US chip sanctions against China: what have they achieved?

 

Two years ago, the USA banned the export of cutting-edge AI chips to China. A year later, the country expanded the restrictions again and also banned exports to 43 other countries that China is said to have used for evasion transactions.

The Biden government wants to significantly slow down China’s technological progress and make it more expensive. Above all, the Chinese military should no longer benefit from American high technology.

Since then, the US authorities involved – the Department of Commerce, security authorities and the Treasury Department’s export control department – have often wrestled with domestic technology companies on a case-by-case basis over who can sell which chips to whom. Exports to the United Arab Emirates and Vietnam recently appeared to be a particular bone of contention.

Just this Tuesday, the Bloomberg news agency reported that the USA is now considering not completely banning deliveries of AI chips to certain countries, but rather capping them. Nvidia, AMD and other American chip manufacturers are only allowed to do business with these countries up to a certain limit.

Two years after their launch, the crucial questions can be asked: What have these sanctions achieved so far? Could the US actually limit China’s progress in developing advanced semiconductors?

How the sanctions came about

China has tried for decades to secure an important place in these supply chains, but has essentially failed despite investing billions. However, the country became increasingly important as a sales market for the semiconductor industry. After 2014, China used this leverage to force Western chipmakers and designers to transfer technology, much as China had done in other industries considered strategically important. It also did not shy away from classic espionage and theft of trade secrets.

Under President Barack Obama, the USA watched this approach rather passively and helplessly. It was only during the administration of Donald Trump that the American authorities once again realized that China’s position in semiconductor development had to be treated not just as a trade policy issue, but also as an extremely important security policy issue. China would also use these cutting-edge chips to develop cutting-edge military technologies.

The US military’s technological lead has also been based on advanced semiconductors for decades. They enabled the development of guided missiles and gave the USA an enormous advantage in the fields of reconnaissance and communications. China’s deterrence, particularly in the South China Sea and in the struggle for Taiwan, is based on this technological advantage and could be at risk if China catches up too much in semiconductor production.

Donald Trump himself made headlines primarily with the broad trade war against China. He viewed the conflict primarily from this perspective and liked to use the sanctions introduced in 2018 and 2020 against Chinese tech companies such as ZTE and Huawei as a bargaining chip to obtain concessions from Beijing in other areas.

Hesitant companies

The American semiconductor industry initially resisted restrictions because China had become such an important market for it. Their approach was and is contradictory: In background discussions, the companies are said to have long since warned the government about the Chinese subsidy machine and the resulting threat to the US’s technological lead. Meanwhile, some exponents, such as Intel boss Pat Gelsinger, are using these arguments to successfully lobby the Biden administration for subsidies.

However, until the Trump years, companies such as Qualcomm, IBM and AMD still entered into close research collaborations with Chinese partners in order to boost sales in China; Although they suspected that this would mean giving up their technological advantage and creating new competitors.

However, the US security apparatus and the Trump administration increasingly opposed such cooperation. He now viewed the computer chip issue as a key national security challenge. The Biden administration should ultimately adopt this perspective, which led to export controls for state-of-the-art chips in 2022.

The United States’ real goal is to slow China’s technological progress, not to completely shut down the country’s economy. The sanctions therefore focus on the most modern chip generations, according to the “small yard, high fence” principle: a small garden should be protected by a very high fence.

China is adapting – as best it can

It is still too early to conclude how much the 2022 sanctions and subsequent tightening will actually harm China’s ambitions. The boycott will continue to have an impact for several years.

If you take the targeted sanctions against the Chinese mobile communications equipment and smartphone manufacturer Huawei from 2019 as a comparison, you shouldn’t set your expectations too high. Huawei lost a lot of business in the West and was set back technologically because it was no longer allowed to use Android operating systems.

But the group has adapted and is now producing powerful smartphones again, with which Huawei has gained large market shares, especially in China, but also in some other countries. Huawei has significantly developed its own operating system and also made progress in chip production.

However, it is certain that the chip blockade is slowing down China. The country and its companies are definitely having more trouble getting the latest generation of chips from abroad; and they are a long way from replicating at home the enormously complex semiconductor industry supply chains that have emerged in East Asia, the United States and Europe over the past few decades. Simply copying the latest lithography machines from the Dutch manufacturer ASML, which are essential for the production of the most modern chips, seems impossible.

China seems to have resigned itself to the fact that it will no longer be able to access the latest production technologies or the most modern semiconductors and will not yet be able to break the West’s dominance in this field. It is now focusing on the development of certain older generation chips in order to capture a larger market share in certain niches and in the inexpensive mass market.

The Rhodium Group, a consulting and analysis company, writes that these older chips continue to be very important components for many industries, such as cars, airplanes or medical devices.

Vehicles actually need tons of it. Car manufacturers ran into enormous problems in 2021 when they misjudged demand during the Covid-19 pandemic and suddenly had far too few semiconductors available. Global car production collapsed – vehicles weighing tons could not be delivered because some tiny computer chips were missing.

If China can establish a dominant position in the mass market of computer chips, it could potentially control key bottlenecks in the global economy. The security policy discussion in the USA increasingly revolves around the question of how dangerous this development is and how much the sanctions need to be tightened.

However, the considerations are not the same as with high-performance chips. It is much more difficult to completely cut off China from the supply chains for older chips, and it may be counterproductive because it would be easier for Beijing to adapt to it.

Furthermore, it is not entirely impossible for China to obtain modern chips. Nvidia has restructured its range of AI chips so that it can continue to supply the country with certain models – even if they are no longer the very latest. The USA initially allowed circumvention trading via third countries to a certain extent. They sought a compromise between security policy on the one hand and the concerns of their companies and their allies (Taiwan, Japan, Korea, especially the Netherlands) on the other.

No departure from a tough China policy is expected

Everything now indicates that the gap between China and the USA and its allies on the semiconductor issue will widen. The political consensus in America is to tighten rather than loosen the rules for exports from China. In addition, there are already voices in the USA who would like to use the strong position vis-à-vis China on the semiconductor issue to extract concessions from Beijing in other areas, as Trump did in his first term in office.

The intransigence also has domestic political reasons. The majority of Democrats and Republicans now support a “tough on China policy”, including the two presidential candidates Kamala Harris and Donald Trump.

This view is far from limited to politicians in Washington. Surveys show that Americans have become very critical of China overall. The belief that China’s subsidies and cheap exports have destroyed many American jobs is very widespread; as well as the desire for politicians to take action against their unfairly acting rivals. Even if the dissatisfaction relates primarily to the area of ​​trade policy, a strict security policy towards China is also well received.

Whether Harris or Trump moves into the White House is probably secondary to the continuation of the “chip war” with China. The crucial questions will be: How radically is Washington taking action against China’s attempts to circumvent the existing sanctions? How much consideration does the USA have for its own companies like Nvidia or Arm, which primarily want to make profits? And how do they get their allies in Japan, Taiwan, South Korea and the Netherlands on board in the future, all of which control important bottlenecks in the global semiconductor industry?