The U.S. Ban of Advanced Semiconductors to China and its Implications by Michael Raphael
A complex and precarious triangle of interdependence between China, Taiwan, and the U.S. for production and innovation of semiconductor chips – powering everything from smart phones to smart cities – hangs in the balance.
On October 7, we witnessed a drastic shift in national security and trade policy with China, reversing a course of one-sided openness and intellectual property sharing that the U.S. has charted for some twenty-plus years. The U.S. Department of Commerce announced that the transfer of U.S. advanced semiconductor chips to China would be strictly prohibited, impacting not only U.S. firms, but other international companies that sell any sort of technology whatsoever to China with advanced U.S. chip components. The policy essentially curbs China’s parabolic advances in computerized technology, forcing the rising superpower to rely on its own capabilities to further its advances in artificial intelligence (AI), machine learning, surveillance, and related fields.
Additionally, Americans working in China’s semiconductor industry were faced with a stark ultimatum beginning October 12: quit their jobs or risk losing American citizenship. Essentially, these measures by the Biden administration not only cut China off from key technology, but perhaps more importantly, key talent, especially since many executives of Chinese semiconductor manufacturing companies are indeed Americans. Although Biden and Xi Jinping did meet on November 14 in Bali, Indonesia to discuss a range of topics from North Korea to climate change, the position on semiconductors appears unchanged.
How is the threat of China invading Taiwan relevant to the chip industry?
China has never been shy about its intentions with Taiwan––it seeks the island’s full integration under Beijing’s One China Principle (not to be confused with Washington’s One China Policy). From Xi Jinping’s speeches echoing “reunification”, to continued military incursions into Taiwanese air and sea space––China sent 30 warplanes into the Taiwan air defense zone in May––the communist country sees the island as an inextricable part of itself. The U.S. tech sector mainly relies on outside countries to produce its companies’ semiconductor chips, namely Taiwan. The island nation boasts laudable chip production capabilities: Taiwan produces. It is this leverage that has equipped the island nation with a “silicon shield”––meaning that Beijing is hesitant on invading the island nation (for now) because the global economy will adversely be affected and it would be too costly for everyone involved—for China especially. If China were to invade Taiwan, the island’s chip industry would grind to a halt due to the TSMC facility’s high level of sophistication and dependence on the global supply chain, predicated by real-time connections to the outside world. There would be no winner here.
What are semiconductors and why are they so in demand?
Semiconductors, also called integrated circuits (ICs), are the key to making (although are often just referred to as) microchips––or just chips––and are the brains of practically every electronic device, from cell phones to cars (gasoline and electric), appliances, medical equipment, smart cities … the list goes on. Conveniently, there happens to be a global chip shortage, exacerbated by the Covid-19 pandemic’s global shutdown, subsequent supply chain issues, soaring demand for new devices as online schooling and working became mainstream, semiconductors’ extensive lead time (production takes about 26 weeks from start to finish), and also extraneous events such as frequent lockdowns in China, a winter storm bringing Texas chip factories offline in February of 2021, the Suez Canal blockage in March of 2021, and the bottlenecking of some 77 cargo ships outside the ports of Los Angeles and Long Beach in October of this year.
What are the implications for China?
A complete ban on transfers of U.S. semiconductors and expertise means that China’s capacity for developing new and advanced technologies may not only be stifled, but could even regress in the near to medium term. Chinese domestic chips are nowhere near as advanced as those produced by top U.S. chip designers such as AMD and Nvidia, and without them, Chinese AI chip design companies would not have been able to grow their business. Without the access to technology and talent, China’s semiconductor production will be treading water––for now. Because China’s tech sector has relied on Western technology to further its own, the propensity for self-driven innovation has diminished, and will be a serious problem in the short term. However, in the longer term, China could find an advantage in this series of events by being forced to overhaul its domestic chip design and ultimately become chip independent. As Plato said in The Republic, “Necessity is the mother of invention.”
But why now?
Out of all possible times, why did the Biden Administration choose this bold course of action now? Potentially, for two reasons: first, the ban acting as a spiritual successor of the “Huawei ban” enacted by President Trump on May 15, 2019; and second, the U.S. building on momentum from its sanctions and international pressures placed on Russia to discourage an invasion of Taiwan.
Huawei, a Chinese multinational telecommunications corporation closely linked to the Chinese government, is regarded by U.S. policymakers as a threat to national security. The Huawei ban essentially dictated that Huawei would be placed on the “Entity List”, which is comprised of companies deemed a risk to U.S. national security, and hence are prohibited from doing business with any organization that functions in the U.S. Huawei has been in hot water before for intellectual property (IP) theft. However, Huawei is also the world’s largest seller of smartphones and communications equipment. Because the U.S. government (among numerous others) is worried that Beijing could coerce the telecom giant to spy on users via its devices and collect data, the enforcement of a total ban across all Chinese firms is among the strongest policy moves available to deter Huawei’s capabilities for global surveillance. Huawei, which (surprisingly) also used U.S. semiconductors––until the Bureau of Industry and Security (BIS) restricted Huawei from these chips in May of 2020 on grounds of national security concerns––is now hampered from acquiring U.S. chips even indirectly via another supply line within China.
In addition, the timing of the ban could not be more fortuitous in capitalizing on the international momentum from pressuring Russia, emphasized by the Ukrainians’ monumental advances and counterattacks as of late. Consequences of Russia being subject to chip export controls have even begun to manifest themselves quite clearly on the battlefield. Russia, desperate to replenish chip stocks from Western sanctions, have been extracting chips from kitchen appliances in Ukraine to be used in military hardware, albeit being significantly less effective.
As for China, the chip ban essentially functions as an ominous forewarning of what could come should Xi Jinping move against Taiwan. The only question that remains is the following: “Could the U.S. and world economy survive without China in the same way it has blacklisted Russia?”
What has the U.S. done domestically to bolster chip production?
On August 9, the Biden Administration signed the into law the bipartisan the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, an initiative which will, according to the White House, “strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence.” Not only that, but the CHIPS and Science Act will allocate $280 billion over the next ten years towards scientific research and development and commercialization. Taking these steps will not only bolster America’s chip independence but will also add to the already surging demand for STEM careers.
Conclusion
Although China’s rise has been meteoric in the past few decades, it has been incredibly reliant on Western technology, specifically chips, to facilitate its technological progress. Restricting Beijing’s access to this coveted commodity, worth more than its weight in gold, is sure to considerably delay Xi Jinping’s ambitions of making China the world’s premier superpower via hindering the development of advanced technologies and infrastructures, including 5G networks. The chip ban also sends a stark message of what could come, although a complete blacklist as with Russia is unlikely given what’s at stake in the global economy. Biden’s recent face-to-face with Xi Jinping was a symbolic show of sportsmanship, but neither nation will be veering away in this geopolitical game of chicken anytime soon. Lastly, now that this chip ban is in place, only time will tell if this buys the U.S. an adequate lead to stay ahead of China technologically.
Author: Michael Raphael is a Senior Researcher at Navanti Group. He holds a BA in International Affairs from The George Washington University.
Disclaimer: The opinions expressed in this publication are those of the author(s). They do not purport to reflect the opinions or views of the Navanti Group or its partners.