The US and China are in a war that is not fought with weapons but via trade, technology, and data. The latest salvo in the conflict is the US decision to restrict China's ability to obtain advanced computing chips, develop and maintain supercomputers, and to manufacture advanced semiconductors.
In August 2022, US President Joe Biden signed into law the CHIPS and Science Act of 2022. This act is twofold: It aims to strengthen the US semiconductor industry through extensive semiconductor manufacturing investments while also countering China. Following this decision, the Bureau of Industry and Security (BIS) announced on 7 October new restrictions to prevent China from obtaining advanced computing chips and manufacturing advanced semiconductors.
Several factors underpin the new restrictions. The protection of US national security and foreign policy interests, job creation, and boosting the economy are the first ones that come to mind. However, the key underlying problem is the current dependency on China. Containing Beijing in the medium run has become a critical issue for Washington, especially since the East Asian country's technological and economic advancement threatens the US global leadership position in the field.
In 2019, China produced 35% of the world's semiconductors. Even so, China still imports semiconductors due to the massive needs of its industry. In 2020, China imported chips worth US$350 billion, a 14.6% upsurge from the previous year.
Therefore, China's position in the global supply chain is crucially important, given that semiconductors are essential for high-end consumer industries and the defense industry. China plays a substantial role in the processes of assembly, packing, and testing of semiconductors. Moreover, it produces legacy chips with low-profit margins in a way that no other manufacturers from other countries are willing to undertake. Such a situation makes the US and the rest of the world highly dependent on China.
Another major country in the supply chain of semiconductors, especially advanced semiconductors used in the defense industry, is Taiwan. Therefore, a potential China-Taiwan war could devastate the semiconductor industry, opening loads of vulnerabilities for the US and other developed nations. This possibility in the backdrop represents another reason for the US to enact new policies targeting the semiconductor industry.
Another brick in the wall
The new US measures are, in fact, just another brick in the wall. In other words, this is merely another phase in the trade war between China and the US. For a long time, the US considered China's rise in trade and technology as benign, as Beijing operated in a global commerce system designed and led by the US. When China became a member of the World Trade Organization in 2001, Washington welcomed China's integration into the global economy as it benefited the US economy. US consumers enjoyed lower prices while US companies made unprecedented profits. However, since the 2008 global financial crisis, Washington has been more concerned about Beijing's rise because of China's state-led development model, subsidized industries, and technology transfer requirements. As a result, China's containment became one of the priorities of the US decision-makers, who started using several tools at their disposal, such as imposing tariffs. Since then, the trade war between both parties has intensified.
From defensive to offensive
The latest restrictions signal a shift in the trade policy goals and policies of the US. Before August 2022, US restrictions against China implied that Washington desired to change Beijing's attitude, strengthen its own economy, and protect its security interests. However, the latest round of restrictions signifies larger goals, such as challenging the Chinese system, retaining hegemony, and containing China.
For a long time, the US decision-makers thought that defensive policies toward China would suffice. Accordingly, the US carried steps such as investment screenings and regulatory restrictions. Recently, US policies shifted from defensive to offensive and are now focusing on R&D policies in leading industries.
The semiconductor industry, too, was impacted by such a shift. This may be due to US authorities’ realization that the semiconductor industry might side with China and cause the US to lose its hegemony. Defensive policies’ adverse impacts on the US economy may be the other reason. Cutting key supply sources and causing serious disruption for the US industry cannot be underestimated. The industry's feeling of destabilization may not be collateral damage after all.
Uncertainty still surrounds China's response. So far, China has been more hesitant than the US to employ restrictive measures mainly because of doubts over its self-sufficiency. This reluctance will probably continue for a while because China's semiconductor industry is not solid enough to fend off these attacks. However, China can still develop its capacity, relying partly on other countries while expanding its production. However, this option seems limited as the restrictions also include non-US companies selling products made with US technology to China. Moreover, the possibility of other countries interfering and nullifying the impact of US policies seems low.
China may also refer the issue to the World Trade Organization (WTO). Beijing has previously stated that the US trade measures that Washington justifies with the WTO security exception rules are, in fact, against the WTO rules. Nevertheless, despite rhetorical objections, experts doubt whether China would effectively refer the issue to the WTO.
What does the future hold?
Xi Jinping's report presented to the 20th National Congress of China's Communist Party (20 October 2022) shows that China views technology as the primary productive force and innovation as the primary growth driver. That being the case, it is realistic to expect China to take every possible action against US measures that impede technological advancement and innovation. The fact that Xi's third term has just started means Beijing will remain on course to realize its goals. The only dark spot for China is its slowing growth rate which could affect efficiency of the country's endeavors.
On the other hand, the trajectory of the White House decisions shows that the US will probably be more aggressive in its war against China. Harsher measures targeting other industries might be in the wind. However, the US needs to assess the possible costs and benefits of such policies for itself and the global economic order.
There will be consequences
While the conflict appears to entangle Washington and Beijing solely at this point, the reality is that every nation is concerned with a global crisis. The confrontation between the two countries has potential long-standing benefits to the US while presenting drawbacks to China. However, the ripple effect will negatively impact many industries worldwide and, beyond it, the prospects for a reshuffle of the international economic order.