End of China’s High Tech Aspirations

Forget a gradual decoupling from China. In October, the Biden administration announced new export controls and rules that effectively decapitate China’s semiconductor industry. The ramifications go beyond semiconductors to everything touched by them, including potentially ending nearly all of China’s high-tech aspirations.

U.S. companies are now banned from exporting advanced chips to China without special exemptions. But the rules go beyond U.S. companies and also ban foreign companies from exporting advanced chips to China if U.S. technology, equipment or software is used in the production.

Once fully implemented this is effectively a total ban on the sale of advanced semiconductors. Some companies, like Samsung and TSMC, have been granted one year waivers. But ultimately once those waivers run out, this will likely become a near total ban.

Manufacturing advanced semiconductors is a complicated business involving many leading technologies. Even though the U.S. doesn’t dominate the manufacturing space, American companies are leaders in IP, capital equipment and design software for semiconductor manufacturing. It would be a difficult task to build advanced semiconductors untouched by American technology.

New regulations should also effectively kill Chinese efforts to build its own advanced chip manufacturing industry. Companies that use American technology are banned from selling semiconductor equipment, design software or technology to China. Assuming America’s Pacific ally Japan respects this ban—and that seems a safe assumption, given current Japanese policy towards China—it’s hard to see how China could equip a modern chip manufacturing facility, even if they knew how to run it.

But the U.S. government isn’t forgetting to also address the folks running fabs. American citizens, including Chinese engineers with dual citizenship, are now prohibited from working with Chinese semiconductor companies (there are exemptions for clerical and administrative personnel). If they do, they will lose their U.S. citizenship. China doesn’t have the expertise to run a modern fab. Their hopes of building an advanced semiconductor industry relies as much on foreign talent as technology. They need both.

Mass resignations from Chinese companies have already been reported. U.S. companies have already pulled out of China. And foreign companies have pulled their employees who are U.S. citizens out of working with Chinese customers. These restrictions and measures don’t impact trailing-edge semiconductors, so China can still manufacture low-tech items.

But Chinese aspirations not only to create a semiconductor industry, but to build other advanced technology industries seem likely dead or at least on life support. Advanced chips are at the heart of modern drug discovery, e-commerce, artificial intelligence and most such industries. And they are, of course, at the heart of most modern weaponry.

These measures are obviously meant to blunt China’s super power aspirations but they could also be used as a bargaining chip in some future trade or political negotiation. Their geopolitical value to the US will depend on whether the ban can be effectively enforced.

During the Russia/Ukraine war, microprocessors harvested from consumer appliances and personal computers have been found in the wreckage of Russian military equipment. The Russians have been forced to buy civilian products, pull the semiconductors out and try to adapt them to Russian weapon systems.

As advanced chips become more ubiquitous it will be difficult to prevent the Chinese and other bad actors from acquiring them even if we can prevent them from manufacturing them. History shows that sanctions, trade bans and embargoes have always been difficult to enforce, as our experience with Iran demonstrates. Those sanctions have been somewhat effective at hobbling the Iranian economy but not so much in preventing them from acquiring equipment for the nuclear industry.

China’s reaction is also uncertain. There are a range of possibilities from cold war to real war (invasion of Taiwan) to negotiations with the US and Europe. There is also the small matter of China’s support for Russia’s Ukraine adventure which is probably another consideration in the US’s recent actions. US support for domestic semiconductor manufacturing is also likely part of China’s calculus regarding Taiwan. Could the prospect of reduced US reliance on Taiwan accelerate China’s timeline for Taiwan?

As America’s relationship with China becomes increasingly adversarial, it’s very clear the American vision for China is far different than China’s. The Chinese Communist Party may envision a future where it is a high-tech leader and military powerhouse but there are many hurdles to achieving those goals. These new US semiconductor rules are one.

However, China’s own domestic policies may be even more effective at preventing the attainment of Xi’s global objectives. Negative demographic trends, external alliances, zero COVID policies, high debt levels, an imploding real estate industry, bad debts from the Belt & Road initiative and a turn back to its Maoist past all point to diminished Chinese influence regardless of what the US does.

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