The United States continues to use economic sanctions as one of the most impactful weapons in its geopolitical arsenal – a fact no country knows better than China. The Joe Biden administration recently placed heavy restrictions on semiconductor chip exports to China in a bid to maintain the US’ technological leadership. Under these sweeping sanctions, companies using US semiconductor technology cannot sell to China. The rules also impose restrictions on US citizens, residents, and green-card holders, banning them from working in Chinese-owned chip firms. 

While many see this as a geopolitical masterstroke, there is an unseen facet to the US strangling China’s chip manufacturing sector. Due to China’s large amount of human capital and body of intellectual property regarding semiconductor manufacturing, this might end up working against the US in the long run. 

Why the ban? 

In 2000, President Bill Clinton signed a historic trade act titled the ‘US-China Relations Act of 2000’. The Act granted Beijing permanent normal trade relations with the United States, resulting in a trade increase of $5 billion a year to a whopping $231 billion a year. This was one of the main factors that catapulted China to the position of the world’s manufacturing capital. 

Chinese capabilities to develop and manufacture technologies have far surpassed the capabilities of the United States. This not only alarmed regulators, but also presented a geopolitical problem for the US, as high-tech chips are required for the next paradigm of military technology. The Biden administration then scrambled to cripple China’s tech manufacturing capabilities as a measure to reduce Beijing’s power in the global geopolitical stage. 

US regulators were also spurred to take drastic measures regarding their dependency on Chinese capabilities.  China’s zero-COVID policy has also exacerbated the semiconductor shortages caused by the first few waves of the pandemic, forcing the US and its Western allies to rethink their geopolitical stance on China. 

The semiconductor ban is the latest in the series of hostile regulatory moves the US is making on China. Standing with the US are its close allies Japan and the Netherlands, which have banned the sale of equipment used to fabricate ICs and lithographic chips, respectively. These moves together represent a concerted effort to stop Chinese chip manufacturing in its tracks. However, China has a history of coming out swinging when it has its back against the wall. 

Why the ban is a success for China

While the short-term impact of the ban will undoubtedly be felt across the Chinese semiconductor manufacturing ecosystem, China might end up being the winner in this standoff. A good example of this was the trade war between US and China, which started in 2016 with the rise of the Trump administration. Even though the United States imposed stringent tariffs on various facets of the Chinese manufacturing sector, China reported a record trade surplus of $323.32 billion in 2019 during the peak of the sanctions. 

While COVID, semiconductor shortages and the zero-COVID policy have since eroded this strong trade position, US companies are reeling from the impact of localising manufacturing and rising costs while China has come out relatively unscathed. While the true winners were countries who stepped in to fill the void left over by China, like Vietnam and India, the US seems to have lost more than China. 

We might see a similar pattern repeat with the stringent semiconductor ban, as China has already begun to ramp up production of chips. TSMC cannot provide chip manufacturers using the 28-nanometer process or below, as these are the only techniques that come under the new sanctions. However, China’s homegrown chipmaker, Semiconductor Manufacturing International Corp, has begun moving towards sub-10nm manufacturing techniques despite the ban. This is one of the most important advancements when it comes to consumer hardware, as this will allow Chinese chipmakers to manufacture competitively-powerful CPUs and GPUs. China also incentivised homegrown semiconductor manufacturing in the 2010s, leading to a boom in chipmakers in the country. At last count, there are 18 GPU manufacturers in the country. 

While many Chinese nationals have been accused of intellectual property theft of chipmakers’ trade secrets, the capability of the Chinese market to adapt to US’ stringent norms is undeniable. As with other moves in the past, the regulators and private sectors are moving as one, with news emerging that the Chinese government is also readying a semiconductor industry support package worth $143 billion. 

These incentives, bolstered by China’s push towards self-sufficiency, can be the formula China needs to create a self-sustaining semiconductor market. Currently, Chinese GPU makers licence intellectual property for designing semiconductor microarchitectures for GPUs, but a tighter integration between the market and regulators may change that.