December 4, 2022

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America’s chip inspections in China will be expensive

3 min read

It was less of a decoupling and more of a rupture. In one fell swoop, Joe Biden may have done more to sever US-China trade ties in the past month than Donald Trump ever did, despite the ex-president’s bombast. Controls preventing US companies from exporting key semiconductor-making tools to China mark another rejection of the theory that the US could tame Beijing’s geopolitical ambitions through closer trade ties. You are a significant gamble.

The measures were unveiled days before China’s party congress, when attention focused on the coronation of Xi Jinping as essentially life ruler of an increasingly authoritarian fortress China. Regardless of intent, it’s hard to imagine how Beijing would view the controls as anything other than a provocation, even as Washington seeks to downplay fears of a cold tech war.

The White House formulated the measures as an attempt to curb the use of high-end chips by the Chinese military. It is understandable that the US would want to tone down the military ambitions of an increasingly assertive and nationalistic rival. Russia’s invasion of Ukraine and the economic woes felt around the world as a result of soaring energy prices have prompted the wisdom of reliance on regimes that are potential adversaries to be reconsidered. But the dual-use nature and ubiquity of chips in everyday life – it’s not for nothing that semiconductors are called the new oil – means that the implications of this action are more far-reaching.

The comprehensive 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”, i.e. 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, let alone those in the US and China. The scope of the measures – especially with regard to US persons – must be determined more precisely.

As things currently stand, such measures harbor real risks. One is China’s retaliation in kind, perhaps for rare metals vital to the modern technology-dependent economy. China, for example, processes 65 percent of the world’s lithium.

The US sanctions would be the least concern of the world if China ever decides to use force to reunite with Taiwan, which dominates the world’s advanced semiconductor manufacturing. The US Navy chief has warned that China could invade the island nation before 2024. Aside from the misery of war inflicting on Taiwan, losing access to Taiwanese chips would affect the supply and price of everything from computers to cars. A Chinese invasion would also unleash a wave of sanctions, which in turn would hit interconnected economies. This would be an order of magnitude greater than the disruption caused by the war in Ukraine. The hope must be that Russia’s botched invasion and the West’s response have made China think.

US semiconductor measures come as other economies and business seek to calibrate ties with China. Bankers, says the UBS chairman, are “all very pro-China”. Olaf Scholz, Germany’s Chancellor, met Xi in Beijing on Friday in a sign of Germany’s continued dependence on China and its failure to learn from the mercantilism that has made it difficult to shake off Russia’s stance.

The US, too, will need to be able to justify its “Made in America” ​​pomp. The company may have already spent billions of dollars building domestic chip manufacturing facilities, but analysts estimate it will require up to $1.2 trillion in upfront costs and then another $125 billion per year to fully localize production-level supply chains of 2019 to create during a livelihood crisis. The bill for decoupling the economies of China and America will come at a heavy cost.

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