Wars, wars everywhere.
Lost in the macabre daily news flow out of Ukraine Monday was what one analyst described as the onset of a “full-scale bilateral economic cold war” between the world’s two superpowers.
Semiconductor stocks were hit on the heels of new US export restrictions aimed at further curtailing China’s capacity to advance critical domestic tech initiatives, including AI development and supercomputing.
Although the chip wars aren’t new, the restrictions are news. Unveiled late last week by the Biden administration, they marked a serious escalation, which some industry experts believe is likely to trigger retaliation. For the industry itself, the heightened tensions are insult to injury at a time when global demand is decelerating rapidly. Just last week, AMD preannounced Q3 results. The news wasn’t good.
The SOX was on track for its largest two-session loss of the year (figure above).
In simple terms, the US wants to stop China in its tracks on the road to developing a domestic chip industry, thereby hampering Beijing’s efforts to build out an already sprawling surveillance state and impeding the enhancement of the PLA’s multi-faceted war-fighting capabilities. More specifically, Washington is actively trying to prevent Beijing from building advanced semiconductors by, among other things, restricting the sale of related machinery. As usual, the Commerce Department initiative will depend on cooperation from America’s “partners” abroad. I don’t think I’m stretching the truth to suggest the US will resort to coercion if necessary to compel compliance.
“The restrictions… follow extensive US government consideration of the impact of advanced computing ICs, ‘supercomputers’ and semiconductor manufacturing equipment on enabling military modernization, including the development of weapons of mass destruction and human rights abuses,” the Commerce Department said. “The Government of the People’s Republic of China has mobilized vast resources to support its defense modernization, including the implementation of its military-civil fusion development strategy, in ways that are contrary to US national security and foreign policy interests.”
The measures are conceptually (i.e., in spirit) similar to some of Donald Trump’s initiatives centered on Huawei, but the Biden administration appears to be casting a much wider (drag)net. Any company seeking to supply China with advanced chips or equipment necessary to produce them will need a special license, and most such requests will be denied, according to Biden officials.
China’s rapidly-advancing AI industry depends heavily (you might even say entirely) on foreign-designed chips. The country’s supercomputers run on Intel or TSMC technology. I assume the latter would be covered under Biden’s new rules. In fact, no company, anywhere in the world, which uses US technology in its production processes, will be allowed to sell AI or supercomputing chips to China.
Ostensibly, the measures are tailored such that the impact falls mostly on military applications and Xi’s surveillance apparatus, but Chinese corporates will surely be collateral damage. Affected industries could include autonomous vehicles, gene sequencing and, one assumes, anything that relies on algos. It’s hard to see how any major tech company, including social media giants like ByteDance, can compete if their access to the best AI technology is inhibited.
Plainly, there’s a revenue risk for US corporates, and it’s also possible the measures could backfire to the extent they accelerate China’s domestic initiatives. The Chinese are an exceptionally capable people. That’s not to say the US should wittingly undermine its own military and industrial hegemony by selling Xi technology. It’s just to say that it’s not obvious these steps are an effective long-term strategy. As the always hyperbolic Global Times put it, in a hilariously overwrought “opinion” column,
Only arrogant and ignorant people can truly believe that the US can block the development of China’s semiconductor or other technology industries by these illegitimate means. US hegemony in science and technology that harms others without benefiting itself may bring some short-term difficulties to China’s semiconductor industry, but will in turn strengthen China’s will and ability to stand on its own.
To be sure, “some short-term difficulties” is a euphemism for “a helluva huge headache” or even “a debilitating migraine.” But the idea that the restrictions could prove counterproductive does have merit.
Dylan Patel, chief analyst at SemiAnalysis, published a lengthy take on the new measures. It’s worth a read. “The summary is that the US is forcefully decoupling the entire advanced technology supply chain before China insources it,” he said, adding that “many major Chinese companies and universities will no longer have access to the American supply chain, which includes practically every large company in Europe, Japan, Taiwan, South Korea, Singapore and India.”
According to Patel, the new export controls, alongside the addition of 31 new companies to a list of firms US suppliers can’t service because the US government isn’t able to determine where their products might end up, could “reduce global trade by hundreds of billions of dollars a year.”
The Chinese foreign ministry was irritated. The measures are unjustified, a spokesperson said, warning that the restrictions will “deal a blow to supply chains” and impede the global economic recovery. A Chinese chip researcher declared the gloves off. US politicians know “no limits” when it comes to leaning on Chinese chips, said Gu Wenjun. “They have a clear purpose and will never stop attacking,” Gu despaired. “In a word: All points of growth in Chinese chips will make the US uneasy and will be targeted.” (That’s actually 16 words, but maybe Gu’s brevity was lost in translation.)
It’s difficult to overstate the potential ramifications both at the company level and at the macro level. In late August, Nvidia said export restrictions on AI chips could jeopardize nearly a half-billion in revenue. “The Company’s outlook for its third fiscal quarter provided on August 24, 2022, included approximately $400 million in potential sales to China which may be subject to the new license requirement if customers do not want to purchase the Company’s alternative product offerings or if the [US government] does not grant licenses in a timely manner or denies licenses to significant customers,” a filing read. A day later, the company said the government did, in fact, grant key authorizations, but the adverse reaction in the shares to the original, August 31, filing was indicative of market angst. As of Monday, company and sector analysts were still attempting to assess and map the implications.
At the macro level, this is yet another manifestation of de-globalization and bloc-on-bloc economic violence. It has nationalistic overtones on both sides, and when taken in conjunction with US legislation aimed at bolstering domestic chip production, it suggests the US is keen to on-shore while preventing China from doing the same. War, both economic and otherwise, is generally inflationary.
The Global Times called the new US measures “illegal interference” with international commerce. Thankfully, the paper mused, “political intimidation can’t overwhelm market forces.” Somebody forgot to tell that to Xi.
All I can see here is a list of unintended consequences. First, historically the Chinese have been the most patient culture on the planet. They will get where they want to go, in spite of us. Hopefully not, but would these policies encourage China to move more quickly to make moves in Taiwan? Who gets punished if some company in France that has PCs with Intel chips decides to sell some stuff to China? Who will know? Too much ineffectual politics here.
Maybe not a bad time to commend Christopher Clark’s “Sleepwalkers: How Europe Went to War in 1914” to your readers. Reading recs aside, it seems to me Team Democracy, led by the U.S., has no choice. The People’s Republic of China is a hegemonic power with global ambitions — and zero tolerance for Western-style democracy. Would like to close with something optimistic on this beautiful fall day, but the saying that immediately comes to mind is: Buckle up, it’s going to be a bumpy ride.
@mfn: I’ll second the reading rec; in fact, as it’s been years and my memory isn’t what it used to be, I might just slog thru Sleepwalkers (I recall it was at times sleep-inducing) again! And I wish I didn’t agree about China – but must….and just hope that chips and technology vis-a-vis China in these ’20’s don’t end up with a similar result to our actions re: oil and natural resources to Japan in the ’30’s… Seat belts and airbags at a minimum!
I just bought it on kindle for $1.99
TBH, we should have done that ages ago.
China may try and paint itself as the victim but it was Xi who decided to cast China and the Chinese “Communist” Party in a mortal struggle with the West and liberal democracies.
Even that, them declaring themselves our enemies, we ignored. Just as we ignored Tibet and the Uighurs. We tut-tut-ed and kept doing business with self declared mortal enemies. But we cannot accept a military attack on Taiwan.
If we do, it’ll be a total free for all and no chances at all to prevent a nuclear war erupting somewhere. I’d rather have a Cold War and deal with relocating supply chains. It’s a headache but your eyeballs don’t melt under the heat of a mushroom cloud…
The first salvo fired by the US government was the CHIPS (“Creating Helpful Incentives to Produce Semiconductors Act which set aside more than $52 billion in subsidies to support secure development and adoption (in other words on-shoring or deglobalization) of trusted telecommunications technologies, secure semiconductors, secure semiconductors supply chains, and other emerging technologies.
Is such an act which is clearly a subsidy legal under WTO rules? But I guess national security concerns would squash any such argument.
The second salvo of this political and economic war is the restrictions on trade of advanced chips. If this action on export restrictions also blurs the lines of what is “legal”, is this not a second reason for the Chinese to respond in kind?
For example, China represents over 60% of world production of rare earths. The US, less than 16%. Could China restrict exports of rare earth minerals or simply cut production? The latter could be targeted to impede sales of chips not only from Taiwan Semi-Conductor coming out of Taiwan but worldwide. China is likely better able to manage the economic fallout from such an export restriction.
IMHO a very short-term win for the US. China will accelerate measures to advance their semi-conductor technologies. And China plays the long-game very well. Whereas western politicians’ time horizon is focused on winning the next election.
And China plays the long-game very well. Whereas western politicians’ time horizon is focused on winning the next election.
This is oft’ repeated ; but China, even in relative recent history, has been through plenty of upheavals – such as going Communist. So I wouldn’t rule out society altering changes if Xi mismanage stuff too much. While the West managed to stay the course to see Nazism and Soviet Stalinism crash and burn. Not so bad for decadent airheads.
The US has also seen its share of upheavals.
Are the riots on Capital Hill in Washington in January already a distant memory?
Does the US have a functional electoral system that serves its citizens or its politicians?
A US electorate that has never been more divided.
And an (oversized) US military and security complex that we may need to “defend ourselves” but can we really afford it.
IMHO the American empire successfully placed itself in the center of a global capitalist empire for several decades. Yes the US$ is the currency of the world and our military patrols the world and guarantees its status.
But this empire is now in decline. And the EU experiment is under severe strain and may fail. Power is shifting to the EAST in the coming decade.
“Power is shifting to the EAST in the coming decade….”
China’s real estate bubble has inflated from $9T to $55T over the last decade; most of that will have to be written off, bringing the Chinese banking sector to its knees. At the same time, China’s rapidly aging population is projected to fall by half by 2100 — if not sooner. The social consequences for the CCP of that trend are profound.
Russia is a second-rate power on the precipice of an internal power struggle that threatens to rival the one it experienced in the early twentieth century (1917-21).
Japan carries a huge and growing debt burden that is exacerbated by hugely negative demographic trends.
India, which is beginning to see experience seriously negative effects from accelerating climate change, is moving ever closer to autocracy and, perhaps, sectarian civil war.
You may be right about power shifting to the East in time, but for that to happen by 2030, a lot of very negative (and deeply rooted) trends are going to have to reverse themselves in a hurry.
I need to correct the China graph (via Doug Noalnd):
“Chinese bank assets reached $55T in 2022, from about $9T in 2009. And fewer and fewer observers/participants are willing to vouch for the quality of Chinese bank assets. We’ve already seen in 2022 a spectacular Chinese developer bond collapse — an industry with several trillion dollars of liabilities. China also has serious credit issues with multi-trillion local government debt instruments and multi-trillion AMCs, “asset management companies” created to clean up after the nineties bust. In addition, the Chinese currency is showing vulnerability, down over 10% YTD versus the dollar. Country Garden, China’s largest builder, only months ago viewed as a sound credit, saw its bond yields surge last week to a record 53 percent.”
MFN, I appreciate your comments and agree that China has its own set of problems and challenges, the most important of which is providing for over 1 billion citizens.
But rest assured, I for one am glad to be in the west (I am a Canadian). And am very much hoping that some worrying trends in the US and which are also present in Canada are reversed.
Other countries do not appear to be ready to take our crown just yet but the trends are worrisome.
The ability of Russia, a second rate power and a country with a GDP of less than 1.5% of the world economy, to so disrupt the world economies serves to illustrate the fragile nature of this capitalist empire.
I wouldn’t write our obituary yet. There are ebbs and flows in the lifecycle of countries/empires and the US has many natural, economic, and military advantages that won’t easily be overtaken. Most countries, especially in the West, would still prefer to be under the umbrella of the US military even if our politics have been ugly as of late.
While Trump is clearly a threat to our democracy, his cult of personality won’t easily transfer to other wannabes and he’s getting up there in age and clearly not a paragon of health. Also, despite democrats not riding the expected demographic wave to electoral victories as often as they should, demographic trends are still generally in their favor. It can be hard to keep a long-term perspective, but the whole Trump era might be a decade-long aberration. A couple sun belt states could turn reliably purple or even blue over the next couple election cycles and make it very difficult for the current iteration of the Republican party to compete at a national level.
It was not intended as an obituary.
And I am not in any way a China/East cheerleader. And very happy to be in the west, a proud Canadian and to have the US as our largest trading partner.
I hope you are right and the midterms this November in the US can unite the US electorate, accelerate the decline of the Trump era and (some day) begin to force the Republicans away from divisive politics. And maybe even an indictment of the ex-President?
this intervention became necessary and inevitable due to China’s enabling of Putin’s inhumane aggression against Ukraine…I think I’m stating the obvious here…
I wonder how much of this is to increase pressure on Xi to control his “friend” Putin. A reminder that the West and its markets and technologies are far more important to China than Russia.
China and India have been very carefully not to openly support the Russian war against Ukraine. But indirectly support it by buying cheap Russian oil/exports.
I suspect the Chinese are wary of Putin at this stage, see an ineffectual commander in chief of a weak disorganized army and a leader that is becoming more irrational and unpredictable with every passing week. But at the same time see this as an opportunity not just to increase pressure on Russia but to gain increased influence over a weakened ally.
Yes access to western markets and technologies are important. But China with a GDP of about 20 trillion (IMF figures) is certainly in the same ballpark as the 25 trillion US GDP.
They are about 2 generations behind in chip manufacturing and are the largest importer of foreign chips. Their significant investments in the semi-conductor space are ongoing, in the billions of dollars per year, and they remain focused on their goal of semiconductor autonomy.
The US should not underestimate the resources China has access to nor its resolve.
H-Man. so I guess if we need something from China for our commerce, it could be a long wait. Like waiting forever.