Briefing | A daunting arsenal
America’s commercial sanctions on China could get much worse
And China could retaliate in kind
Mar 30th 2023 | BEIJING
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The chinese custom official’s suspicions were first aroused by the size of the woman’s stomach. She said she was only five to six months pregnant, yet her belly protruded as if she were close to term. When she was searched, her baby bump turned out to be fake. Inside an improvised pouch she was smuggling not drugs or weapons, but computer chips—202 of them. Since America imposed a ban on sales of certain semiconductors and related equipment to Chinese entities last year, firms in China have been running short. Imports have plunged (see chart 1). Entrepreneurial middlemen (and women) have been coming up with all manner of schemes to obtain the desired goods, and to avoid customs duties to boot.
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It is not just small operators who are feeling the effects of the sanctions. Before the new rules were imposed in October, Yangtze Memory Technologies Corp (ymtc), a big state-owned maker of memory chips, was widely seen as the Chinese firm with the best chance of becoming a global force in chipmaking. Overnight, however, it and all other Chinese firms were barred from buying the equipment they needed to make the most advanced chips. ymtc’s inability to procure this gear, in turn, has stopped it from finalising a business plan for 2023, analysts say. It may have to delay the construction of a new production facility.
The impact is reverberating through supply chains. ymtc cannot build production lines with foreign components, which means it is having to cancel orders for Chinese equipment, too, that would have gone into the same lines. It has reportedly cut orders from one local firm by 70%. It may in time be unable to fulfil orders for chips from Chinese customers. In January it began laying off workers and asked former staff to repay generous housing subsidies. Disgruntled former employees claim it is desperately trying to save cash and that its troubles stem from the sanctions.
The ultimate effect of all this will be to set back China’s chip industry. International Business Strategies, a consultancy, had previously estimated that Chinese firms would be making more than half of the chips their country needed by 2030. After the American sanctions came into effect, it lowered that forecast to 33%.
This is just what America’s policymakers want. The latest sanctions are different from past measures against China, Russia and, during the cold war, the Soviet Union. They seek to deny China access not just to advanced weapons or narrowly defined technologies, but to undermine whole industries. In a speech in September Jake Sullivan, America’s national security adviser, explained that the government wanted to hobble China’s capabilities in “foundational technologies” such as artificial intelligence, biotech and clean energy, to allow America to maintain as much of an edge as possible in these areas. Some call this plan the “Sullivan doctrine”.
FDPRgy-bargy
So far, America’s main technique for hobbling Chinese industry has been export controls using “foreign direct product rules” (fdprs). These orders, issued by the Department of Commerce, can be used to restrict the sale not just of goods made in America but also of any item made anywhere using American intellectual property. Firms that break the rules risk prosecution if they do business in America and crippling sanctions even if they do not.
The fdpr that has spurred chip-smuggling and upended ymtc was issued in October. In keeping with the Sullivan doctrine, it attempts to cut China off from the most advanced chips involved in the machine learning that underpins all ai. It also bars American engineers, and even Chinese nationals with American green cards, from working at many Chinese chip companies. This abrupt escalation, says Joerg Wuttke of the European Union Chamber of Commerce in Beijing, was tantamount to “a declaration of tech war”.
In fact, the war had already begun. America has been cudgelling Huawei, a Chinese tech firm, with various weapons, including an fdpr, since 2019. Donald Trump, the previous president, attempted to force ByteDance, another Chinese firm, to sell TikTok, an app adored by teens around the world. But America’s assault is clearly intensifying. Congress has been loudly debating a ban on TikTok. The mandarins of the commerce department and the Treasury have many more potential sanctions up their sleeves. China, meanwhile, will not sit idly by as its industries are pummelled. And, as in any conflict, bystanders are being pulled into the fight.
How far will the battle escalate and how severe will the damage be? At the very least, the fighting will force a drastic reorganisation of supply chains in the $570bn market for computer chips. It may well spill into other industries such as clean technology, biotech and even agriculture. It will in effect split the world into two distinct and mutually exclusive blocs for many products, and thus undo many of the gains brought about by globalisation. And it will harm the companies and countries that are forced to choose between the two rivals.
