U.S. Sanctions are a Huge Setback to China’s Technological Growth

Introduction

Bilateral ties between the United States and China have reached all-time lows. The ongoing, decades-long competition between the two leading global superpowers has intensified in the realms of geopolitical power, national security, and technology. In particular, one of the defining trends of this rivalry has been the intense technological competition between the two.

After a Department of Defense report detailing the ways in which China’s technological development aided the development of new military technologies (Office of the Secretary of Defense 2021), the United States approached several key allies to propose sanctioning Chinese semiconductor technology. Given the context of war in Ukraine and Chinese military drills encircling Taiwan, the Biden administration viewed stunting Chinese growth as a strategic priority (Bateman 2022). However, the U.S. and its allies were unable to reach any agreement on possible sanctions (Ali 2023). Therefore, the U.S. acted unilaterally: in October, the Department of Commerce’s Bureau of Industry and Security announced a set of nine rule changes that amounted to stifling sanctions - a sudden but not unexpected move.

Thesis

The new sanctions consist of export controls (primarily on US-built high-end AI chips, design software, and manufacturing equipment and components) and restrictions on human capital (managers and executives at Chinese chip manufacturers must choose between keeping their US citizenship or their job). Several other restrictions are also imposed on manufacturers of advanced types of Logic, DRAM, and NAND memory chips (Bown and Wolf 2022). By comprehensively attacking multiple stages of chip development, these sanctions deal a massive short-term blow to the Chinese semiconductor industry and to China’s technological development as a whole. However, these actions do raise the long-term risk of forcing domestic chip development in China, as well as generally raising tensions between the two countries.

Short-run Impact

In the short-run, the clearest impact is that China can no longer access chips designed by the United States. Currently, the U.S. manufactures just 12% of semiconductors globally, but with the CHIPS Act of 2022 funneling $52 billion into semiconductor manufacturing and research, that fraction is projected to grow (Ravi 2022). Furthermore, China may struggle to access most AI chips regardless of where they are manufactured. Chip production is a deeply specialized and integrated process: AI chips are designed in the US, manufactured in Taiwan, Japan, or South Korea, and assembled in China (Varas et al. 2021). By cutting China out of the process, the U.S. essentially aims to eliminate China from the production process of all AI chips that are designed in the US, even if they’re manufactured elsewhere. This poses a massive obstacle to China’s AI centers and military programs, both of which rely heavily on AI chips for all aspects of technological operations.

Restrictions on human capital pose yet another immediate issue. Anecdotally, companies have reported low-level workers resigning “one after another” following these new sanctions (Chang 2022). This is partially due to sanctions forcing some American workers to resign, as well workers having a generally pessimistic outlook on the future of a heavily sanctioned industry (Kharpal 2022). For company executives, the effects of sanctions are more straightforward: sanctions dictate that Chinese executives must either resign their jobs, forfeit their US citizenship, or renounce their lawful permanent residency. This mandate affects at least 43 CEOs and VPs alone, and likely affects a far greater number of managers (Lin and Hao 2022). While some have opted to keep their jobs, the sudden outflow of talent and leadership is a huge loss to Chinese technology companies whose growth depends on the quality of their workers.

This combination led one former Department of Defense official to describe the sanctions as “economic strangling with the intent to kill.” Unlike most rounds of sanctions that aim to put pressure on an industry either as punishment for some action or to incentivize a change in behavior, these sanctions have been designed for the sole purpose of dealing as much damage as reasonably possible to China’s semiconductor industry (Allen 2022).

Retaliatory Measures

The risk of retaliatory measures is relatively high, but fading fast. The United States’ technological dominance ensures that, for the time being, there is relatively little China can do by way of similar sanctions (Clarke 2022). There is certainly a risk that China could impose retaliatory sanctions on other industries, but because they have yet to do so it’s unlikely that they will do so now.

Long-run Impact

In the long-run, these sanctions will hurt China’s long-term economic growth by limiting its access to growth factors. China’s growth is dependent upon the growth of new technologies, but with everything from the technologies to the chips for the technologies to even the chip design software being off-limits (Harrison and Farrer 2022), long-term recovery will be difficult. These sanctions also significantly damage US-China relations.

To mitigate this, China might attempt to find new chip suppliers, but there are limited options to do so. While the United States designs chips that China assembles, China does not manufacture the intermediate pieces. Rather, the vast majority of chip design and manufacturing is done by U.S. allies, with 92% of advanced semiconductor manufacturing happening in Taiwan alone (Varas et al. 2021). Therefore, China will likely be forced onshore much of advanced chip manufacturing, a long and costly process (Zhu 2022). If successful, this could make China more technologically resilient and self-dependent in the long-run. If unsuccessful, then China will have needlessly lost billions of dollars.

Conclusion

Ultimately, the Biden administration’s new semiconductor sanctions are an extremely effective way to cripple the Chinese semiconductor industry for the foreseeable future. The industry simply no longer has access to the physical or human capital that it needs to stay competitive, and no perfect substitutes to the resources it has suddenly been cut off from. For the broader context of the US-China rivalry, this could tilt the scales in favor of the United States. But for China’s semiconductor industry, this is a potentially fatal blow.