Biden Short-Circuits China
The latest U.S. moves undermine China’s ability to import, manufacture, and export the semiconductors that run the world
By Rishi Iyengar, Foreign Policy
After four years of watching Donald Trump inflict flesh wounds on China with his ineffectual trade war, U.S. President Joe Biden appears to have found the jugular. The goal is the same, but this knife is sharper—and could set back China’s tech ambitions by as much as a decade.
The target: semiconductor chips, especially the cutting-edge variety used for supercomputers and artificial intelligence. New export controls announced by the Biden administration this month prohibit the sale of not only those chips to China but also the advanced equipment needed to make them, as well as knowledge from any U.S. citizens, residents, or green card holders.
The chips, wafer-thin and the size of a fingernail, underpin everything from our smartphones to the advanced weapons systems that the United States specifically called out in its filing announcing the export restrictions. Perhaps more important—and this is where the U.S. curbs will hurt China the most—they are indispensable to the technologies of the future, such as AI and self-driving cars, as well as virtually every industry from pharmaceuticals to defense.
“You can pick a cliche—people talk about it as the ‘new oil’ or whatever,” said Raj Varadarajan, Managing Director and Senior Partner at Boston Consulting Group whose research has focused on the semiconductor industry. “But it’s there in everything, it’s pervading everything, and that’s one of the reasons it’s become such a flashpoint.”
China has set out lofty ambitions for its technology sector, with several government plans over the past decade setting out targets such as self-sufficiency in high-tech manufacturing by 2025, global leadership in AI by 2030, and global industry standards dominance by 2035. The latest U.S. broadside is aimed squarely at that “Made in China” sign.
“I think this is part of also signaling to China that we are not just going to resolve to give China global leadership in some of these key areas,” said Daniel Gerstein, a senior policy researcher at the Rand Corp. who previously served in the U.S. Department of Homeland Security’s Science and Technology Directorate. “We don’t want to lose and become beholden, if you will, to Chinese approaches.”
The semiconductor industry is the cornerstone of that strategy, and China has made significant strides in the recent past. The country now accounts for 35 percent of the global market, according to the Semiconductor Industry Association (SIA).
But that figure reflects the final sales of finished chips to electronics companies, many of which have large manufacturing operations concentrated in China. The more high-tech and critical parts of the process, such as chip design and initial production, are still dominated by the United States.
And while China can hold its own at the lower end of the spectrum and the production of older-generation chips, it still lags behind in the cutting-edge research, design, and advanced technology that the Biden administration’s export restrictions target. Those goals have now likely been pushed back several years.
A significant reason for China’s vulnerability, as well as its painstaking effort to achieve independence, is how interconnected the global semiconductor supply chain is. Chips will often be designed in one country; fabricated in another using machines from a third; tested in a fourth; and finally assembled and placed into electronic devices in a fifth—sometimes with a few more countries and steps in between.
And many of those countries have concentrated their strengths and capacities in certain parts of that process, creating potential bottlenecks that can easily be exploited. For instance, the SIA estimates that there are “more than 50 points across the value chain where one region holds more than 65 percent of the global market share.” And 92 percent of manufacturing capacity for the world’s most advanced chips is concentrated in Taiwan; the remaining 8 percent is in South Korea.
The United States is trying to hedge its bets on that front as well, passing the CHIPS and Science Act this year, which provides US$52 billion in incentives—most of it for companies that set up chip factories on U.S. soil—and hundreds of billions of dollars more to further shore up its research and development capabilities. Biden has been doing the rounds in upstate New York this month, touting the impact of the act, including at an IBM plant in Poughkeepsie (a day before the export controls were announced) and a Micron facility in Syracuse.
For the United States, building up its own manufacturing ecosystem is a fail-safe. For China, it has rapidly become an absolute necessity.
“This is an effort that is going to take hundreds of billions of dollars and an incredible amount of engineering talent and energy to recreate a semiconductor supply chain that doesn’t involve U.S. technology,” said Jordan Schneider, a senior analyst at the Rhodium Group. “This supply chain is so globalised, but also so specialised, that at any step in it there’s only a handful of firms in the world that can do it, and if you’re sort of locked out of any one of these steps, then you can’t make chips.”
There are still some unanswered questions, including how the restrictions will be implemented in practice. In many cases, they give companies the option to apply for licenses to use and sell U.S. technology.
“It’s not clear that permission will be denied. It’s very possible that permission will be given, and so it’ll just delay and slow down some things,” Varadarajan said.
The other big question is whether and how China might hit back. Beijing has slammed what it calls “abuse” of export controls and warned that the restrictions could ultimately “backfire” on Washington, but its response so far has been a distant cry from the tit-for-tat tariffs that were a hallmark of Trump’s trade war.
With semiconductors specifically, the vast gap between U.S. and Chinese technological capabilities means Beijing doesn’t have much with which to retaliate. While China accounts for a significant portion of mature node chips—older, larger semiconductors that are not as cutting-edge but are used in products such as cars—it is not indispensable, and production can likely shift elsewhere without much disruption.
“If the U.S. bans selling semiconductors to China, and China says [it is also] going to ban semiconductors, there isn’t much in terms of things that they make over there that they can ban equivalent to proportional response,” Varadarajan said.
China, in any event, is backed into a corner. Any move Beijing makes at the moment to cut itself off from the global supply chain could hit the country’s employment and exports, both of which it can ill afford with a current economic growth rate of 3 percent—far lower than government forecasts—and no easy way out.
Actions within China in the weeks after the U.S. export controls were announced betray the uncertainty within of what to do next. The Chinese government reportedly held emergency meetings with the country’s top semiconductor firms to assess the impact of the restrictions. The Financial Times reported that one of the leading firms, Yangtze Memory Technologies Corp., has already asked several American employees to leave.
China will be forced to double down on its years long effort to build its own semiconductor ecosystem and might just achieve its goal of becoming self-sufficient in the long run. But in the short term, there’s likely to be pain.
“The Chinese companies are going to have an enormously difficult time trying to push past these limits without U.S. technology, but any effort to do so just to get to a 2022 level will probably take a decade or more,” Schneider said. “And even with all the effort, it’s not clear that they would succeed.”
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