«Chip war» against China threatens to undermine America

The Biden administration has expanded sanctions against China’s electronics industry. In turn, Silicon Valley companies are increasingly viewed as an important instrument of big politics. But the “geopoliticization” of the IT industry by Washington threatens to further undermine the international positions of the United States in this significant sector of the economy.

China’s advances in IT technologies have been a point of concern for Washington for years. Unlike before, when they mostly talked about the “threat to the economic positions” of the US and the West as a whole, they now signal concern about “security issues”. A series of new restrictions introduced early in October were designed, Western observers say, to slow the development of China’s IT industry to the point that it would guarantee US supremacy in using advanced IT technologies for military purposes. Among other measures, Biden has significantly limited the participation of American residents in the development of technologies for the Chinese IT sector.

As Bloomberg reported a few days ago, “the US intends to limit China’s access to artificial intelligence and quantum computing technologies”. The White House has drawn up administrative measures to establish tight restrictions and controls on Western investment in a number of critically important technology-related sectors in China. Quantum computers and artificial intelligence are among the top priorities. If implemented, the new restrictions will reinforce the previously adopted ones.

It appears the Biden administration has attempted to revive the practice Trump instituted. In 2018, the Trump administration imposed a wide range of sanctions against China’s IT giant Huawei, which it accused, without evidence, of aiding “espionage schemes and covert surveillance projects carried out by the Chinese authorities”. They imposed a complete ban on the supply of American parts, which were essential for Huawei products to be competitive in the global market. At present, Western sources signal content, however, not about the cessation of “secret espionage”, but about the fact that Huawei’s export revenue has fallen considerably along with the product range.

Meanwhile, according to The Economist, Trump’s “success” had a negative side. The Republican administration blatantly ignored the interests of allies and partners. As a result, Western investors began to invest in companies and supply chains of components that were exempt from the control of US regulatory agencies. Japanese companies offered a full range of electronic components as products that were free from technological restrictions imposed by the United States. Some leading American companies, which annually supplied billions of dollars worth of products to the Chinese market, began to open branches and representative offices in foreign jurisdictions, thereby circumventing Washington’s restrictions.

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At the beginning of 2022, after recognizing a limited number of the existing sanctions, the Biden administration introduced a new variant of export control, which envisaged strict restrictions on the export to China of components whose characteristics extend beyond a certain technological level. In early October, the ban was extended to include chips that were produced under 14 nanometers, or in some cases less than 16 nanometers. Such harsh restrictions, along with the unilateral measures taken by Washington, continue to spark discontent among many nominal allies of the United States.

Biden has also taken steps to encourage the return of microelectronics manufacturing facilities to the United States. In the spring, the White House presented a legislative proposal on chips and science, The CHIPS and Science Act, which allows for the allocation of at least 52 billion dollars in subsidies for the construction of new “factories” to produce state-of-the-art processors on the territory of the United States. Also in the spring, Biden spoke at a ceremony on the site of a future company to be built by Intel – a top processor manufacturer in the United States. Plans to build a new “factory” in the United States have been expressed by Taiwan’s TSMC – a large and the most technologically advanced microprocessor manufacturer in the world.

But the US is facing a lot of “resistance”. According to Foreign Affairs, the CHIPS and Science Act, which went into effect at the end of August, is not enough to restore the United States’ leading positions in microelectronics. An influx of financial resources will not solve all the problems. What is needed is a breakthrough in the managerial and technological culture and a clear understanding on the part of Washington politicians of all the subtleties and issues facing the contemporary microelectronics industry.

At present, most Silicon Valley companies have lost the spirit of technological “iron” innovations. A large number of new “high-tech” companies founded in the United States in the 2000s do not produce products that can be touched with hands. The lion’s share of the profit comes from advertising in apps or search systems. The hype of trendy software news, which spread across America, allowed the competitors from Asia to advance in design, especially in the production of sophisticated microchips. In addition, globalization in its current form, which aims to outsource the production of final products where they are most cost-effective, has played an evil joke on America. “Deindustrialization” not only covered a large number of American industries—it spread to affect the thought patterns of their managers and engineers.

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At the same time, even American experts admit that the harder it tries to “contain” China, the harder it will be for Washington to persuade its allies in Europe and Asia to follow suit. Active assistance from other countries to limit the export of indispensable parts, machinery and technologies to China is essential, because without it the US risks causing irreparable damage to its own electronics sector in the first place. Investors will certainly choose areas where they can avoid draconian US restrictions and where they can continue to develop mutually profitable business relationships with China.

America is “stuck” choosing between the less harsh approach to restrictions in the exchange of technologies, which can have a greater effect, on the one hand, and the attempts to “suppress” the advanced Chinese microelectronics over a short period of time. on the other hand, risks inflicting significant damage on its own IT potential.

Firstly, many US semiconductor manufacturers are heavily dependent on supplies to the Chinese market, one of the world’s largest. As The Financial Times reports, the share of deliveries to China makes up a third of the portfolio of orders from Applied Materials, a California-based company that produces machines for processing silicon wafers. 27 percent belongs to Intel. And 31 percent – ​​to Lam Research, one of the leading suppliers of equipment for the manufacture of processors.

Second, the slowdown in the US and global economy could lead to a decline in sales in the microelectronics sector, which would have a negative impact on the prospects for new investment. The IT industry is thus facing a slower, if not a recession, time. According to The Economist, about 30 major US microchip makers are signaling an $11 billion reduction in cumulative third-quarter revenue forecasts since July. The total capitalization of U.S.-based chip makers has fallen by more than $1.5 trillion this year.

Political pressure has also been building as Washington demands that the microelectronics industry reduce its dependence on China at an early stage. The deteriorating situation on the market is thus further aggravated by even more administrative and political restrictions.

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Meanwhile, U.S. business leaders fear that Beijing could introduce measures in response, imposing even more restrictions on U.S. manufacturers’ access to its vast domestic market. As reported by The Financial Times, Europe is concerned that a further expansion of sanctions restrictions by the US will cause increasing damage to companies and consumers in the Old World. The Chinese manufacturers may find themselves without so much needed parts and components. A drop in supplies will also affect European aerospace companies, car manufacturers, medical device manufacturers and the cloud-based computing sector. Taiwan’s electronic parts makers, including key player TSMC, and their South Korean counterparts are likely to run into difficulties supplying their businesses in China, which account for tens of percent of total output. Japanese companies have had heated debates about the medium and long-term consequences of the restrictions on the use of American components while dealing with Chinese countermeasures.

Finally, the severing of scientific ties with China will destroy the innovative potential of American designers. Chinese researchers already demonstrate a much higher citation index in a wide range of research and technology fields compared to their American counterparts. According to the Beijing Review, during the Trump presidency they launched the so-called “China Initiative” – ​​a set of administrative measures aimed at tracking down potential spies among scientists and engineers of Chinese descent. As anti-Chinese sentiment gathers pace, plunging America into an atmosphere of hostility and suspicion toward Chinese scientists and experts, thousands of researchers and engineers, including from the microelectronics industry, have left or plan to leave the United States and move to China, said Asian American Scholars Forum (AASF).

Washington’s “efforts” may unfortunately result in a further decline in the share of US manufacturers in the global market and an overall decline in the global influence of the US technology sector. All this is happening amid a drop in demand caused by an impending recession. In the past, the United States repeatedly and successfully imposed the destructive “security or development” dilemma on its adversaries. Now America itself risks being trapped by its own hopelessly outdated logic of the past.

From our partner International Affairs



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