February 7, 2023

Eureka News

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A fake baby bump shows the limits of US chip sanctions against China

Guards at the Zhuhai border between Macau and mainland China recently intercepted a woman carrying a fake baby bump.

In many parts of the world, authorities would expect to find drugs in such an appendage. But this one contained 202 processors and nine smartphones.

Chip smuggling into China is booming, creating a lucrative black market that could threaten the effectiveness of US export restrictions introduced this year.

The main goal of the US measures is to prevent China from accessing high-end chips for military use. The recent controls are extensive enough to significantly slow the progress of China’s military and technological development.

Yet only 1 percent of global chip demand comes from governments, including for military use. The overwhelming majority is for consumer products. Even taking into account the chips designed for communication or machine use that may be diverted for military use, a tiny proportion of imported chips are critical for military use.

Most chips needed for military use are based on older technology. Radars, for example, only require the so-called 65 nm process technology, which was developed two decades ago. Older autochips can be reused for most chips used in airplanes, drones and missiles, and they can be made at home by China’s local chipmakers. A fraction of the chips needed for military equipment are high-end variants that China has to import from overseas.

The country imported $350 billion worth of chips a year before US export controls were introduced, which works out at 50 billion units per month.

The sheer volume of chips being traded and the sweeping scope of the U.S. ban mean there aren’t many ways for China to find a workaround.

But historically, sanctioned countries have always adapted, for example by importing goods through foreign subsidiaries of local companies or setting up shell companies to purchase products and then smuggling them into the country.

For decades, Russia and North Korea have evaded sanctions against devices much larger than chips, such as thermal imaging devices. Smugglers hide them between shipments of uncontrolled products, using fake companies, addresses and shipping labels to cover their tracks.

China has a huge black market that was originally created to help people avoid paying high import taxes on foreign goods, which can make this easier. Its scale and efficiency have proven themselves in industries as diverse as Swiss luxury watches, Korean cosmetics, and refined oil.

The global chip shortage since 2020 had already fueled a black market for chips with significant price premiums. After moving to the US, where chips fetch prices up to 500 times their original levels, there is even more incentive to smuggle them.

China has no hope of fully circumventing the ban through illegal trade. But the US shouldn’t delude itself that it could completely cut off China’s access to its technology.

Relatively few chips are needed to keep China’s military progress on track. Illicit trade raises the possibility that US sanctions will cost more than they do.

An analogy can be drawn between chips and medicines that goes beyond the small size, the high value and the transport options in the artificial baby bump.

In both cases, the ban reduces supply, increases prices and encourages crime. US contraband technology will continue to trickle into China the way South American cocaine trickles into the US.