China ‘flea war’ threatens to undermine America
The Biden administration has extended sanctions against China’s electronics industry. In turn, Silicon Valley companies are increasingly seen as a major instrument of grand politics. However, Washington’s “geopoliticization” of the IT industry threatens to further undermine US international positions in this important sector of the economy.
China’s advances in computer technologies have preoccupied Washington for years. Unlike before, when they spoke primarily of the “threat to the economic positions” of the United States and the West as a whole, they now signal concern over “security issues.” A number of new restrictions introduced in early October were designed, Western observers say, to slow the development of China’s IT industry to such an extent that it would guarantee the United States supremacy in the application of technologies. advanced computing for military purposes. Among other measures, Biden has significantly limited the participation of US residents in the development of technologies for the Chinese IT sector.
As Bloomberg reported a few days ago, “the United States intends to restrict China’s access to AI and quantum computing technologies.” The White House has drawn up administrative measures to establish strict limits and controls on Western investment in a number of critical technology-related sectors in China. Quantum computers and AI are among the priority issues. If implemented, the new restrictions will reinforce those previously adopted.
It appears that the Biden administration tried to revive the practice introduced by Trump. In 2018, the Trump administration imposed a wide range of sanctions against Chinese computer giant Huawei, which was accused, without any evidence, of participating in “espionage schemes and secret surveillance projects carried out by the Chinese authorities”. They imposed a complete ban on supplies of US parts that were essential for Huawei products to be competitive in the global market. Currently, Western sources are reporting content, not about the cessation of “secret espionage”, but about the fact that Huawei’s export revenue has decreased significantly, as well as the product line.
Meanwhile, according to The Economist, Trump’s “success” had a negative side. The Republican administration blatantly ignored the interests of allies and partners. As a result, Western investors began to invest in companies and component supply chains that were exempt from scrutiny by US regulators. Japanese companies offered a full range of electronic components as products free from technological restrictions imposed by the United States. Some large US companies, which supplied billions of dollars worth of products to the Chinese market every year, have begun to open branches and representative offices in foreign jurisdictions, circumventing Washington’s restrictions.
In early 2022, after acknowledging a limited scope of existing sanctions, the Biden administration introduced a new variant of export controls, which provided severe restrictions on the export to China of components whose characteristics exceed a certain technological level. In early October, the ban was extended to include chips that were produced at less than 14 nanometers, or in some cases less than 16 nanometers. These harsh restrictions, along with the unilateral actions taken by Washington, continue to frustrate many nominal US allies.
Biden has also taken steps to encourage the return of microelectronics production facilities to the United States. In the spring, the White House introduced a chip and science bill, The CHIPS and Science Act, which provides for the allocation of at least $52 billion in subsidies for the construction of new production “factories” peak. processors in the territory of the United States. Also in the spring, Biden spoke at a ceremony at the site of a future company to be built by Intel – one of the major processor makers in the United States. Plans to build a new “factory” in the United States have been announced by Taiwan’s TSMC – a major and most technologically advanced producer of microprocessors in the world.
However, America faces a lot of “opposition”. According to Foreign Affairs, the CHIPS and Science Act, which came into force at the end of August, is not enough to restore America’s leading positions in the field of microelectronics. An influx of financial resources will not solve all the problems. What is needed is a break in managerial and technological culture and a clear understanding by Washington politicians of all the intricacies and issues facing the contemporary microelectronics industry.
At present, most companies in Silicon Valley have lost the spirit of “iron” technological innovations. A wide variety of new “high-tech” companies founded in the United States in the 2000s do not manufacture products that can be touched with hands. The lion’s share of profits comes from advertising in apps or search systems. The hype around hot software novelties, which spread across America, allowed Asian competitors to break into designs, especially in the production of sophisticated microchips. Moreover, globalization in its current form, aimed at relocating the production of finished products to where they are most profitable, has played a bad joke on America. “Deindustrialization” has not only affected a large number of American industries, it has spread to affect the ways of thinking of their leaders and engineers.
At the same time, even US experts admit that the harder they try to “contain” China, the harder it becomes for Washington to persuade its allies in Europe and Asia to follow suit. Active assistance from other countries in restricting the export of much-needed parts, machinery and technology to China is vital, as without it the United States risks inflicting irreparable damage on its own electronics sector, first place. Investors will surely opt for areas where they can avoid draconian US restrictions and where they can continue to develop mutually beneficial business relationships with China.
America is “stuck” having to choose between the less strict approach of restrictions in the exchange of technologies, which can produce a greater effect, on the one hand, and the attempts to “suppress” advanced Chinese microelectronics on a short period of time. , on the other hand, risking inflicting significant damage to its own computing potential.
First of all, many US semiconductor producers are highly dependent on supply from the Chinese market, one of the largest in the world. As reported by the Financial Times, the share of supplies to China accounts for one-third of the order portfolio of Applied Materials, a California-based company that produces machinery for processing silicon wafers. 27% belong to Intel. And 31% – to Lam Research, a leading supplier of processor manufacturing equipment.
Second, the slowdown in the US and global economy could lead to lower sales in the microelectronics sector, which is bound to have a negative impact on the outlook for new investments. The computer industry is therefore facing a slowdown, even a recession. According to The Economist, about 30 major U.S. microchip makers are reporting an $11 billion reduction in cumulative third-quarter revenue outlook since July. The combined capitalization of US-based chipmakers has fallen by more than $1.5 trillion this year.
Political pressure has also increased as Washington demands that the microelectronics industry quickly reduce its dependence on China. Thus, the deterioration of the market situation is further aggravated by even more administrative and political restrictions.
Meanwhile, U.S. business leaders fear Beijing will impose measures in response, introducing even more restrictions on U.S. producers’ access to its vast domestic market. As the Financial Times has reported, Europe fears that a further extension of sanctions restrictions by the United States could inflict even more damage on businesses and consumers in the Old World. Chinese producers could find themselves without essential parts and components. A decrease in supplies will also affect European aerospace companies, car manufacturers, producers of medical equipment and the cloud computing sector. Taiwanese electronic parts producers, including key player TSMC, and their South Korean counterparts are likely to face difficulties supplying their businesses in China, which account for tens of percent of total output. Japanese companies have had heated debates over the medium- and long-term consequences of restrictions on the use of US components while dealing with Chinese counter-agents.
Finally, the severance of scientific ties with China will ruin the innovative potential of American designers. Chinese researchers already have a much higher citation index across a range of research and technology areas than their American colleagues. According to Beijing Review, during the Trump presidency, they launched the so-called “China Initiative” – a set of administrative measures aimed at tracking down potential spies among scientists and engineers of Chinese descent. As anti-China sentiments grow, throwing America into an atmosphere of hostility and suspicion toward Chinese scientists and experts, thousands of researchers and engineers, including from the microelectronics, have left or are planning to leave the United States and move to China, said the Asian American Scholar Forum (AASF).
Washington’s “efforts” could unfortunately translate into a further decline in the share of US producers in the global market and an overall decline in the global influence of the US tech sector. All of this is happening amid a drop in demand, caused by an impending recession. In the past, the United States has repeatedly and successfully imposed the destructive “security or development” dilemma on its adversaries. Now America itself risks being trapped by its own hopelessly outdated logic of the past.
From our International Business partner