Challenges and Risks in the US-China Semiconductor Industry – ET Telecom

New Delhi: In October 2022, the United States agreed to implement comprehensive restrictions on the export of advanced semiconductors and semiconductor manufacturing equipment to China. The move was driven by concerns about China’s aggressive pursuit of technological dominance, which was seen as a serious threat to American competitiveness and national security. These concerns were rooted in China’s ambitious plans to become a global leader in advanced technologies such as artificial intelligence, 5G networks and high-performance computing, Geopolitica reported.

To implement these restrictions, the United States invoked the Foreign Direct Product Rule (FDPR), which allows the United States to extend export controls to foreign products manufactured with American technology. The use of FDPR was significant because it allowed the United States to control the sale of semiconductor equipment to China that was manufactured by foreign companies but includes American technology.

This forced foreign industry leaders to comply with US restrictions, effectively cutting off China’s access to vital segments of the semiconductor supply chain. The United States has acknowledged that imposing unilateral restrictions could have negative long-term effects, but has gone ahead with the plan, Geopolitics reported.

To offset the potential risks and costs of this approach, the United States has sought support from its allies to limit China’s advances in the semiconductor industry. This effort led to the success of persuading Japan and the Netherlands to limit China’s access to advanced semiconductor manufacturing equipment. Consequently, these countries are preparing their own controls in accordance with the agreement.

However, the unilateral US approach has caused friction with its allies, especially the Netherlands. The US may have overestimated its position in the semiconductor supply chain, potentially leading foreign companies to establish independent supply chains and replicate US technology.

This could undermine the US’s position in the global semiconductor market and result in the loss of market share and revenue. It could also damage US relations with its allies and weaken the ability to cooperate on future strategic initiatives. Despite these potential consequences, the United States has continued with its unilateral approach due to concerns about China’s growing dominance of the semiconductor industry.

In order to tighten restrictions imposed on China’s chip industry in October last year, the United States is said to be working in coordination with both Japan and the Netherlands. This collaboration is intended to prevent China from finding ways to circumvent export controls that have been put in place.

While it is not yet clear how China will respond to these export controls, the United States is taking a proactive approach to ensure its restrictions effectively limit China’s access to advanced semiconductor manufacturing equipment. Despite US efforts, loopholes in export controls have allowed Chinese firms to soften the blow of restrictions on some chip-dependent industries.

Some Chinese companies have purchased chips through subsidiaries and others have been able to access the processing power provided by advanced Western chips through cloud service providers and rental agreements. This allowed them to continue developing their semiconductor industry, albeit at a slower pace than they would have liked.

The United States is aware of these loopholes and is taking steps to address them. However, it’s important to note that export controls can be difficult to enforce, particularly when dealing with a large and complex country like China. It is possible that China will continue to find ways around the restrictions, which could further escalate tensions between the two countries.

In the near term, China is likely to continue to look for ways to circumvent restrictions placed on its chip industry by the United States. This is because China sees the development of its semiconductor industry as a key strategic priority and will not want to be overly dependent on foreign technology.

Therefore, it will try to develop its domestic chip design and manufacturing capabilities as quickly as possible.

However, China may also start targeting US chip companies in areas where foreign alternatives exist. This could result in retaliatory measures that could harm the US semiconductor industry and potentially impact the global supply chain.

The United States will need to remain vigilant about these potential threats and work closely with its allies to mitigate any negative impacts. Additionally, as the United States continues to tighten restrictions and plug loopholes, there is a risk that China could strike back in areas where it has significant leverage, such as rare earth mining and processing.

Rare-earth elements are essential components in many high-tech products, including semiconductors, and China is currently the world’s largest producer of these elements. Therefore, any disruption to the global supply of rare earth elements could have serious implications for the semiconductor industry and other high-tech sectors.

Therefore, it is important that the United States consider the potential long-term impacts of its actions and work closely with its allies to achieve its goals without causing unnecessary harm. The United States must balance its strategic goals with the need to maintain strong economic ties with China while ensuring it remains competitive in vital high-tech sectors.

This will require a nuanced and carefully considered approach to managing the complex relationship between the two countries.