US export controls on semiconductors: implications for the global economy
On October 7th, the United States Department of Commerce’s Bureau of Industry and Security (BIS) announced a measure that is highly likely to reshape global value chains. The BIS has updated its export controls to unprecedented levels with the goal of diminishing China's advanced semiconductors production and purchasing capabilities.
The BIS document explains this decision on national security grounds, stating that the People’s Republic of China (PRC) is using American advanced semiconductor technologies to “produce advanced military systems including weapons of mass destruction”. Due to the strong connection between China's military and commercial industries, the most effective means to contain China's military capabilities is a complete restriction on advanced semiconductor exports. China is the largest single-country semiconductor market, so this measure will have costly implications for US companies in hindering their access to a crucial market.
Why has the BIS taken such measures?
The reason for the measures may be found in certain US official documents released in the last months. In September, National Security Advisor Jake Sullivan said, regarding certain key technologies—including advanced logic and memory chips—the US “must maintain as large of a lead as possible”. With regard to this, the National Security Advisor sustained that the US needed to “revisit the relative advantage premise”, an approach that “said we need to stay only a couple generations ahead”. Given the shift in the “strategic environment”, Sullivan claimed that the US must change its strategy by actively deploying resources such as export controls in order to keep its competitive advantage over China as large as possible.
Additionally, Biden's Administration National Security Strategy (NSS), released just a week after the export controls, also explains the BIS measures. This document clearly states that the US perceives the PRC as the ‘most consequential geopolitical challenge’. As such, the NSS underpins the American strategy to outcompete China. Technology is one of the key areas considered in the document, and export controls are prescribed as a strategic policy to preserve the US's advantage on advanced technologies.
A shift in global economy
“National security” is increasingly more prevalent in government policies than in the past. Indeed, this is a trend that will become more important in the next decade. With respect to this, Evan Feigenbaum talks about “a collision between economics and security”. His analysis underlines the move towards a world in which security concerns and geopolitical affairs will have a key role in economic decisions. The export control on advanced semiconductors and the equipment to design them reflects this trend. In fact, this trend widely explains the tech competition between the US and China that we have seen throughout the last years.
Since the late 1970s and especially after the Cold War, global value chains have worked efficiently and helped increase innovation and mass production. This phenomenon is largely explained by the offshoring of US manufacturing to East Asia, largely to China. Nevertheless, the situation in 2022 is much more complex, as the geopolitical rivalry between the US and China has reflected on value chains and effectively disrupted the world economy.
The case of semiconductors is particularly relevant, since they are vital to electronic devices, ranging from those used in everyday life, such as mobile phones or laptops, to advanced military devices like drones.
The semiconductor supply chain has gained considerable attention amid growing tensions in the Taiwan strait. In the first quarter of 2022, Taiwan accounted for 53% percent of global chip fabrication. Given the growing tensions between the US and China over Taiwan, a considerable number of semiconductor companies are rethinking their strategy, revising business continuity plans in the island.
Overall, American-Chinese competition and general geopolitical tensions have reached a tipping point, which has started to severely affect a number of business sectors, including the technology industry. This global economic trend underpins the vitality for companies to analyze and evaluate geopolitical affairs to reduce the risks and costs as well as identify new opportunities.
Wider implications of the export controls
It will be important to track the reactions and strategic shifts of American companies in response to the export controls. Second, it remains to be seen whether Washington will condition its support to traditional partners in Western Europe and East Asia on the basis of their trade ties to China's technology sector. With respect to this, it is vital to consider the relevance that companies from the Netherlands, South Korea or Taiwan have in the chip supply chain, since their support and participation in the measure is essential in order for the controls to succeed in the long run.
Two scenarios may result from the export control with regard to China's technology capabilities. The Chinese Communist Party's ‘Made In China 2025’ plan may be negatively affected by the BIS measure, in cutting China's capability to build advanced technologies requiring advanced semiconductors. This is the scenario that Washington seeks. Nonetheless, the export control may have exactly the opposite effect: some specialists argue that, in the long run, this restriction may help to boost China’s domestic advanced chip design ecosystem.
All of these implications are a major indicator of numerous developments to come out of the export controls, and that will be central to understanding the global economy in the coming years. The LP Tech and Cyber Watch will be following US-Chinese competition in the technology sector and its impact on global supply chains, providing timely analysis on developments.