Chip War v2: US Decoupling from China or Declaring War by Other Means?

The United States has gambled big in its latest across-the-board sanctions on Chinese semiconductor companies, believing it can kneecap China and retain its global dominance. From the globalisation and “free trade” slogans of the neo-liberal nineties’, it has reverted to the good old technology denial regimes it followed during the Cold War with its allies. While it might slow down Chinese advances in the short run, losing China—its biggest market—will have significant consequences for its semiconductor industry. In the process, the semiconductor industries of Taiwan and South Korea and equipment manufacturers in Japan and the European Union are likely to become collateral damage. It reminds us of what Kissinger said: “To be an enemy of the United States is dangerous, but to be a friend is fatal!”

After the earlier sanctions in August 2021, these second-generation sanctions aim to restrict China’s ability to import advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Though cloaked in military terms—denying China access to technology and products that can help its military—in reality, the sanctions target almost all leading semiconductor players in China and, therefore, its civilian sector. The fiction of “barring military use” is only to provide the fig leaf of a cover under the WTO exceptions on having to provide market access to all WTO members. Most military applications use older generations of chips and not the latest versions.

What are the specific sanctions?

• Advanced logic, such as AI and High-Performance Computing chips

• Equipment for 16nm logic chips and non-planar logic chips include FinFET and Gate All Around, required for the most advanced chips

• Memory chips: NAND with 128-layers or more and DRAM with 18nm half-pitch, again the latest generations of memory chips

The specific equipment bans go even further to include many older technologies. For example, one commentator pointed out that the prohibition of tools is so broad that it includes technologies used by IBM in the early nineties!

The sanctions also encompass any company that uses United States technology or products in its supply chain. This is a provision in its laws: any company that “touches” it while manufacturing its products automatically comes under its sanctions regime. It is a unilateral extension of the United States’ national legal jurisdiction and can be used to punish and crush any entity—a company or another institution—directly or indirectly linked to it. These sanctions are designed to completely decouple the supply chain of the United States and its allies—the European Union and East Asian countries—from China.

The other part of the latest sanctions, apart from specific companies already on the sanctioned list of Chinese companies, is adding 31 companies to an “unverified list”. These companies must provide, within two months, complete information to United States authorities, or they will be barred as well. Furthermore, no United States citizen or one domiciled in the United States can work for those sanctioned or unverified companies, not even to maintain or repair equipment supplied earlier.

How big is the global semiconductor industry? What are the likely consequences of the sanctions?

The semiconductor industry is currently more than half a trillion dollars and is likely to double to over one trillion by 2030. According to a Semiconductor Industry Association and Boston Consulting Group Report—Turning the Tide for Semiconductor Manufacturing in the US—China is expected to account for approximately 60% of that growth, displacing the United States as the global leader. This is the immediate trigger for the sanctions; they attempt to halt China’s industry from taking over the lead from the United States and its allies.

While the above measures intend to isolate China and limit its growth, what is the downside to these sanctions for the United States and its allies?

The problem for the United States—more so for Taiwan and South Korea—is that China is their biggest trading partner! Imposing wide sanctions on equipment and chips means destroying a good part of their market with no prospect of immediate replacement. This is true not only for China’s East Asian neighbours but also for equipment manufacturers like a Dutch company that is the world’s only supplier of Extreme Ultra Violet (EUV) lithographic machines that produce the latest chips. For Taiwan and South Korea, China not is not only the biggest export destination for the semiconductor industry but also its other exports and its biggest supplier for a range of products. The forcible separation of its supply chain in the semiconductor industry will likely be accompanied by separation in other sectors as well.

American companies—equipment manufacturers such as LAM, Applied Materials, and KLA Corporation; the electronic design automation (EDA) tools such as Synopsys and Cadence; and advanced chip suppliers such as Qualcomm, NVidia and AMD—are also likely to see a big hit to their bottom line. China is the largest destination for all these companies. The problem for the United States is that China is not only the fastest-growing part of the world’s semiconductor industry but also its biggest market. So the latest sanctions will cripple not just the Chinese companies on the list but also its own semiconductor firms, drying up a significant part of their profits and, therefore, future investments in research and development. While some of the resources for investments will come from the United States government, for example, the $52.7 billion chip manufacturing subsidy, it does not compare to the losses the semiconductor industry will suffer due to these sanctions. This is why the semiconductor industry had suggested narrowly targeted sanctions on China’s defence and security industry, not the sweeping sanctions now introduced; the scalpel and not the hammer.

The sanctions regime and separating the global supply chain are not news. The United States and its allies had a similar policy toward the Soviet Union during the Cold War. It was called the Wassenaar Arrangement, and its purpose is very similar to what the United States has now introduced for the semiconductor industry. In essence, it was a regime of technology denial to any country the United States considered an “enemy”, with its allies dittoing then as now what the United States dictates. The targets on the export ban list were not only specific products but also the tools that could be used to manufacture them. Not only the socialist block but countries such as India were barred from advanced technology, including supercomputers, advanced materials, and precision machine tools.

Under the Wassenaar Arrangement, the critical equipment required for India’s nuclear and space industries was completely banned. Though the arrangement still exists, with countries like Russia and India now within the tent, it has no teeth. The real threat comes from falling out with the United States sanctions regime and its interpretation that American laws supersede international law, including WTO rules!

The advantage the United States and its military allies—in NATO, SEATO and CENTO—had then was that it and its European allies were the biggest manufacturers. The United States also controlled West Asia’s hydrocarbon—oil and gas—a vital resource for all economic activities. The current chip war against China is being waged when China has become the biggest manufacturing hub and the largest trade partner of 70% of countries. With the OPEC countries no longer obeying its diktats, the United States has lost control of the global energy market.

So why has the United States started a chip war against China when its ability to win is limited? It can, at best, postpone China’s rise as a global peer military power and the biggest economy. An explanation lies in what the military historians claim as the Thucydides Trap: when a rising power rivals a dominant military power, it leads to war in most cases. According to Thucydides, the rise of Athens led to Sparta, then a dominant military power, going to war against it, destroying both—therefore, the trap. While other historians have disputed such claims, when a dominant military power confronts a rising one, it does increase the chance of a physical or economic war. If the Thucydides Trap between China and the United States restricts itself to only an economic war—the chip war—we should consider ourselves lucky.

One issue now settled with the United States’ new sanctions is that the world of neo-liberal free trade is officially over. The sooner countries like India understand it, the better for their people. And self-reliance means not simply the fake self-reliance of local manufacture, what the BJP government calls Make in India, but true self-reliance: developing the technology and knowledge for making in India.