In October 2022, the United States took the decision 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 posing 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.
To implement these restrictions, the U.S. government invoked the Foreign Direct Product Rule (FDPR), which allows the U.S. to extend export controls to foreign products manufactured with American technology. The use of FDPR was significant because it allowed the U.S. to control the sale of semiconductor equipment to China that is produced by foreign companies but includes American technology. This compelled foreign industry leaders to comply with the U.S. restrictions, effectively cutting off China’s access to vital segments of the semiconductor supply chain. The U.S. government recognized that imposing unilateral restrictions could have negative long-term effects, but still proceeded with the plan. To offset the potential risks and costs of this approach, the U.S. sought support from its allies to limit China’s advances in the semiconductor industry. This effort led to successful persuasion of Japan and the Netherlands to restrict China’s access to advanced semiconductor manufacturing equipment. As a result, these countries are preparing their own controls in accordance with the deal.
However, the U.S.’s unilateral approach has caused friction with its allies, particularly the Netherlands. The U.S. may have overplayed its position in the semiconductor supply chain, potentially leading foreign companies to establish independent supply chains and replicate U.S. technology. This could undermine the U.S. position in the global semiconductor market and result in the loss of market share and revenue. It may also damage the U.S.’s relationship with its allies and weaken the ability to cooperate on future strategic initiatives. Despite these potential consequences, the U.S. government proceeded with its unilateral approach due to concerns about China’s increasing dominance in the semiconductor industry.
In order to strengthen the restrictions it imposed on China’s chip industry in October of last year, the U.S. government is said to be working in coordination with both Japan and the Netherlands. This collaboration is aimed at preventing China from finding ways to circumvent the export controls that have been put in place. While it is still unclear how China will respond to these export controls, the U.S. is taking a proactive approach to ensure that its restrictions are effective in limiting China’s access to advanced semiconductor manufacturing equipment. Despite the efforts made by the U.S. government, loopholes in its export controls have made it possible for Chinese companies to soften the blow of the restrictions on some chip-dependent industries. Some Chinese firms have been able to purchase chips through subsidiaries, and others have been able to access processing power provided by advanced Western chips through cloud providers and rental arrangements. This has enabled them to continue to develop their own semiconductor industry, albeit at a slower pace than they would have liked.
The U.S. is aware of these loopholes and is taking steps to address them. However, it is important to note that export controls can be difficult to enforce, particularly when dealing with a country as large and complex as China. It is possible that China will continue to find ways to circumvent the restrictions, which could further escalate tensions between the two countries. In the short term, it is likely that China will continue to search for ways to circumvent the restrictions placed on its chip industry by the U.S. government. This is because China views the development of its own semiconductor industry as a key strategic priority, and will not want to be overly reliant on foreign technology. Therefore, it will seek to build up its domestic chip design and manufacturing capabilities as quickly as possible.
However, China may also begin to target U.S. chip firms in areas where foreign alternatives exist. This could involve retaliatory measures that could harm the U.S. semiconductor industry and potentially impact the global supply chain. The U.S. government will need to remain vigilant to these potential threats and work closely with its allies to mitigate any negative impacts. Furthermore, as the U.S. continues to tighten restrictions and close loopholes, there is a risk that China may retaliate 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. As such, 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 U.S. considers the potential long-term impacts of its actions and works closely with its allies to achieve its goals without causing unnecessary harm. The U.S. must balance its strategic objectives with the need to maintain strong economic ties with China, while also ensuring that it remains competitive in key high-tech sectors. This will require a nuanced and carefully considered approach to managing the complex relationship between the two countries.