US chip controls on China will be expensive

US chip controls on China will be expensive

It was less a decoupling than a rupture. In one fell swoop last month, Joe Biden did potentially more to sever U.S.-China trade ties than Donald Trump ever did, despite the ex-president’s emphasis. The controls banning US companies from exporting critical semiconductor manufacturing tools to China mark yet another rejection of the theory that the US could tame Beijing’s geopolitical ambitions through closer trade ties. They are a big bet.

The measures were unveiled days before China’s party congress, when attention focused on the crowning of Xi Jinping as lifelong ruler of an increasingly authoritarian Chinese stronghold. Whatever the intention, it’s hard to see how Beijing would view the controls as anything more than a provocation, even as Washington tries to downplay fears of a tech cold war.

The White House presented these measures as an attempt to curb Chinese military use of high-end chips. It is understandable that the United States would want to blunt the military ambitions of an increasingly assertive and nationalistic rival. Russia’s invasion of Ukraine and the economic hardship that has spread across the world in the wake of soaring energy prices have prompted a rethink of the wisdom of dependence on regimes. who are potential adversaries. But the dual-use nature and ubiquity of chips in everyday life – it’s not for nothing that semiconductors are dubbed the new oil – means that the implications of this action are wider.

Extensive controls extend not only to the export of US semiconductor chips, but also to all advanced chips made with US equipment. They target “US persons”, that is to say not only citizens, but also green card holders. As a result, companies from Taiwan to South Korea to the Netherlands are now trying to quantify their exposure, not to mention those in the United States and China. More precision on the scope of the measures – especially around American people – is needed.

In their current state, these measures carry real risks. One is in-kind retaliation from China, perhaps over rare metals vital to the modern technology-dependent economy. China processes 65% of the world’s lithium, for example.

US sanctions would be the least of global concerns if China ever decides to use force to reunite with Taiwan, which dominates global manufacturing of advanced semiconductors. The US Navy chief has warned that China could invade the island state before 2024. Regardless of the misery of war imposed on Taiwan, the loss of access to Taiwanese chips would affect the supply and price of everything, from computers to cars. A Chinese invasion would also trigger a wave of sanctions which, in turn, would hit interconnected economies. That would be an order of magnitude greater than the disruption unleashed by the war in Ukraine. The hope must be that Russia’s botched invasion, and the West’s response, gave China pause.

The U.S. semiconductor moves come as other economies and the business community try to calibrate their relationship with China. The bankers, says the chairman of UBS, are “all very pro-China”. Olaf Scholz, German Chancellor, met Xi in Beijing on Friday, a sign of Germany’s continued dependence on China and its failure to learn the lessons of the commercialism that has made it difficult to ignore the embrace of Russia.

The United States, too, will have to be able to sustain its “Made in America” bravado. It may have already spent billions of dollars to set up domestic chip factories, but analysts estimate it will take up to $1.2 billion in upfront costs and then another $125 billion. per year, to create fully localized supply chains at 2019 production levels, all. during a cost of living crisis. The bill for decoupling the Chinese and American economies will be expensive.

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