Zooming in on a chip, you will see millions, even billions, of tiny transistors existing in an incredibly small space, sometimes just the size of a fingernail. Yet these miniatures power our modern world. Computers, smartphones, electronic devices, even the most powerful military weapons, they all rely on… chips.

When it comes to China, the country's annual chip imports even exceed those of oil. However, the Joe Biden administration's crippling October 2022 ban on American firms selling chips or advanced chip manufacturing equipment to China disrupted the global supply chain. Major U.S. allies in the semiconductor sector have followed suit. Effective from July 23, Japan tightened rules on exports of 23 types of advanced chip manufacturing equipment. As of September 1, the Netherlands, too, will impose a similar ban. Their actions are bound to affect China's growth, but may also backfire.

The CEOs of several leading U.S. chip companies, including Intel, Qualcomm and Nvidia visited Washington on July 17 to discuss China policy, including market conditions, export controls and other matters affecting their businesses. They urged for a halt to more curbs designed to slow the flow of artificial intelligence (AI) chips to China, Reuters reported.

That same day, the U.S.-based Semiconductor Industry Association (SIA) called on President Biden to "refrain from further restrictions" on chip sales to China as his administration is reportedly considering updating a sweeping set of rules in October that might hobble China's chip, quantum computing and AI sectors, as well as a new executive order restricting some outbound investment.

"Allowing the industry to have continued access to the China market, the world's largest commercial market for commodity chips, is important to avoid undermining the positive impact of this effort. Repeated steps, however, to impose overly broad, ambiguous, and at times unilateral restrictions risk diminishing the U.S. semiconductor industry's competitiveness, disrupting supply chains, causing significant market uncertainty and prompting continued escalatory retaliation by China," the SIA said.

In response to a question about the American plans to tighten export restrictions, Chinese Foreign Ministry spokesperson Mao Ning stressed it is in no one's interest to place arbitrary curbs on normal technology cooperation and trade, violate the market economy principles and destabilize global industrial and supply chains. "China opposes the U.S.'s politicizing and weaponizing of trade and tech issues," Mao said during a news briefing on July 18.

Opposition at home

The chip industry is strongly invested in safeguarding its profits in the Chinese market as the Biden administration considers another round of restrictions on chip exports to China. According to the SIA, China accounted for $180 billion in chip purchases last year, comprising approximately one third of the global total of $555.9 billion, making it the largest single market.

Companies like Nvidia, Qualcomm and Intel have substantial sales that depend on the Chinese market. Qualcomm is the only company with a license from U.S. regulators to sell mobile phone chips to Huawei, a prominent Chinese tech giant.

Nvidia will soon begin selling an AI chip tailored to the Chinese market. The largest U.S. chipmaker confirmed the news to Reuters on November 7, 2022 only one month after the export ban imposed by the Biden administration.

Intel CEO Pat Gelsinger in early July wrapped up a low-key trip to China to announce the company's own AI chip offering as the U.S. chip giant is doubling down on the Chinese market despite an intensifying U.S. tech war against China. Its newly released Habana Gaudi 2 is a deep learning accelerator card designed specifically for the Chinese market.

Jensen Huang, CEO of Nvidia, has repeatedly warned that the U.S. tech industry is at risk of "enormous damage" from the escalating battle over chips between Washington and Beijing.

American economist and Nobel Laureate Jeffrey Sachs, also Director of the Center for Sustainable Development at Columbia University, said at a webinar themed on China-U.S. relations in the Asia Pacific, hosted by the Chile Pacific Foundation on June 29, that he had spoken with one of the major American tech companies about their take on U.S. policymaking. "Their top lawyer told me, 'It makes no sense. We try to tell [the U.S. Commerce Department] they are going to kill our major market in China. Do they have any idea what they are doing?'" Sachs noted.

The lawyer continued to explain that the U.S. model to succeed is staying one step ahead of the rest through smart research and development, instead of resorting to protectionism. But "the U.S. authorities had no idea of how they'd actually managed to stay ahead of the game," he told Sachs.

The curb obsession

Or did they? Yan Xuetong, Dean of the Institute of International Relations at Tsinghua University and one of China's leading political scientists, said remaining one step ahead is not the case when trying to slow down China's technology progress is the ultimate goal. The U.S. seemingly wants to maintain the existing technological gap and potentially widen it in the future, he told a gathering of Chinese business people at the 2023 China Qianhai Entrepreneurs Summit in late April.

In his speech, Yan said the U.S. is adopting a "small-yard, high-fence" approach to restrict China's digital technology innovation as Washington attaches great importance to digital innovation, to the extent it believes the core of China-U.S. strategic competition is less ideological than digital.

"Small yard, high fence" means the U.S. administration identifies critical American technology directly related to the so-called "national security" (small yard) and delineates boundaries to protect its technological competitiveness (high fence).

The American determination to contain China's tech advancement should not be underestimated. As a piece published by The New York Times on July 12 pointed out, the sweeping 2022 export control took aim at a target "far broader than the Chinese security state." The rationale is "to understand that the U.S. wanted to impact China's AI industry," and the export controls "essentially seek to eradicate, root and branch, China's entire ecosystem of advanced technology."

C. J. Muse, a senior semiconductor analyst at global independent investment banking advisory firm Evercore ISI told the newspaper, "If you'd told me about these rules five years ago, I would've told you that's an act of war—we'd have to be at war."

Peter Wennink, CEO of ASML, a Dutch corporation that specializes in the development and manufacturing of photolithography machines which are used to produce computer chips, in an interview with Bloomberg News earlier this year expressed his concern that U.S.-led export control measures could eventually push China to develop its own technology in advanced chipmaking.

"If they cannot get those machines, they will develop them themselves. That will take time, but ultimately they will get there," he said.

China's response

On July 3, the Chinese Ministry of Commerce announced that the export of gallium and germanium, two elements used in producing chips, solar panels and fiber optics, will be subject to a license system for national security reasons as of August 1. That means exports of the materials will need to be approved by the Chinese Government.

As China accounts for 98 percent of global raw gallium production and 67 percent of raw germanium production, several American technology researchers and experts have described the move as "China's first big volley in the chip exports war."

But this export control is not a ban on relevant exports and permits will be granted if exports comply with the relevant regulations, Shu Jueting, a spokesperson for the Chinese Ministry of Commerce, told a press conference on July 6. The measure is to make sure these items are used for legal purposes, and it aims to safeguard national security and better fulfill international obligations, she added.

Chen Jing, a columnist at Shanghai-based news portal Guancha.cn, believes it would be an oversimplification to view the move as retaliation against U.S. export restrictions. In a recent op-ed, he explained how both gallium and germanium are scattered metals, meaning they have relatively low abundance in the Earth's crust.

"And so, imposing export controls on the metals urges the countries concerned to rethink whether the curbs they are putting on China is reasonable or is just disrupting the global industrial chain. They need to gain a new understanding of China's role in the global economy," Chen noted.

(Print Edition Title: Are the Chips Down?)

Copyedited by Elsbeth van Paridon

Comments to liwenhan@cicgamericas.com