Employees work on the semiconductor chip production line of Jiangsu Azure Corp in Huaian, Jiangsu province. Photo: China Daily via Reuters
Opinion
The View
by Marianne Lu
The View
by Marianne Lu
US chip ban: America must beware of backing China into a corner
The more the US races to choke off China’s access to semiconductors, the greater the risks of alienating allies and forcing Beijing – the world’s biggest chip customer and supplier of critical rare earths – to retaliate
The Chips and Science Act, a bipartisan bill signed into law in August, was hailed as a “Sputnik moment” for America and a turning point in the global semiconductor race. Injecting billions of dollars into the domestic chip industry, it seemed to mark a new chapter of “running faster” than China, instead of “slowing it down”.
But Washington’s recent actions tell a different story: the Biden administration is not only still focused on crippling China’s chip-making abilities, but also taking unprecedented measures to do so.
Its most recent move – a sweeping set of export controls – includes measures to cut China off from certain semiconductor chips made anywhere in the world with US tools. While drastic, it is just the latest in a growing cascade of restrictions that have attempted to thwart China’s access to chipmaking equipment, electronic design automation (EDA) software, and chips themselves.
Whether these moves were prompted by concerns over national security or a desire to stay ahead of China in the semiconductor space, the consensus in Washington seems to be that the United States needs to continue down the path of ever-increasing restrictions.
While this strategy is effective in the short and medium term, it poses inherent trade-offs in the long run: the more it races to choke off China’s semiconductor sector, the more difficult it will be for the US to get its allies on board, diminishing the effectiveness of any unilateral policy, and making it likelier that China retaliates.
For its export controls to be effective, the US needs to ensure its allies are on board. In 2020, for example, Trump added Semiconductor Manufacturing International Corp (SMIC), China’s largest chip maker, to the so-called entity list, cutting it off from the American technology it needed to make its products. But tools kept flowing to the Chinese firm, because foreign companies started to fill the hole left by Americans.
Chinese orders for chip-manufacturing equipment from overseas suppliers rose by 58 per cent to US$29.6 billion last year, making it the biggest market for those products for a second year running, representing 28.8 per cent of global total sales. In particular, SMIC’s purchases from Dutch semiconductor equipment giant ASML grew from US$1.2 billion in 2020 to US$1.5 billion last year, as purchases from its other top suppliers, mostly American, fell.
Unilateral restrictions also threaten to weaken American companies. American semiconductor companies have argued that export controls like the SMIC ban slash their revenues, adversely affecting research and development. The US semiconductor industry invests, on average, 18 per cent of its revenue into R&D, among the highest amounts of any sector. Cutting off access to certain global markets hampers the ability of semiconductor companies to continue funding research, harming US technology leadership.
But getting America’s allies to impose the same export controls on their toolmakers is not easy. In interviews regarding the latest chip restrictions, senior government officials have conceded that they had not yet secured any promises that allied nations would implement similar measures. This isn’t surprising, or new.
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AI chip maker ordered by US government to halt exports to China
AI chip maker ordered by US government to halt exports to China
The US has pushed the Netherlands to ban certain ASML equipment from going to China, but the Dutch government has yet to agree to the restrictions. For one, ASML stands to lose billions in revenue. Furthermore, US lobbying against ASML has already strained Sino-Dutch relations, with the former Chinese ambassador to the Netherlands telling a Dutch newspaper in 2020 that trade relations would be damaged if ASML was prevented from shipping its advanced machines to China.
In the short term, the US could use brute force to secure the cooperation of allies, especially through its latest broadening of the foreign direct product rule. The rule has been used successfully to cripple Huawei Technologies’ chip development, but if Washington continues to strong-arm foreign companies that use American chipmaking equipment, chip makers could seek to limit US technology in their supply chains to skirt expansive controls in the long run.
Expansive controls also risk Chinese retaliation. Beijing has largely refrained from responding to American measures, focusing on promoting its chip development, but there are a host of levers it could employ to hurt American businesses and interests.
For one, Chinese producers dominate the extraction and refining of rare earth materials that all semiconductors rely on. While rare earths can be mined in many countries, China controls the refinement and purification processes, allowing it to indirectly influence prices and deny access of supplies to targeted supply chains.
Another way China could hit back at US sanctions is by leveraging its large and growing market. Boston Consulting Group has reported China’s end-use consumption of chips at 23 per cent of global sales, roughly equivalent to that of the US. By withholding access to key players such as Xiaomi, Lenovo or Oppo, China could affect the growth and competitiveness of virtually all semiconductor companies.
China is unlikely to take drastic measures to hurt American companies in the short term, since it still needs foreign technology and foreign investment to reach its goal of self-sufficiency in the semiconductor space. But if it senses that it has nothing to lose, it is not unthinkable that China would strike back.
The US needs to keep these considerations in mind as it continues issuing the increasingly extensive bans that seem to have become the playbook in Washington. As the scope and severity of restrictions ramp up, so will the difficulty of coordinating with allies and avoiding serious Chinese backlash. This trade-off requires lawmakers to critically assess how far they are willing and able to go to hold China back.
Marianne Lu is an undergraduate studying international relations at Stanford University
