China has prospered as businesses in the Western World tapped into its cheap labour market, but the Covid-19 pandemic, geopolitical tension and a shift towards national security has led to the US imposing strict restrictions on the export of US high-tech.
In August, US president Joe Biden signed into law the Chips and Science Act of 2022, which aims to make the semiconductor supply chain in the US more resilient to counter China. As part of this move to spur on the US semiconductor industry and curb China’s influence, the White House announced $50bn in additional funding for the US semiconductor industry. According to the White House, these funds come with “strong guardrails, ensuring that recipients do not build certain facilities in China and other countries of concern”.
Since the Chip Act became law, the US has been steadily ramping up pressure on China.
On October 7, the Bureau of Industry and Security (BIS) at the US Department of Commerce announced new restrictions limiting China’s ability to both purchase and manufacture certain high-end chips used in military applications.
Alan Estevez, under secretary of commerce for industry and security, said: “As I told Congress in July, my north star at BIS is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence and security services. The threat environment is always changing, and we are updating our policies today to make sure we’re addressing the challenges posed by the PRC while we continue our outreach and coordination with allies and partners.”
The export controls also impact companies exporting any semiconductor manufacturing equipment to China. According to the Financial Times, LAM Research, Applied Materials and KLA Corporation have ceased supplying equipment to Chinese semiconductor fabrication plants (fabs).
In a tweet of an internal email sent to staff at ASML, a pioneer in extreme ultraviolet lithography equipment used for “printing” semiconductors, the company wrote: “ASML US employees must refrain – either directly, or indirectly – from servicing, shipping or providing support to any customers in China until further notice, while ASML is actively assessing which particular fabs are affected by this regulation.”
BIS also added 31 Chinese-based organisations to its Unverified List (UVL) for export controls. This action was taken because BIS said it was unable to verify the legitimacy and reliability relating to the end use of items subject to export restrictions. In a document published on 13 October, BIS stated: “Sometimes these checks, such as a pre-license check (PLC) or a post-shipment verification (PSV), cannot be completed satisfactorily for reasons outside the US Government’s control.”
Thea D Rozman Kendler, assistant secretary of commerce for export administration, said: “The PRC has poured resources into developing supercomputing capabilities, and seeks to become a world leader in artificial intelligence by 2030. It is using these capabilities to monitor, track and surveil their own citizens, and fuel its military modernisation. Our actions will protect US national security and foreign policy interests while also sending a clear message that US technological leadership is about values as well as innovation.”
The Semiconductor Industry Association, which represents over 90% of US chipmakers and two-thirds of global semiconductor firms, said: “We are assessing the impact of the new export controls on the US semiconductor industry and working with our member companies and the US government to ensure compliance. We understand the goal of ensuring national security and urge the US government to implement the rules in a targeted way – and in collaboration with international partners – to help level the playing field and mitigate unintended harm to US innovation.”
Nvidia is one of the major US chip providers whose technology is subject to export restriction controls. The company said that since it was already subject to broader industry controls, it did not expect the new controls, including restrictions on sales for highly dense systems, to have a material impact on its business.
At the time of writing, during the China Communist Party Congress, China appears to have remained quiet on the latest actions by the US administration. However, The New York Times reported that in his opening speech at the conference, Chinese leader Xi Jinping spoke about self-reliance on core technologies, which suggests that China will embark on a programme to build out a national tech sector that does not require components or equipment from Western businesses.
While the US government has put forward the security argument as the main reason behind the semiconductor export restrictions to China, the ramifications are far wider for a country that is building out a society encompassed in technology. In October 2021, McKinsey’s The future of digital innovation in China paper reported that in 2020, China had 989 million internet users – over three times more than the US – and that almost half of the world’s smart cities are in China.
Clearly, if China is unable to buy in the technology it requires, it will need to develop its own alternatives.