Chinese, US economies inextricably linked

THE purpose of US Treasury Secretary Janet Yellen’s visit to Beijing earlier this month was to convince China that Washington is carefully calibrating its actions and does not want a system-wide economic decoupling or conflict of any kind. US policies, especially those related to the tightening of technology exports to China, were driven by national security concerns and narrowly targeted. American officials accompanying her made it a point to put out the word that what the US was looking for were “stable and constructive” ties and business opportunities from the growing Chinese middle class, rather than decoupling.

The net loser could be the global industry, which depends on semiconductors for a vast range of applications.

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As of now, the Chinese are listening and taking actions which are designed to send some messages of their own. Just days before Yellen’s visit, Beijing announced controls on the exports of gallium and germanium, special metals used in a range of high-tech applications, including semiconductors and solar panels. On July 1, China announced a new counter-espionage law that expands the government’s investigatory powers. American businesses which have recently been targeted by investigators are worried about more raids and phone searches and even a ban on their leaving the country under the new provisions.

The Chinese and American economies remain deeply entangled with two-way trade at a record $ 690 billion in 2022, but they are both suffering from the fraying of their supply chains arising from the restrictive actions they are taking against each other. Imports from China to the US are showing a decline and those from Vietnam and Taiwan are growing, but some of them could be repackaged Chinese goods.

This despite the fact that countries are discovering that it is not so simple to decouple even in the area of semiconductors. Following US-China trade tensions and pandemic-induced disruptions, countries such as China, US, Europe and even India have determined that it was important to “onshore” or “friendshore” semiconductor manufacture.

In 2021, a US Chamber of Commerce report had said that a complete end of US semiconductor sales to China would cost the industry $83 billion in revenue and 124,000 jobs. The report was meant as a warning to Washington that if the whole policy of restricting technology to China was not carefully managed, there could be damaging consequences for the US as well. China is a major market for chips for cars, smartphones, dishwashers and computers and many US companies are dependent on it for their profitability. Overall, China accounts for a third of the global semiconductor sales.

An example is Micron Technologies, whose chips were recently barred by Beijing from being used in its companies that handle crucial information. Micron expects that this changed situation could affect roughly an eighth of its worldwide revenue. Yet, the company has made it clear that it plans to invest around $600 million in Xian over the next few years to support their product portfolio.

In October 2022, the US announced a series of curbs on the sale of semiconductor technology to China with the frank aim of hobbling China’s technological rise on the grounds that it was helping its military. Companies would no longer be allowed to supply advanced computing chips, chip-making equipment and other products to China.

It took China six months to retaliate. It slapped sanctions on US weapon companies such as Lockheed Martin and Raytheon, began an investigation into Micron, raided US consultancy Mintz and fined Deloitte.

Now, the semiconductor ‘war’ is underway and the results are mixed. China had already been putting in vast sums of money to fund its semiconductor industry, but in 2022, the US came up with the CHIPS Act, which put in $52 billion to subsidise a high-end semiconductor industry in the US. Likewise, countries such as Japan and India offered subsidies to establish semiconductor manufacturing units in their territories.

But factories take time to come up and in the meantime the industry works hard to adjust, both towards its profits and the new realities. Enforcing the chip ban is not easy, either. Unlike other dual use items, top-end chips are made by the millions. Smuggling them is relatively easy. Chinese companies have also been able to access the banned chips virtually through cloud services offered by cloud computing companies.

All these steps are being taken despite industry leaders such as ASML saying that it was “extremely difficult and expensive” to decouple and collaboration was the best way in the industry. Indeed, in 2022, a Nikkei Asia investigation has shown that it is extremely difficult to reproduce the architecture of the globalised semiconductor industry in a single country or a region. So, the net loser could be the global industry, which depends on semiconductors for a vast range of applications.

The US is now preparing for more restrictions on exports of AI chips to China which will affect its ability to build its AI capacity, but will also hit US companies like Nvidia and AMD. The Biden Administration is also considering restrictions on leasing cloud services to Chinese AI companies that have used such arrangements to bypass bans on the export of advanced chips. The US is also looking at the possibility of issuing an executive order to restrict American investment in China.

No doubt the Chinese will retaliate in some way and it remains to be seen how the Americans will further ‘calibrate’ their measures. In sum, there will be a further erosion of the US-China relationship. As it is, we are approaching the election season in the US and a hard line on China will be something all candidates will stress and speak about on the campaign trail. And if Donald Trump wins, all bets would be off.