Chip Wars

Published October 17th, 2022 by JMSCapitalGroup

While the Russian invasion of Ukraine has understandably captured the world’s attention, there is another feud simmering between China and the United States. Technology transfer has long been a sore spot between the two countries; now, the Biden administration announced further export controls on artificial intelligence (AI) and semiconductor technologies to China.

Gregory Allen of the Center for Strategic and International Studies argues that these interlocking measures are an unprecedented attempt to cripple many areas of Chinese technology. He delves in great detail about 4 sets of restrictions of sales to China.

First, Biden’s policy would block Chinese access to high-end chips. Previous attempts to ban sales to the Chinese military while allowing sales to commercial ventures have been difficult to enforce, given the close ties between commercial and military sectors in China. However, since halting exports of high-end chips provides great incentive for China to develop domestic AI high-end manufacturing, export controls took the second step of banning access to US-made chip design software and semiconductor manufacturing equipment. Then, to further snarl Chinese technology supply chains, US policy would then seek to block Chinese access to advanced semiconductor chips by stopping sales of such US-made semiconductor manufacturing equipment. Finally, access to US components would be blocked in order to hamper Chinese ability to create its own high-end equipment for semiconductor production. Allen’s bottom line is that US policy has shifted to actively seeking to degrade Chinese technological prowess instead of merely seeking to stay two steps ahead.

Economist Noah Smith points out that new US policy would also stop American engineers from working in the Chinese semiconductor industry, which would further inhibit Chinese ability to create domestic semiconductor manufacturing. He also argues that for US technology companies, the Chinese market is now even more fraught with complications and less lucrative, as China will likely become more determined to reduce dependence on any foreign suppliers. 

We don’t know the long-term economic impact of these AI and semiconductor conflicts. Smith speculates that due to agglomeration effects, the global manufacturing landscape may become bifurcated between China and the rest of the developed world. On the other hand, diplomat Bilahari Kausikan believes that globalization means that the US and China will not be able to decouple so easily—for instance, while the high end semiconductor market may divide into separate spheres, it may be in both US and China’s best interest to trade more freely in the less tech-heavy end of that market, given China’s manufacturing prominence in that area. Whatever the future holds, politics will influence economics—as it has with Russia’s invasion of Ukraine, and as it will with the AI and semiconductor technology race between the US and China.


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