What are the limits adopted by the US Government?
China is the target of new sweeping and severe export controls from the US. At the start of October (Friday, 7 October), the Biden Administration issued sweeping restrictions on selling semiconductors and chip-making equipment to China. As a result of the move, companies will have to request a special license to supply advanced computing chips, chip-making equipment, and other products to China. These types of semiconductors, made with US technology, are employed in Artificial Intelligence (AI)I, high-performance computing and supercomputers. Such AI capabilities are used in a range of areas, including autonomous vehicles, logistics, medical imaging and research centres using AI from drug discovery to climate change modelling.[1]
A ban was also issued to prohibit the sale of a broader range of products made outside the US with American technology to the 28 Chinese companies that have been placed on an “entity list” over national security concerns.
Finally, the US Department of Commerce is tasked with issuing permissions to any US Citizen wishing to provide support to Chinese fabs. Several US firms, including Lam Research, Applied Materials and KLA, have pulled personnel out of China as a result.
Mainland China and Hong Kong are two of the leading exporters of microchips[2], even if value addition remains low (at around 10% of the value of trade). China’s manufacturing capabilities remain low for sophisticated microchips in modern data centres running machine learning processes. Taiwan’s Semiconductor Manufacturing Company (TMSC) is the world’s largest semiconductor manufacturer, and Taiwan ranks as the second largest exporter in the world. Significant sales from the US go to China, and substantial US investment has been poured into Chinese manufacturing operations.
Sanctions concern not just the chips but the technology, intellectual property and machinery used in the manufacturing of microchips. More significantly, the Biden administration also imposed broad international restrictions that will prohibit companies anywhere in the world from selling chips used in artificial intelligence and supercomputing in China if they are made with US technology, software or machinery (called “foreign direct product rule bans”). As highlighted by Friedman,[3] this rule will have a major consequence because of what he calls the “complex adaptive collation” needed by firms to complete the whole value chain of operations.
The measures risk disrupting every stage of the production value chain. Typically, a semiconductor value chain would consist of three major stages. Firstly, the designing phase involves R&D investments which are made into devising the characteristics, purposes and technical feasibility of semiconducters. Secondly, (manufacturing stage), the microchips are produced through a series of manufacturing steps, later to be layered and mounted on circuit boards, and finally these are tress tested under different conditions. In the last phase of the integration phase, the semincoductors are integrated into final products, consisting of consumer goods, cars, machinery, information technology equipment, etc. (see Figure 1). Currently, not only American, but also European and Asian companies are engaged in the semiconductor value chains. These include major players like AMD, Qualcomm, Intel, Apple and Nvidia, which design the chips; Synopsis and Cadence, which lay the software and create computer-aided design tools; Applied Materials forges the billions of transistors and connecting wires in the chips; etc.
Figure 1: Semiconductor manufacturing production value chain
Source: Wallach, O. (2021) Visualizing The Global Semiconductor Supply Chain. December
The implications on Chinese production networks will be swift and severe
The semiconductor industry in China has received vast investments from the Chinese Government. However, it still lags behind the US, Taiwan and South Korea in its ability to produce the most advanced chips. While China has made significant progress in other fields of technology, such as AI, those technologies mostly rely on advanced chips designed or fabricated by non-Chinese (US alliance) firms.
Analysts at the Bank of America say restrictions on the sale of equipment will affect the production capabilities in China for logic chips designed recently and Dynamic Random Access Memory (DRAM) chips designed in the last five years.[4]
The global implications cut across all countries and industries
The measures will impact many American companies whose sales to China contribute a vital source of revenue that allows them to reinvest in research and development. For example, US equipment maker Applied Materials obtained one third of its sales from China last year, whereas Lam Research exported just under this share to China. Major US companies that dominate the semiconductor manufacturing industry have already complied with the measures and are studying carefully the implications of the restrictions.[5]
Despite the $52.7 billion committed by the Biden administration to develop advanced semiconductor capabilities in the US, it remains far from being self-reliant in this area. Currently, all advanced chips are imported from overseas (90% from Taiwan’s TMSC and 10% from South Korea’s Samsung). Since the shortage of chips in 2021, many manufacturers in the automobile space have also tried to internalise the production of microchips to limit reliance on foreign suppliers. However, given the multitude of different technologies needed in a car, such self-reliance is unlikely in the medium term.
As the US’ main motivation was to limit China’s progression in the field of advanced semiconductor technology and manufacturing, some analysts believe that the measures will favour foreign chipmakers. For example, leading foreign chipmakers such as Taiwan Semiconductor Manufacturing Company or Intel are seen as giants that could fill the vacuum.[6]
Figure: 2 Global trade in electronic components, 2020
Source: IEC analysis based on UNSD COMTRADE and ITC Trade Map
In the short term, the surge in demand, coupled with the restrictions on supply chains by keeping a major player out, will lead to shortages in supply chains and drive up prices. As a result, the measures will also have repercussions on the global digital economy. The digital economy is estimated to be worth close to one quarter of global GDP. The growth of the digital economy is far oustrippping traditional sectors. According to the World Bank, the Digital Economy accounts for over 15% of global GDP and has been growing at 2.5 times the speed of non-digital sectors.[7] Such phenomenal growth will increase further the demand for semiconductors, not to mention the increasing purchasing power for appliance which are heavily reliant on semiconductors. The Internet of Things alone could potentially have an explosive impact on demand.
Way forward
The US chip ban is seen as an attempt to curb China’s access to critical technologies, from supercomputing to guiding weapons, and their use for the East Asia country’s military and economic ambitions. Compared to the crackdown on Huawei a few years ago, this move is much broader in scope and will affect not only Chinese firms but also other large chip makers with facilities in China (for example, China account for 5.5% of US’ wafer capacity), not to mention the other downstream producers of semiconductors industries.
The response by Beijing might be quite combative, as it was during the trade war that started with the Trump Administration. In reaction to past US sanctions on Huawei, China chose to use soft diplomacy. This is unlikely to be the case on this occasion. Beijing might impose restrictions on American companies or firms from other countries that comply with US rules with operations in China in retaliation. The world needs to brace for a storm in almost all segments of international trade.
See the interview of International Economics’ CEO on CNBC here.
Paul Baker is the founder and chairman of International Economics Consulting Group. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on trade technologies for trade and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. In 2021-22, he led the work on creating an e-Payments Blueprint for Africa, recently authored a study n regional value chains in ASEAN for the electronics industry, and is currently working on the trade aspects of a continental harmonization strategy towards a Single African Digital Market. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s Trade Select Committee, and UN panels and events regarding trade impact analysis.
References
[1] FT (2022). China’s chip sector braced for US exports blow. Monday 10 October
[2] UN COMTRADE
[3] Thomas L Friedman (2022). Wil the war over computer chips be the biggest? New York Times, Friday 14 October
[4] FT (2022). China’s chip sector braced for US exports blow. Monday 10 October
[5] FT (2022). Chip Equipment suppliers shun China. Friday 14 October
[6] FT (2022). China’s chip sector braced for US exports blow. Monday 10 October
[7] Hayat, Z. (2022). Digital Trust: How to Unleash the trillion dollar opportunity for our global economy. WEF August 17.
