisticated GPUs (graphics processing units).

China needed US technology for the development of its artificial intelligence, supercomputers and large data centers. All of civil interest, but also military. With the recovery of Taiwan in the background, where 37% of the world’s supply of chips is manufactured. Although in this the US policy can enter into contradictions. The visit this past summer of the speaker of the House of Representatives, Nancy Pelosi, to Taipei not only sent a message to China to protect the island. Pelosi also met with the directors of TSMC (Taiwan Semiconductor Manufacturing Company), the world’s largest chipmaker, to send them the message that Washington wanted to strengthen the manufacture of advanced semiconductors in its own territory.

Now, China is not going to stay quiet in the face of these measures against its technological development. Technological self-sufficiency is an objective that has been proposed for years and has been reiterated in the recent Congress of the Chinese Communist Party (CCP), which has seen Xi Jinping enthroned for at least five more years. “For the first time, the Communist Party congress has added a category to its top priorities: ke jiao xing guo, which means a great power based on technology, science and education. Science and technology are now at the core of China’s development, and self-sufficiency has become a national imperative,” he explains in New York Times Chinese economist Keyu Jin. To meet this challenge, he adds, China is resorting to its strongest form of techno-nationalism, the tizhi juice, or “whole country” approach, whereby all national resources are mobilized to achieve a strategic objective. But China’s semiconductor industry, and others, are going to suffer. In value, China imports more chips than oil, 40% of the global market, and only manufactures 12%. Although, according to some studies, due to its internal demand, China is destined to become the world’s leading semiconductor superpower. This is exactly what Washington wants to prevent.

“China is not going to stand still in the face of these measures. Technological self-sufficiency is an objective that has been proposed for years and has been reiterated in the recent CCP Congress»

We are in a new race for dominance of technology in these fields (in others such as quantum computing, China seems to be more advanced). It is to be hoped that the Chinese regime provides the means to speed up its technology (for which it also requires more capacity for innovation). Recently, Western experts thought that when it came to chips, China was about 10 years behind the US. The Biden administration is trying to widen this distance, which is difficult to bridge as these technologies are not easy to copy through fraudulent acquisitions or reverse engineering. Among other needs, they rely on automated design programs, a capability dominated by three US companies: Mentor, Cadence and Synopsys. It is a very complex global chain in which China manages itself badly and in which, today, no country is self-sufficient.

All this does not mean that China will retaliate directly against Washington – it could restrict the export of low-end chips essential for traditional and electric cars, and take action against US companies operating in China (such as Apple or Microsoft) – based on to the law approved in 2021 on countermeasures against sanctions. But it is not expected to do so directly. What is certain is that you will invest in self-sufficiency, although success is not guaranteed.

The US is not self-sufficient in this war. You need allies and partners. It is not certain that Washington fully understands itself with them, since for many countries a decoupling radical with China poses serious problems. For example, more than 20% of the revenue of the aforementioned ASML comes from China. The European Union, although it now looks at China with more critical eyes than in the past, fears that the United States will lead it into an economic war with Beijing that it does not want. Europeans see Biden as tougher than Trump on this because going against China is the only thing that unites their politically and socially polarized country. A spiral in chip export controls could lead to a new shortage in the world, and in Europe, affecting car production, consumer electronics or even data centers, the cloud, land that Europe intends to recover. The Europeans do not want the US to be the one imposing the limits. Among the EU’s plans is to manufacture and sell 20% of the world’s chips in a few years, which implies having access to the Chinese market. Japan and South Korea may also see their interests seriously affected by limiting their exports of chips and the tools to make them.

As Chris Miller points out in his magnificent historical study chip warthe fight to control this industry will determine our future.