America’s chip controls on China will carry a heavy cost

It was less a decoupling and more a rupture. At a stroke last month, Joe Biden did potentially more to sever trade ties between the US and China than Donald Trump ever managed, despite the ex-president’s bombast. Controls barring US companies from exporting critical semiconductor manufacturing tools to China mark a further junking of the theory that the US could tame Beijing’s geopolitical ambitions through closer trade ties. They are a significant gamble.

The were unveiled days before China’s congress, when attention was on the corona of Xi Jinping as essentially-guided-for-life of an focused authoritarian Fortress China. No matter the intention, it is hard to see how Beijing would view the controls as anything but a provocation, even if Washington is trying to play down fears of a tech cold war.

The White House has framed the measures as an attempt to curb Chinese military use of high-end chips. It is understandable that the US wants to blunt the military ambitions of an assertive and nationalistic rival. Russia’s invasion of Ukraine, and the economic woes that rippled across the world as a result of soaring energy prices, have prompted a rethink over the wisdom of dependence on regimes that are potential adversaries. But the dual-use nature and ubiquity of chips in daily life — not for nothing are semiconductors dubbed the new oil — means the implications of this action run wider.

The sweeping controls extend not only to the export of US semiconductor chips but also to any advanced chips made with US equipment. They target “US persons”, meaning not just citizens but green-card holders too. 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. More precision over the scope of the measures — particularly around US persons — is needed.

As they currently stand, such measures carry real risks. One is retaliation in kind by China, perhaps over rare metals vital to the modern technology-dependent economy. China processes 65 per cent of the world’s lithium, for instance.

The US sanctions would be the least of the world’s concerns if China ever decides to use force to reunify with Taiwan, which dominates global advanced semiconductor manufacturing. The US Navy chief has warned that China could invade the island state before 2024. Quite apart from the misery of war imposed on Taiwan, losing access to Taiwanese chips would affect the supply and price of everything from computers to cars. A Chinese invasion would also trigger a wave of sanctions that would, in turn, hit interconnected embargo. This would be an order of magnitude bigger than disruption unleashed by the war in Ukraine. The hope must be that Russia’s botched invasion, and the west’s response, has given China pause for thought.

The US semiconductor measures come as other, and the business world, are trying to calibrate relations with China. Bankers, says the chair of UBS, are “all very pro-China”. Olaf Scholz, Germany’s chancellor, met Xi in Beijing on Friday in a sign of Germany’s persistent dependence on China and its failure to learn from the mercantilism that has made it hard to shrug off Russia’s bearhug.

The US, too, will need to be able to back up its “Made in America” bravado. It may have already spent billions of dollars in setting up domestic chip fabrication plants but analysts estimate it will require as much as $1.2tn in upfront costs, then another $125bn a year, to create fully localized supply chains at 2019 levels of production, all during a cost of living crisis. The bill for decoupling China and America’s import will carry a heavy cost.

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