US semiconductor ban targets highest of Chinese high tech

Semiconductor chips are likened to the “steel” of the modern digital economy – tiny circuits vital to powering the processing of huge quantities of data. They’re essential components of many electronics – from mobile phones and video games to supercomputers and high-tech drones. As such, the cutting-edge chips are at the center of the technological decoupling underway between China and the United States, with each country seeking greater security for their supply chains.

In October, the U.S. broadly expanded restrictions on the export to China of advanced semiconductors and manufacturing equipment. It also stepped up restrictions on U.S. personnel and firms supporting Chinese chip making, while tightening export controls on Chinese entities involved with supercomputing.

The wide scope of the latest measures – aimed at cutting China off from high-end chips and preventing civilian-to-military transfers – means the impact will be far greater than previous, narrower controls targeting specific firms, experts say. 

What do the recent U.S. export controls aim to achieve?

U.S. officials say the sweeping new controls are needed to curb China’s access to the high-end chips used in supercomputing and artificial intelligence that are vital to modernizing its military, weaponry, and surveillance networks – deemed threats to U.S. national security. 

Curbing China’s access to the powerful chips and hampering its efforts to produce them will also hit Chinese industries ranging from electronic vehicles and advanced robotics to aircraft and drones.

“The Chinese themselves say this puts them back at least a decade,” says James Lewis, senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies.

The controls are expected to impede some aspects of China’s military advance, experts say, even as Chinese leader Xi Jinping has called on the People’s Liberation Army to accelerate its transformation to a “world-class military.”

“The key differentiating factor between how military systems work today versus prior decades ... is they have more and more computing power applied,” says Chris Miller, associate professor of international history at the Fletcher School of Law and Diplomacy at Tufts University.

“Will limits to China’s abilities to produce advanced computing power at home feed into military power? The track record of the last 50 years suggests almost certainly,” says Dr. Miller, who is also a visiting fellow at the American Enterprise Institute and author of “Chip War: The Fight for the World’s Most Critical Technology.” 

How is China expected to respond?

China is expected to redouble its longstanding effort to attain self-sufficiency in semiconductors – part of its overarching goal of dominating key emerging technologies and using innovation to boost slowing economic growth.

In his report to the Communist Party’s 20th National Congress Oct. 16, Mr. Xi called on China to “speed up efforts to achieve greater self-reliance and strength in science and technology.”

Under Mr. Xi, China poured billions of dollars into a state-led industrial policy – launched in 2015 and initially called Made in China 2025 – that uses subsidies to try to gain a leading position in high-technology manufacturing, including artificial intelligence. Semiconductors have been a major focus of the policy.

Yet China’s push toward independence in semiconductors has had mixed results. The country’s state-run chip industry investment fund, known in China as “Big Fund,” has funneled more than $30 billion into the effort since its creation in 2014. But one major chip maker it backed went bankrupt, and last summer three former senior fund executives were placed under investigation for legal violations, reportedly linked to corruption.

“Something goes wrong in China, it probably has to do with the government,”  says Dr. Lewis, “because they’ve spent a lot of money, they have a lot of good people, they’re a big market, but they just can’t make it work.”

As of 2019, China accounted for about 60% of global demand for semiconductors, but produced only about 13% of the supply. U.S. firms have the lead in making the most advanced chip designs as well as chip-production equipment.

Anticipating growing U.S. restrictions, China has been stockpiling chips, and could still buy some on the gray market, although not enough to meet the need, says Dr. Lewis.

Still, China won’t give up on its semiconductor industry, experts say, and some predict the U.S. controls could backfire. “In the medium to long term, U.S. pressure is set to ‘force’ China’s high-tech industry to develop a more solid industrial base,” said a recent report on the semiconductor policy by a think tank at Fudan University in Shanghai. “This will lead to a more challenging, comprehensive, and thus more-difficult-to-contain, powerful adversary.”

How will the U.S. controls impact the global semiconductor supply chain?

The production of semiconductors requires such high levels of investment that the world’s main supply chain includes several other countries specialized in different parts of the production: Japan, South Korea, Taiwan, and the Netherlands. 

Fortunately for the U.S., these countries are all allies, and they and their semiconductor firms so far appear generally willing to support the new U.S. policies.

“For all key countries, there is a fair amount of incentive to comply broadly,” says Dr. Miller. “I don’t see an easy way for China to break apart the informal alliance the U.S. has put together.”

Under this scenario, what is likely to emerge is a multilateral semiconductor supply chain with a reduced China presence, experts say.

The goal “is not to just shut down China, it’s to move China out of the global supply chain, and that is the big task,” says Dr. Lewis.