For years, there have been warnings that a new Cold War is coming, this time with China. The first shot of that war may have just been fired.
In this case, that shot didn’t come from the barrel of a gun, but from the point of a commerce department bureaucrat’s pen. Earlier this month, the Biden administration put in place draconian export restrictions on semiconductor chip technology that one industry analyst charged amounted to “a full-scale bilateral economic cold war” against China.
Per the new controls, the United States will no longer permit chipmaking equipment or certain chips, notably those for supercomputing and artificial intelligence, to be exported to Chinese companies. Thirty-one Chinese firms have been added to the Bureau of Industry and Security’s (BIS) Unverified List, which makes it more difficult to send items to the listed entities that are US-made or produced with US supply-chain links, including foreign-made products created using technology that originated in the United States. And it’s not just items that are targeted for restriction, but “US persons,” too. (More on that later).
The controls also expand the criteria for ending up on the BIS Entity List, where listees are suspected of threatening US national security or foreign policy interests. Now, when a government proves itself uncooperative in allowing regulators to check they’re complying with US export rules ― like the Chinese government, which doesn’t allow US auditors ― companies based in that country can be slapped with sanctions. In other words, US regulators will now effectively have free rein to freeze any Chinese company out of American supply chains.
Since the United States houses three of the world’s top-five semiconductor processing suppliers, and since China only produces 15 percent of the world’s semiconductors while buying three-quarters of the world’s output, this is no small thing. It’s not being taken as one in China, either. China’s foreign ministry spokesperson Mao Ning charged the Biden administration with “abusing export control measures to wantonly block and hobble Chinese enterprises,” while a Chinese commerce ministry spokesperson accused Washington of “violating the spirit of cooperation between the two sides” with “technology bullying.”
If the goal is to hurt China, then this will certainly do the trick. China is heavily dependent on the rest of the world for semiconductors, importing $400 billion worth of semiconductors last year. The president of the US-China Science and Technology and Cultural Exchange Association in the United States has said that because “China has not made much progress” on its semiconductor industry, these measures would lead to its “collapse.” China’s Ministry of Industry and Information Technology called an emergency meeting with semiconductor firm executives where “many of the participants argued US curbs collectively spell doom for their industry,” Bloomberg reports.
You only need to look at Huawei to get a sense of how devastating such trade curbs can be. Though Huawei was once the number one smartphone maker in the world, Donald Trump’s decision to add it and dozens of its non-US affiliates to the Entity List wreaked havoc on the firm, which, among other things, was no longer able to put the Google Play app store on its phones. Huawei fell out of the top three smartphone companies after the first year of sanctions as its market share plunged 42 percent, and its revenue the next year dropped nearly 30 percent.
The BIS foregrounded the chips’ military uses in justifying these restrictions, but US officials have been clear that maintaining US technological dominance and hobbling China’s accelerating industrial development are at least as big a concern here. The controls come only a couple of months after Biden signed the CHIPS and Science Act into law, which puts nearly $53 billion toward research funding and subsidies for the domestic US chip industry, after the COVID-19 pandemic’s supply chain shocks had underlined just how pivotal the products are. It’s also in-line with the Biden administration’s recently released and somewhat incoherent National Security Strategy, which pits the United States against China in a “contest for the future of our world” and singles out “investments in innovation to sharpen our competitive edge” to that end.
But the trouble this is all about to cause for China obscures the fact that there may be real costs for the United States and its allies, too. This point is, unsurprisingly, being made in the Chinese press, but it’s also one being stressed by Western analysts and press outlets, some of whom have warned of less collaboration and demand, along with higher prices. China is, after all, the largest trading partner of most of the world, including Taiwan and South Korea, which are home to two of the world’s top-three advanced processor chip firms. Washington had to rush to exempt both chipmakers just hours before the controls went into effect, according to Reuters, so they could keep doing business in China undisrupted.
Meanwhile, we’ll have to wait to find out if the Boston Consulting Group’s 2020 prediction — that US semiconductor firms would see a hit of 37 percent to their revenues and 18 percentage points to their global market share in the case of US-Chinese “decoupling” — will come true. Ditto for the Australian Strategic Policy Institute’s belief that these new controls will “severely affect” US semiconductor processing companies.
One of those companies, Applied Materials, has downgraded its August-October earnings outlook and has estimated it will lose $400 million worth of sales in the fourth quarter of this year. And given semiconductors’ importance to a variety of other kinds of manufacturing and the role of higher education in the field, the shockwaves of this move will likely be felt well beyond just the chip sector, and this is before any possible retaliatory measures from Beijing. Meanwhile, US hopes for creating a fully US-sourced supply chain for semiconductors rests in large part on Intel, which is set to start firing thousands of workers in the face of slumping demand, despite the many billions of dollars of government subsidies it successfully lobbied for earlier this year.
The new controls will also have human costs. As Fortune reports, the Biden administration’s ban on “US persons” supporting Chinese factories’ “development or production” of chips without a license ― the first time trade curbs on China have targeted actual human beings ― means US citizens and green card holders will have to pick between their jobs and their US immigration status.
Finally, none of this bodes well as tensions between the United States and China are reaching fever pitch over the status of Taiwan, with the chief of US naval operations just this week calling on Washington to get ready to respond to a Chinese invasion of the island, and longstanding calls from hawks to go to war with the nuclear-armed state in that scenario, which would likely prove disastrous. The prime minister of Singapore, for instance, called Biden’s move “a very serious one,” and warned that if national security concerns drive a wedge between the economically interlinked West and China, it “may result in less economic cooperation, less interdependency, less trust and possibly ultimately a less stable world.”
The first Cold War may have been dangerous, but it took place between two countries that barely traded with each other. We may be about to find out what that war looks like when the two countries are each other’s largest trading partners.