Plenty of devices have nowadays gained a significant space in the life of every individual, the gadgets most importantly like mobile phones, refrigerators, televisions, laptops, etc.
Each of the above-discussed gadgets contains a tiny chip that has been ruling the world these days, it is a semiconductor, and these are highly advanced chips that help the devices to perform efficiently.
Chinese companies manufacture most of the gadgets, but China needs semiconductors from the U.S, so thinking about leading a life without these gadgets could be unimaginable, but the current scenario of a cold war between China and the U.S. seems alarming.
In this article below, I have highlighted the significance of a semiconductor and how the production of different gadgets by Chinese companies would be impacted by the export control rules imposed by the U.S.
What is a Semiconductor?
Before we get into the details of the export restrictions and their impacts, the essential thing is to know what the semiconductor is; it will be easier to understand the effects of chip shortages in China.
Semiconductors are small computer chips containing millions of components that allow a device to process, store, and function with the data centers.
The semiconductor can be called the brain of various appliances and gadgets, giving them a leading edge to function correctly.
These chips are not just basic ones; in fact, the production of advanced AI chips has led to the development of artificial intelligence that touches the highest skies.
How important are Semiconductors for Chinese Firms?
Now that it is known, what semiconductors are, it must also be understood how important they are to companies producing advanced equipment in China.
China’s tech sector is never less than any other country; it gives a leading edge competition to foreign firms regarding gadget production.
However, one of the persistent problems is the need for china’s semiconductor industry to produce semiconductors.
They make these chips but not enough to cover the demand raised in the country.
Hence, despite having Chinese semiconductor companies, they must rely on multinational firms to source the semiconductors that help them manufacture equipment.
Which Countries Supply Semiconductors to China?
When looking at the global semiconductor supply chain industry, many countries lead in manufacturing semiconductors, like South Korea, Japan, Taiwan, and the USA.
It is stated that the market share of the U.S. in advanced chip design is about 45%.
In contrast, along with Japan, U.S holds 75% of the market share in semiconductor manufacturing equipment.
On the other hand, Taiwan and South Korea hold about 25% of the market and have the latest wafer fabrication techniques in place that helps them fabricate the chips that foreign companies design.
However, a significant share of the production lies within the hands of the USA; therefore, many foreign companies that produce equipment-using semiconductors depend on the USA.
Therefore, the USA can be considered the largest global semiconductor industry in the world and comprises its own export controls.
How is China Trying to Boost Semiconductor Manufacturing?
The trade ties between China and U.S. does not seem to improve, but this still doesn’t change the fact that Chinese companies need cutting edge chips for their technological innovations.
Hence, China is looking forward to being self-sufficient by trying its best to develop semiconductors independently, yet it still needs to meet the demand completely.
The manufacturing of semiconductors in China amounted to an increase of just 5% in 2010, in contrast, when the analysis of 2020 was conducted, it was observed to have an increase of 13%.
Although this is an increase, still needs to be more to allow China’s semiconductor industry to be free from importing them from international firms.
China’s development is seamless in all fields, but to cater to them all, the essential thing amounts to be semiconductors; China, however, is looking forward to taking over various foreign firms.
The state council also suggested specific guidelines for China’s development in semiconductor manufacturing equipment; this plan was devised in 2015 and was labeled as “Made in China 2025”.
The guidelines comprised a series of priorities that were stated in four stages: chip design, semiconductors manufacturing, packing of the final product, and then equipment manufacturing.
The plan “Made in China 2025” comprised three stages: the following stages for manufacturing advanced A.I. chips to manufacture advanced equipment.
- The first stage was that Chinese supply chains meet at least 70% of the semiconductor need in China and achieve the rank of a global manufacturer of such chips by 2025.
- The second phase requires China to compete equally with other global suppliers with Chinese chip ready to serve other countries by making advanced chips.
- The third stage perceives China to be the only leading supplier of semiconductors all over the world by 2049.
What has caused the Tensions between China and U.S. to Rise?
It is not just the semiconductor technology being controlled by the U.S.; this entire situation to block China in the context of semiconductor supply chain disruptions has a history.
The primary reason that caused the trade tensions between the U.S. and China was that when it comes to technology, China is developing by leaps and bounds.
China can manufacture everything from the smallest to the largest, from household appliances to communication and entertainment gadgets, you name it, and China makes it.
This supremacy in China’s growth has been a significant threat to the U.S., and to control this, the U.S. has used semiconductor manufacturing as one of the essential aspects to lead against china.
According to Ghosh, in 2021, President Trump imposed reciprocal tariffs on the products, which started the trade war between the two countries.
President Joe Biden administration continued the policies laid down by Trump’s government, followed by the sanctions that were initially imposed.
This government even added various people and Chinese companies to the entity list to restrict trade with China causing the situation to worsen; they never wanted China to lead.
The rise of COVID also caused the U.S. to blame China, and on the whole, it even caused the entire world to suffer economically.
Looking at the worsening situation, the semiconductor industries need to be independent because it is one of the essential chips that cannot be compromised.
U.S. Export Controls Policy for China and Its Key Features
On 7 October, a set of new policies was laid down by the commerce department bureau of the U.S.; this policy was targeted to add some export controls to restrict China from obtaining advanced chips.
What Is the Impact of this Export Policy on China?
China is a superior technology giant manufacturing various computing devices and other gadgets that need advanced semiconductors, and these devices must be protected from adding less advanced chips.
The policies laid down by the commerce department’s bureau of the U.S. will bind China, as it will need more semiconductors to manufacture its end-user products.
The U.S. export controls will cause a severe problem for Chinese companies that need semiconductors; they are already suffering.
What are the New Rules Laid by the U.S.?
The new rules laid by the U.S. comprise the following:
- To impose export controls on some of the semiconductor manufacturing equipment used for advanced computing devices.
- To follow the stringent foreign direct product rule to control the flow of the semiconductor value chain in China.
- Adding specific Chinese companies to the entity list to bound them from sourcing advanced semiconductors from the U.S.
What are the Key Features of the New Rules?
The new export controls laid down by the president Joe Biden administration has some essential features that impact China a lot; these are:
- Some very high-performing logic chips, some computing devices, and semiconductor manufacturing equipment into a CCL list, to export these items; a license will be needed from the U.S. Department of Commerce.
- The expansion of the Export Administration Regulation’s scope covers the computing items that are advanced in nature and are produced in foreign countries.
- Adding a license requirement to export computing devices from and to China also covers the fabricating facility of semiconductors in China.
- License requirements for exporting the items needed to manufacture semiconductors, including semiconductor manufacturing equipment and other applied materials.
- Restricting the people in the U.S. to support the facilities located in Chinese industries without obtaining a license.
How Is License Obtained Under the New Rule?
Chinese semiconductor firms are not only bound to the extent of just rules; obtaining a license is a comprehensive procedure.
The availability of a license to and within China is limited except for some exceptions.
Moreover, every licensing requirement is being reviewed case by case by the President Joe Biden administration and is subject to denial if they want.
Therefore, no matter whether a gadget company in China needs semiconductors or chip design companies need equipment for manufacturing, the chances of denial are present due to the prevailing semiconductor controls.
Moreover, BIS has also added some rules regarding the Temporary General License, as this will limit the manufacturing activities for the items that are exported to be used outside China.
What would be the Global Impact of the New Rules Set by the U.S.?
After understanding the expected implementation of the new rules, one of the essential things is considering its impact on the global semiconductor industry and not just China.
There is no doubt that China will suffer because of these rules as it would not be provided with advanced semiconductors based on various factors, of which one is national security considered by the U.S.
However, the impact on the other countries would also appear visible, and they could either make the most of these new rules or lose to them.
For instance, other giants like Japan and Netherlands may take advantage of these rules and start supplying china with these chips so that the technological decoupling of China by the U.S. may be controlled.
It is also heard that the U.S. is convincing these two countries to refuse the orders from Chinese companies for the semiconductors.
The impact of these rules set by the U.S. might even backfire because many American companies manufacturing semiconductors would lose China as their biggest customer.
In addition, the shortage of products manufactured using semiconductors would cause a supply chain disruption worldwide.
These rules may also severely impact military applications because the latest weapons even use semiconductors, and restricting its supply to China could bring national security problems worldwide.
In addition, it will not be wrong to say that the U.S. does not want the Chinese military to have highly innovative weapons, which might have led to such rules being imposed.
What Is China’s Reaction to the Current Situation, and what are the Next Moves?
After the rules on trade about to be applied by the Biden administration, China needs to gear up for sure, but the worst part is that Japan and Netherlands seem to join hands with the U.S.
Since China will not get most of the supply from these two countries, China has to work on increasing its production capability and cutting down the economic costs to achieve the right output.
China is currently struggling to fulfill its requirements for manufacturing semiconductors due to a lack of equipment and materials and sufficient technologically equipped staff, but it is expected to hit back.
This is not the first time in history that China has suffered due to trade restrictions.
In the past, China has faced the loss of tens of billions of products and is a giant today.
However, the impact of these sanctions and the response of the Netherlands and Japan would be countered by China since China is the biggest customer of Japan’s semiconductor supply chain.
On the other hand, if we look at the other countries, irrespective of the White House concerns regarding China, Mexico, and Brazil, they never restricted Huawei.
Therefore, if the rest of the countries do not support the U.S. in the policies introduced against China to supply semiconductors, this situation will only last for a short time, and eventually, the U.S. might have to give up on its own export controls.
The situation is quite intense, and people have yet to learn what the semiconductor industry holds as its future; if you have your opinions regarding this issue, please do so in the comment box below.