US-China Chip War: Bans and Containment Won't Work
A review of "greatest hits" articles on the chip war that give much needed perspective.
Image by DALL-E!
The US-China chip war is big news. With the most recent ban on all chip-making gear with US IP and high-end chips, the US is essentially declaring war on China’s high-tech ambitions. The intent isn’t just strangling China’s access to chips but its ability to make them. What makes this such a significant move is that the US is putting its “containment” policies on public view with little expectation that US allies and the US chip industry will foot the bill.
This is not the first time the US has tried to “contain” another nation, the Soviet Union is the first to come to mind, but it is the first time that the US is taking its “boxing gloves” off with China in its quest to remain a global hegemon. It also shows how the US views the great power struggle between nations over chips, arguably the foundation of our digital future, as a zero-sum game with winners, losers, and nothing in between.
The PRC is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.
White House, “National Security Strategy, Oct 2022”
The chip ban is stressful enough in its own right, a tidal wave in the geopolitical game. To add to its impact, it is coming at a time when the Ukraine conflict is putting additional stress on a global financial system already wreaked by interest rate rises, war, and sanctions. The old saying about “timing is everything” seems to fit.
Still, there is no doubt that this ban will set China back years in its quest for high-power chips required not just for military use but for the digital society it is so very vocal about building.
Will it stop China dead in its tracks? No way, no how. At best, it will delay China’s production, and at worst, it will cost the US and its allies, who have no say in the matter, sales revenue required to build bigger and better chips for the world. Yet, at the same time, it is ensuring that China will be an even bigger chip rival in the future.
As I have said repeatedly in my writing, whether discussing Huawei, CBDC, Chips, or TikTok bans:
Betting against China building just about anything is a sucker’s bet.
Greatest Hits
Regular readers reached out and wondered why I haven’t written about these latest US moves on chips. Two reasons; first, I was shocked and saddened by the decision. While US-China relations are never quiet, I thought that an open war in Ukraine with the threat of nuclear escalation would reduce the US’s desire to escalate global conflicts.
The US claims that it’s now or never and that they should have done this years ago. That is true. The US should have devised a policy on chip technology exports long ago; if it did, it would have likely avoided such harsh bans which impact US manufacturers. Second, the outpouring of articles also gave me pause. There was so much being produced that looked at this move with skepticism I couldn’t keep up!
This article is intended to capture a few articles about the chip war that left a lasting impression on me. For lack of a better term, these articles are my “greatest hits.” My goal is to place them all in one place and then take a few quotes from each to spin a story that gives you additional perspective on the Chip wars.
1. Uncharted territory
The biggest issue that arises from the escalation in US chip policy is that we are now even further into “uncharted territory” with China relations. Bad enough that the US is managing an escalating proxy war with Russia, but the US also launched the equivalent of a missile strike against China the week before China’s National People’s Congress.
The US may have enjoyed sending this message the week before China’s leadership meeting. Still, in doing so, it gave senior leaders time to impress upon everyone gathered the severity of China’s life-or-death tech war with the US. The result, of course, means more money pumped into China’s chip development through national programs that make the US’s “space race” look tame by comparison.
Many articles may be behind paywalls. Try opening in “private windows” or Printfriendly.com I have also attempted to find non-paywall versions.
Links: NYT, Non-paywall site
Thomas Friedman of the New York Times sums it up better than anyone else, in very plain language:
In case you haven’t noticed, let me alert you to a bracing turn of events: The U.S. is now in conflict with Russia and China at the same time. Grandma always said, “Never fight Russia and China at the same time.” So did Henry Kissinger. Alas, there is a strong case in the national interest for confronting both today. But have no doubt: We are in uncharted waters. I just hope that these are not our new “forever wars.”
…The point is this: The more we push the boundaries of physics and materials science to cram more transistors onto a chip to get more processing power to continue to advance artificial intelligence, the less likely it is that any one company, or country, can excel at all the parts of the design and manufacturing process. You need the whole coalition.
“The US was in an untenable position,” she [US Secretary of Commerce Gina Raimondo] told me in her office. “Today we are purchasing 100 percent of our advanced logic chips from abroad — 90 percent from TSMC in Taiwan and 10 percent from Samsung in Korea.”
What is interesting is the global nature of these bans, which impacts all US and non-US companies from supplying Chinese entities with hardware or software whose supply chain contains US technology. So all chip-related companies, regardless of domicile, are impacted.
These bans are also the result of the US failing to negotiate the “Chip 4 alliance” with Korea, Japan, and Taiwan, as none wanted to sustain losses due to Washington’s restrictions. Chip 4 was designed as an alliance against China chip production but went nowhere. Instead of continuing these negotiations, more radical elements in the US government went for the nuclear option.
Links to Foreign Policy: Here
Jon Bateman in Foreign Policy sums it up below:
The U.S. government imposed the new rules after limited consultation with partner countries and companies, proving that its quest to hobble China ranks well above concerns about the diplomatic or economic repercussions.
In short, America’s restrictionists—zero-sum thinkers who urgently want to accelerate technological decoupling—have won the strategy debate inside the Biden administration. More cautious voices—technocrats and centrists who advocate incremental curbs on select aspects of China’s tech ties—have lost. This shift portends even harsher U.S. measures to come, not only in advanced computing but also in other sectors deemed strategic.
2. Containment or “beggar-thy-neighbor” becomes policy
In reality, Washington perceives its role in the global economy and chips as zero-sum games. There isn’t room for two in the great power struggle, and that beggaring China is fair game.
The Financial Times’s Edward Luce highlights the severity of the policy:
Imagine that a superpower declared war on a great power and nobody noticed. Joe Biden this month launched a full-blown economic war on China — all but committing the US to stopping its rise — and for the most part, Americans did not react.
To be sure, there is Russia’s war on Ukraine and inflation at home to preoccupy attention. But history is likely to record Biden’s move as the moment when US-China rivalry came out of the closet. America is now pledged to do everything short of fighting an actual war to stop China’s rise.
…There are two big risks to Biden’s gamble. The first is that America is now close to making regime change in China its implicit goal…..
…The US has endorsed a zero-sum metric in which China’s rise is seen as being at America’s expense.
The Hill: Here
The irony is that China has long protested US policy as containing China, which the US steadfastly denied. With these new bans, however, no denial is possible as, according to Jeff Moon writing in The Hill, they represent “unabashed containment.”
This new policy may be a turning point in U.S.-China relations. This approach departs from the past and establishes an important precedent because it is designed primarily not to manage differences or maintain a level playing field or remain a few steps ahead in a key technology field, but rather to explicitly contain indefinitely Chinese advanced technology development.
…now that Biden has established the precedent of containment as a legitimate U.S. foreign policy goal, will the U.S. be tempted to slide down the slippery containment slope and extend that philosophy to other diplomatic, economic or military realms?
3. It will be costly
The reality is moves of this magnitude come with a cost attached. Sadly, in this case, the US chip industry and our allies will bear the costs. This is why the Chip 4 alliance didn’t garner support. Losses from China’s massive consumption of semiconductors, 53% of the global total, mean that the bans will push the entire industry back either years or decades. No one knows. Chip development is a truly international effort, and the whole industry will suffer without collaboration. To say nothing of US companies like Nvidia designing their latest chips in China!
More from David Goldman, one of my favorite authors on China:
The damage to capital investment and R&D in the Western semiconductor industry will exceed Washington’s modest subsidies for the chip industry by a factor of five or more.
It will also elicit an all-out Chinese effort to replace American chip-making and design technology. CapEx and R&D will shrink drastically in the US semiconductor industry while China allocates a massive budget to the sector.
China is by far the world’s largest consumer of semiconductors, with 53 percent of the global total. The US manufactures just 12 percent of the world’s chips, but it leads in some areas of chip technology, including some chip-making equipment.
Two years ago, a Boston Consulting Group study warned that an all-out US ban on chip sales to China would eliminate 37 percent of the revenue of US semiconductor companies, lead to severe cuts in R&D and capital expenditures, and the loss of 15,000 to 40,000 highly skilled direct jobs in the US semiconductor industry.”
Mainland China has 20 of the world’s 50 highest-ranked engineering schools and more if Hong Kong is counted and graduates seven times the American count of engineers each year. China can’t buy some American technology, but it can hire anyone it wants.
Even “The Economist” has weighed in with the apparent contradiction of Washington funding US chip production with the Chips Act and then cutting demand. All of this is amid a global glut in chips!
The chips act, which became law in August to cheers from chip bosses, is stimulating the supply side of the semiconductor business just as the Biden administration is stepping up efforts to stop American-made chips and chipmaking equipment from going to China, dampening demand for American products in the world’s biggest semiconductor market.
Whether or not it makes strategic sense for America to bring more chipmaking home and to hamstring its geopolitical rival with export bans, the combination of more supply and less demand is a recipe for trouble. And if America’s policies speed up China’s efforts to “resolutely win the battle in key core technologies”, as President Xi Jinping affirmed in a speech to the Communist Party congress on October 16th, they may give rise to powerful Chinese competitors. Field of dreams? Enough to keep you awake in terror at night.
4. Why it won’t work
At best, these bans will delay China’s chip-making ambitions, but they cannot derail them entirely. Claims of “shock and awe” and that the bans represent a permanent debilitating blow ring as hollow as the sanctions on Russia. Worst of all, the US will create a global competitor of unprecedented scale and hasten tech bifurcation. In a not too distant future, the choice between China and US tech will be even more difficult, particularly within the developing world. Can US tech compete on price?
Again, these bans are severe, and many proponents will feel an immediate sense of glee for knee-capping China’s chip efforts. However, I predict their happiness will be short-lived, and those in Washington profiting from a “tough stance on China” will cause many more problems than they know. Again, it won’t happen overnight, but remember, this is China, where long-term planning far exceeds the four-year election cycle.
As an example of how China will evade these bans, look at what China was already doing after the last set of prohibitions. As harsh as the new bans sound, they have loopholes big enough to drive a truck through. Here’s how China is going to work around these bans. Scott Foster in the Asia Times makes this clear that cost is no object:
The US government is in the process of creating a competitor that it won’t be able to control while forcing American companies to abandon a massive market that until now has supported their sales, profits, economies of scale and stock prices.
“Higher costs would threaten the competitiveness of chips for consumer devices, as seen by how US sanctions nearly bankrupted ZTE and hobbled Huawei. But cost won’t deter the use of these pricier chips for military and other strategic purposes. The growing use of artificial intelligence—where China already has world-class strengths—in chip manufacturing and accumulated experience could also reduce the cost of alternatives, making export control measures less effective over time.”
Technological workarounds are already bridging the gap between China’s current capabilities and the industry’s leading edge. These include clever packaging and maximum use of DUV ArF immersion lithography.
Chinese chipmaker SMIC, which recently shocked the US by announcing that it had produced 7-nm chips despite being denied access to EUV equipment, is now reported to be advancing to more advanced 5-nm. SMIC has also started construction of a new 300mm wafer fab.
Sometime in the second half of the decade, we will know whether the US government’s attempt to stifle China’s semiconductor industry has succeeded or failed.
Failure seems likely, except at the leading edge, and the cost for America and its semiconductor companies will likely be very high.
And for those who think that China can’t buy the high-tech machinery required for manufacturing chips, these quotes from ASML, the world’s largest producer in the Netherlands, should temper expectations.
This is from the FT but is available from many sources:
The direct implication for us is fairly limited,” ASML’s chief financial officer Roger Dassen said on Wednesday. “First off, as you know we are a European company. So there is not a lot of US technology in our tools.
Dassen said ASML continued to ship non-EUV equipment out of Europe to China, as it evaluated the latest US export controls. He pledged the company would do “whatever it takes” to follow Washington’s rules.
Final Thoughts:
The US is in “uncharted waters” with a policy designed to contain China.
Expect China to return the favor with rare earth minerals or other exports.
Despite claims of shock and awe, the new bans can delay but not stop China’s progress in building chips.
The US is giving billions to US chip manufacturers to bring production back to the US and increase supply while killing demand in its largest market. As a result, I expect US chip development to suffer.
The cost to US allies Japan, Korea, and Taiwan will also be severe.
That all US workers cannot have contact with Chinese chip companies will cost US employment, and business will reroute to the EU when practical.
Telling US citizens that they cannot work for Chinese chip companies, or contact Chinese companies is akin to “collaborating with the enemy” and a gross government overstep.
Citizens are hysterical over CBDC because of the false belief that the “government will tell you where to spend your money.” With the chip ban, US citizens are being told where they can and cannot work and it is met with silence.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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