By Megha Shrivastava
On September 16, 2022, Jack Sullivan, the national security advisor of the United States, delivered a speech wherein he identified new priorities in US's national security approach concerning technology development and its regulations. He said, similar to the Pareto principle, eighty percent of our overall success will depend on how we materialize the benefits from twenty percent of the technologies. Sullivan laid the current priority of the US regarding using some strategic technologies that will enhance the competitive capabilities of countries in the future. He identified computing technologies and advanced chips as an area where there is a need to maintain a lead over its competitors.
The recent export control measures on the microchips to China are viewed as a part of the larger strategy of the Biden administration to restrict the flow of priority US tech and research & development (R&D) materials to China. By explicitly quoting national security reasons, on October 7, 2022, the Department of Commerce's BIS (Bureau of Industry and Security) imposed restrictions on providing China with specific high-end chips that enhance its capability to make supercomputers and advanced computing chips, software & manufacturing equipment that raise China's strategic military capability. It has signaled a new phase of strategic tech competition.
What do the new export control measures mean?
Recent export control measures are an addition to a series of sweeping efforts taken by the US to curb the transfer of US chip R&D to China. It started by first banning the sale of specific technologies and microchips to China's technology giant Huawei Technologies Co. Limited in 2019 and then restricting the sale of microchips to Russia due to the Ukrainian crisis. Also, in August this year, the enactment of the CHIPS and Science Act highlighted US's effort to emphasize the R&D in the semiconductor chip industry and protect it through appropriate measures. BIS's recent export control measures in this respect only increase the scope of two existing sets of rules. The fresh additions are aimed at preventing foreign firms from selling advanced chips to China or supplying Chinese firms with tools that can be utilized to make their advanced chips. The first rule referred to as the "Foreign Direct Product Rule" (FDPR), deals with restrictions on exports in particular industries. It bans the export of any US or non-US-based company (whose supply chain contains US tech) from supplying any hardware or software to a Chinese entity. As a significant number of Americans are working in Chinese chip industries, the rule also restricts the ability of any US-based entity or person to support the production of semiconductor chips at certain fabrication facilities in China. In addition, the rule adds additional licensing requirements for the export items used in supercomputers and semiconductor manufacturing. The second rule makes revisions to the Entity List maintained by the BIS. This is called the Entity List Criteria and Unverified List rule. Those companies are added to this list for which the US authorities cannot verify whether they can be entrusted to receive the sensitive US tech. The companies added to this list come under broader restrictions on trade. Under this rule, 31 Chinese entities have been added to the unverified list due to non-confirmation of their bona fides.
Implications for China
The global semiconductor industry and supply chain are deeply integrated with China. About 30 percent of the US's revenue in the sale of microchips is drawn from the Chinese market. China is one of the largest markets for South Korea's Samsung & SK Hynix, the Netherlands' ASML, and Taiwan's TSMC. Also, other European companies such as STMicroelectronics, NXP, and Infineon depend on China's buying power. Since China mainly relies on its microchip imports from these markets, any effective anti-China measures in the chip industry will be a more formidable challenge for Beijing to tackle. Banning export will significantly affect the Chinese efforts to build independence in the chip industry and supply chain.
Moreover, the ban on chip exports affects the supply of chips to China and disrupts the development in other sectors like aerospace, e-vehicle, smartphones market, electronics market, etc., raising concern for Beijing's overall technology development plans. With immediate effect, many Chinese manufacturers have started losing employees and foreign chip manufacturing firms based in China. In the medium term, the measures may not just drastically affect China's chip industry but will also slow down its rapidly growing chip-based technological developments.
China also fears that disruptions in the supply chain might significantly affect its electronics and other equipment exports. In the long run, given the extraordinarily long and complicated supply chain, it is yet to see how other manufacturers respond to US's measures. On the contrary, if China finds a way into the loopholes, it may only end up accelerating China's drive for self-sufficiency in the chip industry. This might further the ambitious goals of China towards militarizing commercial technologies.
The Bigger Picture
The competition over technology has remained one of the hottest talks of the town in recent years within the framework of great power politics. US's move might be refreshing for those who thought the tech war was over with the Trump administration's series of curbs on Chinese technology. Notably, the recent measures signal another wave in the US-China tech war. However, US's unilateral actions will only affect when other significant global chip supply chain actors join. The US is actively involved in influencing other major chip suppliers like ASML Holding of The Netherlands and Japan to bar the export of their machinery to China.
In addition to enacting the CHIPS and Science Act and the New National Security strategy in recent times, the US has also expressed its desire to join any multilateral efforts that identify the chip industry as a potential area to curb exports. Some American experts have also called on to create a successor to the now-defunct Cold War-era Coordinating Committee for Multilateral Export Controls (CoCom). However, the tendency to formulate anti-China multilateral groupings will grow only resistance in China. First, the direct curb on China will further push Chinese efforts to poach technological expertise through its vast pool of students and working talent residing in the US. Second, suppose China chooses to impose an embargo on the exports of other materials like Lithium, which stands at the center of the US's efforts to fight climate change. In that case, it will also have severe implications for the US.
On the other hand, if the US fails to get the allies on board to construct a comprehensive multilateral export control regime in terms of specific technologies with common national security concerns, it will move the non-US companies and their R&D centers out of the US borders. As a result, the nightmare regarding the shortage of microchips may become a real problem. Moreover, since microchips have every utility, they will be a problem for the entire global industry. Interestingly the US may be the worst hit as a significant share of sales from American enterprises like Intel, Lam Research, Applied Materials, etc., depending on the chip-hungry Chinese market.
About the Author:
Megha Shrivastava is a Dr. TMA Pai Fellow and Doctoral Research scholar at the Department of Geopolitics and International Relations, Manipal Academy of Higher Education, Manipal, India. Her research focuses on China's ICT development and its internationalization.
Parallel Development
According to a Bloomberg News report, China's Ministry of Industry and Information Technology (中华人民共和国工业和信息化部) convened a series of emergency meetings over the past week with leading semiconductor companies to assess the damage from the U.S. chip restrictions, which are going into effect on October 21. The move is the latest in a series of steps intended to halt shipments of chips and chip-making technology of potential use to China in its military build-up and bid to dominate critical industries.
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