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21 October 2022

Joe Biden crushes Xi Jinping’s precious semiconductor ambitions

The US has imposed sweeping sanctions on a sector key to China’s goal of global technological dominance.

By George Magnus

The most important development in Sino-US relations since China joined the World Trade Organisation in 2001, or even Richard Nixon’s visit to China in 1972, came into effect quietly on 7 October. Overshadowed by other global developments and the expectations surrounding the 20th Communist Party congress in Beijing, the imposition of new US regulations affecting China’s chip industry is truly the crossing of a Rubicon. The regulations could decapitate much of China’s more advanced semiconductor industry, which is key to Xi Jinping’s recently reiterated emphasis on technological dominance, with serious implications for years to come. Semiconductors are crucial to computers, smartphones, cars and almost any electronic device.

Until now export controls and licensing requirements affecting technology have been authorised under US law against individual firms and with regard to specific goods deemed sensitive from a national security or public safety standpoint. China has been a particular focus, with the number of firms on the Department of Commerce’s so-called Entity List quadrupling from 130 in 2018 to about 530 now.

The new regime is different. While it does not affect less sophisticated, consumer-sector chip applications, it targets the rest of China’s more advanced semiconductor ecosystem – from research to production – because the US sees the problem as being not so much one of individual firms in China as of a state-oriented industry. Broadly, the new export controls block China from even accessing certain semiconductor chips and the equipment needed to make them. The regulations target high-end applications and functions, involving the supply of inputs, tools, production and fabrication equipment, and software. They also target US citizens working in or for Chinese enterprises in the sector.

The US government is clearly no longer willing to stand by while its principal adversary uses state-centric acquisition and procurement policies to access sophisticated technologies, whether US-made or foreign-made with US inputs. It is particularly concerned about products that have “force multiplier” properties. In other words, semiconductor technologies that have ostensibly commercial uses, such as machine learning or climate modelling, but which can be applied equally to advanced military applications and to the repression of human rights.

America’s angst is underscored by China’s desire to promote military-civic fusion – that is the deeper integration of its economic and military ecosystems, and the legal obligation of Chinese firms to provide access and support to the government’s intelligence gathering work under the National Intelligence Law.

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To realise its goals Washington will need to pay attention to its own home-grown technology firms and industries, and those of its allies. Recently passed legislation such as the America Competes and CHIPS Acts includes important initiatives to complement China-specific measures that must be realised to enhance domestic capacities. For example, these acts provide for tens of billions of dollars to be allocated towards the development of new technologies, including semiconductors, and for the promotion of advanced US-based manufacturing. Washington will also need to work closely with European and Asian allies to ensure that other foreign technology firms exploiting revenues from China’s home market remain aligned with its own unilateral measures.

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Though preoccupied by the party congress, Beijing will doubtless view the Biden administration’s actions as corroborating its narrative that the US seeks to contain China and prevent it from realising its goal of being a global leader in knowledge-intensive industries and in science and innovation by 2049.

China’s semiconductor industry will reel under the new restrictions. As things stand it remains highly dependent on foreign firms’ and US employees’ activities in China and on imports of chips accounting for about 80 per cent of local demand. The Chinese government’s aim of self-reliance in this and other advanced technology sectors – including computing, aerospace and healthcare – will no doubt be emphasised even more. Whether this is realistic or not is a moot point; these industries will at least have been severely curtailed. 

Chinese markets took the news badly. The Hang Seng Technology Index and the Nasdaq Golden Dragon Index, both of which reflect the performance of Chinese technology firms, and which were torpedoed by the technology and data regulatory crackdown in China in 2021, remain about 70-75 per cent below their February 2021 peaks, having recently sold off sharply again on expectations of the news coming out of Washington.

The technology sector generally isn’t that big in China. The value added of the information, transfer, software and IT services sectors account for about 4 per cent of GDP. Yet this understates the significance accorded to the sector in China’s narrative about its future, and also of job opportunities for graduates, especially in view of the thousands of job losses announced by technology firms already this year. 

It is highly likely that China will retaliate, given the severity of the regulations imposed. It could target rare earth exports, used crucially in a wide range of advanced technology applications. Yet although production has become concentrated in China rare earths are found in many countries and previous export restrictions on Japan proved not to be that effective. It could target US firms, by name or by sector. For the most part, though, China is dependent on the know-how and technology that these firms bring to the Chinese market at a time when many of them are tiring of the idiosyncrasies of doing business in China.

Indeed, given the parlous state of China’s economy, it is hard to see what measures Beijing might be able to take without incurring greater self-harm. This might not prevent it from trying, though, given the current state of international politics. That is why the rest of the world will have to be vigilant. It is by no means clear yet how this game-changing shift in Sino-US relations will affect Chinese intentions towards US allies in Asia, such as South Korea and Japan, or as regards the South China Sea and, above all, Taiwan. 

George Magnus is a research associate at Oxford University’s China Centre and at SOAS and author of “Red Flags: Why Xi’s China is in Jeopardy

[See also: Chairman for Life? | China under Xi]

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