The technological war between the US and China forces the industry and allies to make difficult decisions

The United States has put in place the toughest restrictions on technology flows to China since the cold war. The new export controls they seek to prevent US and foreign companies from supplying Chinese entities with high-end chips and the tools, technology and software needed to design and produce them. The measures are aimed at graphics processing units (GPUs) and other chips for supercomputing and artificial intelligence (AI). They are intended to cripple China’s ability not only to source modern semiconductors, but also the machines and talent to make theirs. What said US national security adviser Jake Sullivan, Washington now intends to “maintain as much advantage as possible” in underlying technologies such as AI. The ramifications will be deep.

Reduction of China’s capabilities in leading areas

The move marks a sea change in technological competition between the US and China. Until now, Washington has restricted specific technologies with clear military end uses. The new controls seem to represent a departure from the doctrine of “small yard, high fence” (literally small patio, high fence). Now, the goal is to stop China by weaponizing the bottleneck of AI chips, electronic design automation software, manufacturing equipment and their components. Washington is betting that the short-term cost of lost sales will be outweighed by the long-term damage to China’s ability to innovate. This is due to the approval of the Chip Law and Science US, which offers incentives to the semiconductor industry to relocate their supply chains to US soil.

The policy change was prompted by evidence that chip sales to Chinese companies have been favoring China’s military development — including its nuclear and hypersonic weapons programs—already surveillance initiatives. It was a response to Beijing’s strategy of military-civilian fusion, which seeks to turn commercial AI into military applications. Washington appears intent on freezing Chinese semiconductor development at current levels and limiting the country’s AI progress, affecting end users and commercial applications if necessary. Through the so-called “unverified list,” the Commerce Department can now also automatically blacklist Chinese companies suspected of having military or police ties, in the event of non-compliance with inspections.

Uncertainty for companies in Europe and East Asia

Given the complexity of value chains, the US unilateral move will also cause some disruption to European and East Asian chip companies. If they want to sell certain advanced computing items made with US technology to Chinese entities, they will now have to apply for a license under US Foreign Direct Products (FDP) rules. They will also need a license to sell technology subject to US controls to 28 Chinese companies on the current Commerce Department entity list, the focus of US trade restrictions since 2019.

“Given the complexity of value chains, the US unilateral move will also cause some disruption to European and East Asian chip companies”

Although the exact application of some of the provisions remains unclear, European companies will have to choose between submitting to the new US approach or trying to avoid it, for example by creating a firewall between their business in China and the US. For example, US-based Siemens’ electronic design automation business looks set to take a hit. The Dutch company ASML, a world leader in semiconductor photolithography equipment, obtained in 2021 the 15% of their income in China. The company has forbidden its US employees work on projects destined for China.

However, it is important to carefully assess the full impact of the new US rules. Although Washington has long tried to pressure The Hague to retain ASML’s export licences, even for its non-state-of-the-art product line, the company said that he expects limited impact from the new controls, given that his machines contain little American technology.

Europe’s temptation to sell out East and West

By taking advantage of its long-arm jurisdiction and dominant position in semiconductor technology, Washington is aware that it is alienating allies and partners in Europe and Asia. He tried to coordinate the controls of the semiconductor sector with Brussels, The Hague, Tokyo, Taipei and Seoul through various means. After fail In his attempt to get these capitals to adhere, US President Joe Biden opted for a unilateral push. But unless a broad coalition agrees to fall in line with these new restrictions, the US could hurt its semiconductor industry in the long run. It can only enforce its rules on the FDP with the help of allied governments, and there are European and East Asian alternatives to some US technologies. What if these regions opt for semiconductors to go on as usual with China?

The new US export controls will deal a serious blow to the Chinese chip industry. But in the long term, they can also strengthen China’s efforts for building a national semiconductor supply chain. Although initially unable to compete with global industry leaders, Beijing has shown in the past that it is willing to pay a heavy price for the strategic goal of technological self-sufficiency, and its interest in European high-end chip technology also increase. Given the importance of China to many non-US chip companies, the world could even end up divided into two separate semiconductor ecosystems. Europe could be tempted to join both, although success would depend on how the US now implements its new rules.

Article originally published in English in the Web by MERICS