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China Trying to Fight Back US Ban on Its Chip Industry

FILE - Employees work on the semiconductor chip production line of Jiangsu Azure Corp in Huaian, Jiangsu province, China, March 25, 2022.
FILE - Employees work on the semiconductor chip production line of Jiangsu Azure Corp in Huaian, Jiangsu province, China, March 25, 2022.

China is spending $143 billion to combat U.S. moves to cut off its supply of semiconductor technology.

The funds will be used to provide financial subsidies and incentives to help China's chipmakers develop and acquire semiconductor technology to withstand the U.S. move.

This is one of three measures, analysts say, taken by Beijing to protect semiconductor companies supporting its vast electronics, automotive and military hardware industries.

“China views semiconductors as a strategic resource. Therefore, it wants to become self-sufficient in all aspects of advanced chip design and manufacturing,” said Lourdes S. Casanova, director of the Emerging Markets Institute at Cornell University. “These funds are meant to build China’s capabilities towards this goal."

Washington issued an order in October barring U.S. companies from supplying semiconductor chips, chipmaking devices, and updates for past sales to Chinese companies. It also prohibited American citizens from working for Chinese semiconductor firms.

The U.S. government Thursday broadened its crackdown on China’s chip industry by adding memory chipmaker YMTC and 21 "major" Chinese players in the artificial intelligence chip sector to a Commerce Department trade blacklist. YMTC's suppliers will now be prevented from shipping U.S. goods to it without a license.

The U.S. move is likely to hit not just China's semiconductor industry, but dozens of other businesses as well, such as electronics, artificial intelligence, and automobile manufacturing that depend on U.S.-made chips from companies like Nvidia and AMD. The stakes are high. For instance, Chinese electrical vehicle makers controlled 56% of the global market in the first half of 2022. Such vehicles depend heavily on semiconductor chips.

Analysts said the U.S. order may also force non-U.S. companies using American technology to cut off support for China’s leading factories and chip designers.

China has initiated the process of challenging the U.S. order at the World Trade Organization. Its Commerce Ministry has accused the United States of “generalizing the concept of national security and abusing export control measures, which hinders the normal international trade in chips and other products.”

Non-US support

The U.S. move would be much less effective if chipmakers in other countries, particularly in Japan and the Netherlands, take advantage of the market vacuum and step up their supplies to China. This is possible because the new $143 billion package will make it possible for Chinese firms to offer higher prices. The United States is lobbying both these countries to refuse Chinese purchase orders.

China is likely to raise this issue during the expected visit of Japanese Foreign Minister Yoshimasa Hayashi to China later this month. This will be the first visit by the Japanese foreign minister to China.

“Beijing will very likely discuss the issue. It will make it clear that stopping the supply of semiconductor technology would damage China-Japan relations,” said Dexter Roberts, author, and principal of Cold Mountain, an investment management company.

Casanova said the Netherlands and other European countries will likely follow U.S. policy. “However, other countries have been more reluctant. For instance, both Mexico and Brazil did not ban Huawei as a possible supplier of telecom equipment in the 5G auctions in both countries,” she said.

It is difficult to predict Japan’s response to the U.S. request, she said. China is Japan’s No. 1 trade partner, with 22%, followed by the U.S. with 18.5%.

There are no reports of the United States trying to restrict Taiwan, its close ally, from dealing with the Chinese semiconductor industry. TSMC, the world’s largest semiconductor company, is based in Taiwan.

“China is the world's largest importer of semiconductors since 2005 and China’s semiconductor industry relies mainly on imports from the Taiwanese TSMC,” Casanova said.

Decoupling China’s semiconductor industry from the global supply chain may hurt U.S. consumers, besides taking away business from American companies that supply chips to Chinese firms.

“As the U.S. continues to ratchet up efforts to slow the development of China’s advanced chips sector, there will be an impact on global and U.S. consumers who will inevitably pay higher prices. There may be supply shortages of the many products that use chips, from autos to mobile phones and electronic devices,” Roberts said.

At the same time, the United States has realized that starving China of semiconductor technology will not be easy unless it is backed by other countries. In October, the Peterson Institute of International Economics, a Washington-based economic research organization, said semiconductor-producing countries are closely linked to each other in a supply chain.

“Each of the five major global semiconductor producers—China, South Korea, Japan, Taiwan, and the United States—is also a large chip importer. Not all chips are equal, and no producer specializes in every chip category, leaving even the largest exporters reliant on imports,” it said.

Despite the odds, the Biden administration has shown it is determined to delink the Chinese semiconductor industry from the global supply zone. The trade war in the chip industry is set to intensify because chips are central to China’s security and industrial growth plans, analysts said.