If the Ukraine situation is one kind of warfare, even though Russian President Vladimir Putin still refers to it as a “special military operation”, the recent US action targeting China and semiconductors amounts to full-scale economic warfare.
This is despite the superficially more friendly atmosphere at last week’s G20 meeting in Bali.
In this regard, it would now seem crystal clear that the US, enabled by a bipartisan consensus in Washington, is determined to stop China upgrading technologically, which has potentially massive implications for Beijing’s ambitions in areas such as artificial intelligence and autonomous driving.
The 139-page report released by the Department of Commerce’s Bureau of Industry and Security on 7 October is heavy on detail (see The Wall Street Journal article: “US Restricts Chip Exports To Slow China”, 8 October 2022).
Going forward US companies will need to gain export licences to sell to China.
The stated rationale for this action is that China’s ability to make advanced chipsets will enable it to produce “weapons of mass destruction”.
Another point about the latest US Department of Commerce move is that it targets not only US companies’ involvement in selling tech products to China but also US persons (i.e. anyone with a US passport or green card).
This puts the many founders of Chinese tech companies who were educated in the US, and acquired a US passport on the way, in a seemingly difficult position.
It will also make it much harder for Chinese tech companies to attract talent.
Similarly, R&D laboratories set up by some Chinese companies in the US now look vulnerable.
Alibaba has research labs in Seattle and Silicon Valley while Tencent also has a research lab in Seattle.
All of the above makes it clear the extent to which China is seemingly now treated as an enemy, which is why the direction of travel is for US private capital to be banned from investing in Chinese technology.
US Pressure is Turning to those Supplying China with Chips
Meanwhile, the assumption in the markets is that US pressure will be brought to bear to stop Holland’s ASML, the semiconductor equipment company, and relevant Japanese companies from supplying China.
Indeed the latest measures amount to a far bigger deal than the original attack on Huawei by the Trump administration in 2019-2020, which was effective in demolishing the company’s handset business but not its business of supplying 5G mobile network equipment.
In fact, it has claim to be the most direct attack on globalisation this writer has seen yet.
Indeed it is now more relevant to talk about the growing balkanization of the world economy as opposed to the move away from globalisation.
What is clear is that this latest move goes far beyond what used to be called “containment”.
It also raises the issue of how long Beijing continues to turn the other cheek since, so far, it has done nothing to make life difficult for American companies operating in China, save for its Covid restrictions, on the view that it wants to keep encouraging foreign direct investments.
China, for example, earlier this year allowed the extension of licences for US casino operators in Macau.
The Macau government officially extended in late June six casino licences for six months to the end of December, including those held by Wynn Macau, Sands China and MGM China.
But at a certain point turning the other cheek may start looking weak to the Chinese population, just as not responding to US escalation on the Taiwan issue would.
TSMC Semiconductor in the Crosshairs of World Leaders
Meanwhile, the recent announcement also has implications for TSMC and other Taiwan companies given the amount of semiconductors Taiwan exports to the mainland.
According to China Customs data, Taiwan’s chip (integrated circuits) exports to China totaled US$155bn in 2021 and US$134bn in the first ten months of 2022, and accounted for 36% and 38%, respectively, of total Chinese chip imports.
So, for now at least, China remains dependent on imported chips from Taiwan.
China imports of chips (integrated circuits)
Source: General Administration of Customs
The Commerce Department’s move is also why the most interesting aspect of Nancy Pelosi’s much discussed Taiwan trip in early August was her meeting with TSMC founder Morris Chang and chairman Mark Liu, most particularly in the context of legislation on semiconductors passed by Congress in late July which provided US$52.7bn in subsidies to encourage chip manufacturers to build factories in America.
By the way, both Chang and Liu have US passports.
TSMC is already building a fab in Arizona.
Construction of the factory started in June 2021 and its main facility is now reportedly completed, while production is scheduled to begin in 2024.
Under the legislation TSMC will be required to transfer its technology to the US.
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