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New U.S. Export Controls to Hit China’s Economy and Semiconductor Industry

China expands its footprint in WANA

In his speech at the 20th party Congress on October 16, Chinese President Xi Jinping specifically emphasised the need for domestic “self-reliance” in technology. He said, “we will focus on national strategic needs, gather strength to carry out indigenous and leading scientific and technological research, and resolutely win the battle in key core technologies. Xi’s comment was noteworthy in the context of the new US export controls to curb China’s growing tech ambitions, especially its advancement in producing high-end chips and semiconductors. What is also interesting about the US decision is that it came almost a week before the 20th Congress of the Chinese Communist Party (CCP), in which President Xi Jinping will get the third term as its general secretary, and president of China. In the short term, the new US measures will significantly harm Chinese Artificial Intelligence data centre companies. It is not good news for Xi personally, who is facing a difficult task to bring back China’s economy on track, in the aftermath of the COVID-19 lockdowns, to compete with the US economy.

The US-China strategic competition is intensifying under the Biden administration, which prioritises “maintaining an enduring competitive edge [over China].”[  On October 7, the United States Department of Commerce’s Bureau of Industry and Security introduced a set of export controls aimed at restricting export of sensitive technology to China, specifically with respect to advanced computing, and semiconductor capabilities. The move does not come as a surprise because the Biden administration has been preparing to take a major policy decision on revitalising domestic semiconductor manufacturing capacity for some time.  In the recently released National Security Strategy document, the Biden administration specifically recognised the importance of the semiconductor supply chain to America’s strategic competitiveness with China and national security, and is thus, “seeking to reinvigorate the semiconductor industry in the US.”[

In addition, on August 9, President Biden passed the bipartisan “CHIPS and Science Act of 2022” to “boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems.” The Act authorises USD 280 billion for civilian investment in research and development, especially in critical sectors such as semiconductors and advanced computing, next-generation communications, clean energy technologies, and biotechnologies. According to the Act, these funds will ensure that “recipients do not build certain facilities in China and other countries of concern and preventing companies from using taxpayer funds for stock buybacks and shareholder dividends.

The measures aimed at China’s supercomputing abilities have already impacted stock markets, with semiconductor firms losing USD 240 billions of value in just a few days.  Within three days of the decision, China’s largest chipmaker, Semiconductor Manufacturing International Corp, fell 4 per cent in Hong Kong, while Hua Hong Semiconductor tumbled 9.4 per cent and Shanghai Fudan Microelectronics plunged 20.2 per cent. U.S.-based tech giant Apple has suspended plans to use memory chips made by China’s largest memory chip maker Yangtze Memory Technologies Co (YMTC).

Leading chip equipment suppliers such as Lam Research, Applied Materials and KLA Corporation, etc, have already suspended sales and services to semiconductor manufacturers in China. The move will hit China’s economy, which is already seeing a downward growth rate projected at 3.2 per cent in 2022 from 8.1 per cent in 2021. China is fuming over the decision and has called the new controls “unfair,” which will “also hurt the interests of US companies.”

China is known to aggressively steal and copy advanced and critical technologies from the western countries through cyber hacking and other illegal methods. Despite knowing China’s modus operandi for years, the western countries had been reluctant in taking a serious step(s) against the Chinese government and tech companies based in China. However, the US and Europe have finally come to the realisation that China is posing a serious long-term economic and security challenge to them, especially its technological advancement in the recent years and hegemony on the supply chains.

China’s ‘Zero-Covid’ approach in the aftermath of the Wuhan outbreak of early 2020 majorly impacted the supply chains of advanced and critical technologies to the western countries. For instance, a critical shortage in semiconductors created shipping delays and led to higher prices for electronics in 2021, which continued in 2022 after the forced lockdown in Shanghai in April. All these developments and burgeoning U.S.-China tech competitiveness have forced a new policy outlook in Washington about Beijing’s suspicious activities in the field of science and technology. Since March 2018, when former U.S. president Donald Trump successively initiated Section 301 investigations targeting China and imposed a retaliatory tariff on Chinese steel and aluminium, the bilateral conflict gradually spread to the tech industry. It is noteworthy that the Biden administration is continuing with the US’ aggressive posturing against China on the tech front. However, China may use coercive tactics and use illegitimate ways to improve domestic chip design industry.