On December 12 last year, less than four weeks after the first in-person meeting between U.S. President Joe Biden and Chinese President and Communist Party Chair Xi Jinping, China filed a complaint with the World Trade Organization over unprecedented US restrictions on the export of cutting-edge chips and advanced manufacturing equipment to Chinese customers. The U.S. ban, defined by China's foreign ministry spokesperson Mao Ning as the last attempt by the United States to retain its “technological hegemony” (Nellis et al. 2022), is the most stringent export control measure ever placed on China in the semiconductor industry and is set to raise stakes in Sino-U.S. competition over technological supremacy. But what does the ban mean for China, and is it truly a win-win for the U.S.?
Since trade frictions broke out in 2018, China has more than once resorted to the WTO dispute settlement mechanism to request consultations with the United States against President Trump’s protectionist agenda. This time, however, Beijing’s complaint came after what may have been the boldest move of the Biden-Harris Administration so far, signaling mounting concerns in light of the new challenges facing the global semiconductor industry. According to Goldman Sachs, semiconductor demand will skyrocket along with the rapid expansion of chip-based industries, from 5G to electric car battery manufacturing, of which China is the world's largest market (Goldman Sachs 2022; IEA 2022). In addition, the COVID-19 pandemic has revealed critical bottlenecks in the global chip supply chains, reinforcing the urge for China and the U.S. to reduce interdependence in sensitive sectors and ensure a steady flow of chip components.
China has been working on that at full speed. Since President Trump revoked permits for the Chinese telecommunication giant Huawei to acquire cutting-edge American technology, Beijing has launched a massive effort to achieve self-sufficiency in “key core technologies” (关键核心技术) as part of the “Made in China 2025” (中国制造2025 Zhongguo zhizao 2025) then, and the “Dual Circulation Strategy” (双循环战略 shuang xunhuan zhanlüe) now. With the final goal to cut dependency on the overseas market and develop a domestic-driven economy, the Chinese government has already spurred research in advanced technology and injected almost $150 billion into its semiconductor industry since 2015 (García-Herrero and Weil 2022).
As a result, it is not surprising that thwarting China’s quest for “indigenous innovation” (自主创新 zizhu chuangxin) in becoming a manufacturing powerhouse of high-value technological goods lies now at the heart of Washington’s national security strategy. Since Joe Biden came to office, semiconductors have regularly topped the national agenda, and hopes for a shift in the tycoon’s hard line on decoupling have been utterly dashed. The bipartisan CHIPS and Science Act passed last August allocated over $52 billion for the American semiconductor sector in order to boost research and develop domestic manufacturing (The White House 2022). The historic investment plan expresses Washington's frustration to catch up with China and address the U.S. chip industry’s non-existent production capacity. This is because, while Washington remains the unrivaled leader in the designing the most sophisticated chips and equipment, Asian countries account for more than 75 percent of global semiconductor manufacturing, with China dominating in assembling, packaging, and testing operations (Shivakumar and Wessner 2022). As a result, American companies now depend nearly entirely on Asian manufacturers for chip fabrication: the Taiwan Semiconductor Manufacturing Company (TSMC) already controls more than 65 percent of the market share of chip-making (Ryugen 2022), placing China-U.S. tech frictions in a delicate geopolitical balance.
Thus, the United States has little choice but to rely on its competitive advantage if it hopes to leapfrog China in the near run. The comprehensive export policy set in October heads precisely in this direction. President Biden’s latest trump card prohibits American top chip companies KLA Corp, Lam Research Corp, and Applied Materials Inc from selling highly technological fabrication equipment to Chinese supercomputer centers and chip designers without a specific government license (Nellis et al. 2022). Furthermore, the U.S. Department of Commerce's Bureau of Industry and Security has recently added to its “entity list” more than 30 Chinese companies operating in the chip sector, including the Yangtze Memory Technologies Corp (YMTC), China’s top flash memory chip manufacturer (Reuters 2022). And it does not end here. In order to prevent Chinese customers from acquiring U.S. leading-edge technology, the restriction also applies to non-American companies trading U.S.-made equipment with China (Rao 2022), a decision that has spread concerns throughout the U.S. ally bloc, especially among the trans-Atlantic partners. However, despite initial EU concerns about the potential impact on the continent's industrial base (Alden 2022), the Netherlands and Japan have finally buckled under American pressure to cut ties with China. The Dutch ASML and the Japanese Tokyo Electron have reportedly reached an agreement with the United States to block the shipment of the most sophisticated semiconductor machinery to China (Swanson 2023).
Although the terms of the deal have not been made public, Biden’s plan to scorch the earth around China has put Beijing in a challenging position, to say at least. In response to the ban, the Chinese government is now working on a 1 trillion yuan ($143 billion) investment package for its chip industry in order to ramp up technological independence and support Chinese firms in developing design and production facilities (Zhu 2022). But it will not be easy. Despite government subsidies and tax relief for chip design operations, China’s semiconductor sector is not free of systemic institutional and industrial shortfalls, facing corruption cases and still depending on high-end chip equipment from Japan, the Netherlands, and, indeed, the States (Zhou 2022). Furthermore, given the paralysis of the Appellative Body following the U.S. veto on judge appointments, China has a little prospect that a potential WTO victory will result in lawsuits against Washington. In other words, the U.S. ban has hit the mark in hindering China from moving to the advanced nodes of the chip supply chains, and the effects on its industrial ecosystems are already manifesting. Recently, major multinational firms have announced relocations of core activities outside China: Apple and its primary supplier Foxconn will shift MacBook and iPad assembly operations to Vietnam by mid-2023 (Feng 2022). The same as Google’s Pixel phone production and Amazon, which has lately moved its Fire TV devices to India (Wakabayashi and Tripp Mickle 2022). Ultimately, Biden’s sweeping restrictions have successfully pushed large American firms to embrace the administration’s strategy to relocate, or as Treasury Secretary Janet Yellen calls it, "friend-shore," chip operations to friendlier countries.
But is the United States really winning it all? It may be the case for now. However, looking at the broader picture, it seems that neither decoupling nor quotas will produce potential winners in the long run: the severing of the intricate links that weld the U.S. and China together will come at unbearable economic costs for the U.S., other than representing a dramatic setback for the stability of semiconductors supply chains at the global level. According to Boston Consulting Group, the U.S. ban on Chinese customers may cost U.S. companies 18 percentage points of global share and 37% of revenues over the same period, leading to the layoff of 15,000 to 40,000 highly qualified workers in the semiconductor sector (Antonio Varas and Raj Varadarajan 2020). For instance, Applied Materials, one of the world's major U.S. manufacturers of cutting-edge chip equipment, reported 29% of its total sales in China alone in 2021 and is forecast to be in the red by $250–550 million by the end of the year (Kumar and Malik 2022). Even if the federal government succeeds in compensating financial losses through company subsidies, a full re-shoring of the supply chains is not going to happen overnight. Asian countries will remain at the heart of U.S. supply chains both for cheaper production costs and well-established manufacturing companies' skill sets in processing operations (Benard 2022).
And not every Asian nation is willing to support the new U.S. semiconductor strategy and turn its back to China, politically and economically. Recently, South Korea was reportedly considering joining the U.S.-led “Chip 4 alliance” bringing together the four global chip superpowers: South Korea, the United States, Taiwan, and Japan (Na 2022). Even so, during a bilateral meeting between China's Foreign Minister Wang Yi and South Korea's counterpart Park Jin in December, the two sides agreed to “ensure safe and smooth production and supply chains, maintain the international free trade system, and strengthen cooperation on regional and global issues” (FMPRC 2022) in clear contrast to U.S. policies against China. In addition, as a demonstration of South Korea’s ambiguous position, Korean top chip producers Samsung Electronics Co. and SK Hynix Inc. had requested Washington for a special license to keep operating in China despite the ban (Choong Wilkins 2022).
There is also another factor to consider. Aside from the political and economic effort that the United States should put into building a consistent Asia-Pacific strategy in order to plan a fast and efficient supply chain restructuring, the U.S. should also worry about a potential severe backlash from China. At present, China dominates the manufacturing of essential components for renewable technologies, producing more than 90% of solar wafers, 85% of anodes, and 70% of cathodes for lithium-ion batteries, all of which are required for the construction of solar panels and EV batteries (IEA 2022; Castillo and Purdy 2022). According to Bloomberg, China is now considering imposing an export ban on crucial components for wafer manufacturing (Murtaugh 2023), which will severely jeopardize Biden’s goal to strengthen clean energy supply chains and become the global leader in clean energy technology manufacturing as part of the much-discussed U.S. Inflation Reduction Act.
In conclusion, the U.S. tightening of export restrictions and China’s muscular response to it does not inspire much optimism for anything other than a protracted rivalry between the two superpowers. The U.S. administration’s moves in the chip industry have revealed not only a new blueprint for Sino-U.S. technology relations but also a re-interpretation of supply security built on cooperation with “like-minded nations” in defense of democratic values (Moreland 2019, 15). The competition between the two countries has therefore shifted from the economic to the political arena and further entrenched the progressive deterioration of diplomatic ties. Ultimately, it remains to be seen how the U.S. and China will manage to balance a political-level dialogue on a collision course with economic objectives while the rest of the world waits for concerted actions required by such intricate economic interdependence.
Rebecca Lalloni holds a bachelor’s degree in Chinese Language, Culture, and Society from the Ca’ Foscari University of Venice and a double master’s degree in International Relations and China Studies from the University of Turin and the Zhejiang University of Hangzhou. Passionate about Chinese history and food, she has spent a semester at Fudan University in Shanghai to study Chinese language. Her research focuses on U.S.-China relations and China’s role in the ongoing clean energy transition.
The opinions expressed here are those of the writers and do not represent the views of European Guanxi.
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