In October, the US introduced extensive controls on chip exports in an attempt to slow China’s progress in artificial intelligence and supercomputers and make it more difficult for the country to produce advanced semiconductors. The controls are probably the toughest measures taken by President Joe Biden against China and the first serious attempt to slow down its military modernisation by targeting the technologies behind everything from modelling nuclear weapons to developing hypersonic weapons.
China’s leading chipmaker Semiconductor Manufacturing International Corporation, which makes logic chips for powering computers, will be hit by restrictions that will prevent US companies from supplying technology for chips more advanced than 14 nanometres or, in some cases, 16 nm. The rules will impact areas such as maintenance, equipment replacement and memory chip manufacture. Some of the more advanced products already meet the thresholds set by the US for memory chips, YMTC, for example, will suffer from US restrictions on the export of technology for the production of their most advanced chips. Without access to US technology, China will struggle to maintain its rapid expansion in artificial intelligence and supercomputing – two important areas for the Chinese military – and cloud computing. However the controls could also backfire in the long run, as they could turbocharge the Chinese own chip industry.
At the same time the sanctions will affect US companies too, according to analysts, the impact on them depends on how aggressively the US will apply the controls. Many US companies that produce chips or tools for chip production point to China as their main market. China accounts for 33% of Applied Materials’ sales, 27% at Intel and 31% at Lam Research. Applied Materials said the restrictions will cut 6 per cent, from next quarter’s sales. Nvidia, which will not be able to export its advanced graphics processing units used in machine learning systems to China, also estimated a quarterly impact on sales of $400 million, or 7% of its sales. Lam Research, a major supplier to China’s YMTC, estimated a cut up to $2.5 billion, or 15% of its 2023 sales. But some US companies could benefit, such as memory chip maker Micron, which is facing growing competition from YMTC.
According to experts, Beijing has limited capacity to retaliate. Last year, China passed a law allowing countermeasures against sanctions, but it has not yet been used in response to Washington’s tightening of controls on semiconductors or to retaliate against other US moves. Some experts suggested that China is unlikely cut off technology giants, including Microsoft and Apple, from its huge consumer market and Beijing will prefer to seek for an agreement. However as far as the political outcome the more imminent risk is that Biden’s gamble could prompt Xi Jinping, China’s president, to accelerate his timetable for Taiwan reunification. The island state is by far the world’s largest maker of high-end chips. That Biden’s move took place shortly before China’s 20th party congress, is notable. Many China watchers think Xi wanted to put the party congress behind him before turning to his vow of fixing the Taiwan problem. Biden could have made a violent resolution to China’s Taiwan policy more likely. He could equally have given Xi pause for thought. We will find out.
Finally spillovers to other sectors are likely to happen, on 7 October, the US added several Chinese companies, including YMTC, to the ‘unverified list’ of entities for which Washington has been unable to conduct end-user audits to verify that US technology is being used for legitimate purposes. If these problems are not resolved within 60 days of listing, the company will almost certainly be placed on the ‘entity list’, which will effectively ban US companies from supplying them with technology. European officials believe the US is likely to extend the range of stricter measures, with knock-on effects for EU companies. Some analysts warn that most Chinese manufacturers could run out of stock, triggering a chip shortage that would affect other industries, such as consumer electronics, medical devices, aerospace and cloud computing. A chip shortage could cause risks, such as a general slowdown in vehicle deliveries or a further deterioration in the profitability of Chinese car manufacturers.