According to the official publication of the Bureau of Industry and Security (BIS) of the Department of Commerce, "these updates will restrict the People's Republic of China's (PRC) ability to both purchase and manufacture certain high-end chips used in military applications and build on prior policies, company-specific actions, and less public regulatory, legal, and enforcement actions conducted by BIS." (Commerce, 2022)

These export restrictions, according to the US, were introduced as part of ongoing efforts to safeguard US national security and foreign policy objectives. The updated export controls, according to the US Commerce Department, which is in charge of enforcing the rules, are concentrated on these areas because China could use the chips, supercomputers, and semiconductors to build sophisticated military systems, including weapons of mass destruction; violate human rights; and speed up and more precisely plan and execute its military operations.

The official release further states that, to support the development or manufacturing of advanced chips in China, U.S. persons, including American enterprises, and Americans and U.S. green-card holders working in foreign firms overseas, must obtain a U.S. government license. 

How is China reacting?

The US action has drawn criticism from China, which has described it as a breach of international economic and trade norms that will "isolate and backfire" on the US. According to Mao Ning, a spokesperson for China's foreign ministry, "the U.S. abuses export control measures to maliciously block and suppress Chinese companies" in order to preserve its "sci-tech monopoly." (Standard, 2022)

Apart from these reactions, it is crucial to understand the possible impacts too. However, before that, let’s take a look at what exactly semiconductors or chips are and why they are so important for China.

A semiconductor, integrated circuit, microelectronic chip, or computer chip, according to the Congressional Research Service, is a small electronic device made up of billions of components that store, move, and process data (Service, 2021). Chips are fundamental to almost all contemporary industrial and national security activities, and they are essential building blocks of other emerging technologies, such as artificial intelligence, autonomous systems, 5G communications, and quantum computing. This is according to CRS's 2021 report, "China's New Semiconductor Policies: Issues for Congress."

China, which is progressively establishing its influence in practically every aspect of life, intends to lead in this area as well. However, according to the CRS 2020 report, imports and foreign companies that have production facilities there satisfy more than 90% of China's demand for semiconductors (Why China avoids banning Taiwanese chip imports, 2022). Keeping these statistics in mind, China has resolved to make gradual efforts toward transitioning from import dependency to self-sufficiency in chips.

For instance, China issued "Guidelines to Promote National Integrated Circuit Industry Development" in 2014. According to these guidelines, China wishes to meet 70% of its semiconductor demand domestically by 2025. China announced a new, more ambitious aim in 2019, pledging to satisfy 80% of its domestic semiconductor demand via domestic production by 2030.

Possible consequences of export controls

According to reports, the restrictions are already having an effect since several Western suppliers have begun acting. For instance, ASML, a manufacturer of advanced equipment located in the Netherlands, has instructed its staff to abide by the restrictions, which include refraining from installing or maintaining equipment at any Chinese chip factories. Additionally, similar actions have been taken by Lam Research, Applied Materials, and KLA Corporation. The export restrictions, according to Applied Materials, will prevent it from making sales of almost $400 million in the fourth quarter, which is a clear indication that these actions will result in lower sales.

Additionally, it was highlighted in one of the Financial Times' articles how export restrictions will affect large Chinese companies. It has highlighted the potential effects on memory chip makers, including Yangtze Memory Technologies Corp. and ChangXin Memory Technologies, as well as Semiconductor Manufacturing International Corporation (SMIC) (Times, 2022). Additionally, Biren, a producer of AI chips, has an agreement with Taiwan Semiconductor Manufacturing Co. to develop the firm's chips using cutting-edge 7-nanometer technology. However, given the most recent export restrictions, TSMC could have to stop working with the Biren, and the issue is that no Chinese company has the ability to fill in. These cases amply demonstrate how these restrictions would ultimately stifle China's aspirations to dominate artificial intelligence, cloud computing, and supercomputing on a global scale.

But there's a catch in these export controls. There is a section about license requirements in the updated export controls. According to this, US persons and companies may assist in the development and production of advanced chips in China if they obtain a license from the US or official permission. This allows foreign chipmakers to apply to the US government for authorization to continue obtaining US equipment. For instance, Taiwan Semiconductor Manufacturing Company, the largest contract chip manufacturer in the world, recently declared that its Nanjing fab (fab stands for Fabrication plants) had been granted a one-year authorisation. Furthermore, SK Hynix, a South Korean manufacturer of memory chips, stated that because it had also been granted a one-year grace period, it would not be affected by the suspension of supply from US toolmakers.

On US

As was previously indicated, several companies have already begun to implement export control measures. But the real question is whether or not the US will be affected. The answer is yes. Many US companies that manufacture semiconductors or chipmaking tools cite China as their largest market, according to the Financial Times. China is accountable for 33% of Applied Materials', 27% of Intel's, and 31% of Lam Research's sales. However, the article also indicated that US firms, like memory chipmaker Micron, which is experiencing increased competition from YMTC, might gain (Times, 2022).

Additionally, there is another significant issue, which is emphasized by Willy Shih, a professor at the Harvard Business School who specializes in manufacturing and technology (Post, 2022). He points out that China might produce even more low-end chips if it is prevented from producing the most advanced ones, which would drive down prices and make it difficult for American and Western firms to compete in that market. This might therefore make Western consumers of such chips dependent on Chinese suppliers.

On Taiwan

According to a 2021 Boston Consulting Group report, Taiwan has 90% of the global production capacity for semiconductors. Because of this, it is crucial to think about how Taiwan would be impacted by the new export controls.

Taiwan is home to the world's biggest chipmaker, Taiwan Semiconductor Manufacturing Company. According to Business Insider India, the company controls more than half of the world's semiconductor industry (Zinkula, 2022). Even the finest chip produced by SMIC, the leading semiconductor maker in China, is reportedly approximately five years behind TSMC's.

Wang Mei-hua, Taiwan's Economy Minister, elaborated on the export controls, pointing out that while the restrictions may damage certain Taiwan businesses, their overall effect will be minimal since they only apply to a tiny portion of the chips used in supercomputing and artificial intelligence (Whalen, 2022).

Thus, after analysing these, it is reasonable to assume that, in light of the abrupt US decision, China will want to become self-sufficient in chips and it will be interesting to observe how China manages to do so.

References

Commerce, U. D. (2022). Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC). USA .

Post, T. W. (2022, October 17). Western suppliers cut ties with Chinese chipmakers as U.S. curbs bite. Retrieved from The Washington Post : https://www.washingtonpost.com/technology/2022/10/17/export-controls-us-china-chips/

Service, C. R. (2021, April 20). China’s New Semiconductor Policies: issues for Congress. Retrieved from Congressional Research Service : https://crsreports.congress.gov/product/pdf/R/R46767

Standard, T. B. (2022, October 08). China slams US for export controls on chips, calls it violation of rules. Retrieved from The Business Standard : https://www.business-standard.com/article/international/china-slams-us-for-export-controls-on-chips-calls-it-violation-of-rules-122100800513_1.html

Times, F. (2022, October 22). How the US chip export controls have turned the screws on China. Retrieved from Financial Times : https://www.ft.com/content/bbbdc7dc-0566-4a05-a7b3-27afd82580f3

Whalen, J. (2022, October 21). Taiwan, a major producer of semiconductors, says it will abide by U.S. rules. Retrieved from The Washington Post : https://www.washingtonpost.com/politics/2022/10/21/taiwan-major-producer-semiconductors-says-it-will-abide-by-us-rules/

Why China avoids banning Taiwanese chip imports. (2022, August 10). Retrieved from The Print : https://theprint.in/world/why-china-avoids-banning-taiwanese-chip-imports/1076418/

Zinkula, A. H. (2022, October 22). The fate of the world economy may depend on what happens to a company most Americans have never heard of. Retrieved from The Business Insider India: https://www.businessinsider.in/tech/news/the-fate-of-the-world-economy-may-depend-on-what-happens-to-a-company-most-americans-have-never-heard-of/articleshow/95030860.cms

Pic Courtsey-Hillary Black at unsplash.com

(The views expressed are those fo the author and do not represent views of CESCUBE.)