As US Treasury secretary Janet Yellen heads to Beijing in an attempt to steady economic ties, high on the agenda will be how to navigate the growing chip war between China and the US.
Despite diplomatic overtures from both sides, the competition in advanced technology between the two superpowers shows no sign of letting up.
On Monday, Beijing set a hostile tone for Yellen’s trip as it set export restrictions on two minerals that the US says are essential to the production of semiconductors and other advanced technology. Chinese state media tabloid the Global Times said on Wednesday: “There’s no reason for China to continue exhausting its own mineral resources, only to be blocked from pursuing technological development…”.
The measures came as the Biden administration reportedly prepares to expand its own restrictions on the sale of advanced microchips to China.
What is the US worried about?
Washington’s concerns are twofold. The first is that China’s People’s Liberation Army (PLA) could surpass the US military in terms of overall power. The second is that it could use US technology to do so.
President Xi Jinping has ordered the PLA to become a “world class” military by 2049, the centenary of the Chinese Communist party’s (CCP) rule. A big part of that involves developing autonomous weaponry, including hypersonic missiles, and using artificial intelligence (AI) for a range of applications, including electronic warfare.
It is unclear how close China is to achieving this goal. According to the US department of defence’s annual report on China’s military power, the PLA is “pursuing next-generation combat capabilities … defined by the expanded use of artificial intelligence and other advanced technologies at every level of warfare”.
But while China is a world-leader in certain AI applications, such as facial recognition, its domestic industry is not yet able to produce the most advanced semiconductors that power these technologies. So Chinese businesses, and the military, rely on imports to acquire the advanced chips.
The US wants to turn off that tap.
What measures has the US taken so far?
In October, the Biden administration imposed a sweeping set of export controls, targeting China’s access to US-origin semiconductors and their related products. Businesses and individuals in China are now unable to buy advanced chips and chipmaking technology from US suppliers without the seller obtaining a specific licence from the US government.
The US bolstered these controls in January by persuading the Netherlands and Japan to curb exports of technology used in the productions of chips. Both countries were targeted because they are home to the world’s most advanced chip manufacturing technologies, including the Dutch ASML. ASML is the only company that can provide the latest generation of photolithography scanner equipment, which is used to etch minute circuits on to silicon wafers.
On 30 June the Netherlands confirmed that its export controls would take effect from 1 September.
Jake Sullivan, Biden’s national security adviser, says the restrictions are designed to protect foundational technologies with a “small yard and high fence”. Xi and other senior CCP officials accuse the US of cold war-style “containment”.
What has been the impact?
Jensen Huang, the chief executive of Nvidia, one of the world’s leading chip companies said the restrictions risked causing “enormous damage” to the tech industry. In the 12 months to February, Nvidia’s revenues from China and Hong Kong declined by nearly 20% year-on-year.
In recent months, Nvidia has started offering a less advanced chip, the A800, to Chinese buyers. But the new curbs being mulled by Washington would restrict even those products.
And Chinese companies have also felt the squeeze. In the first five months of this year, chip imports were down nearly 30% compared with the same period in 2022, according to data from China’s General Administration of Customs.
How has China reacted?
Angrily, to say the least. People’s Daily, the official newspaper of the CCP, accused the US of “containment and suppression”. In May, Wang Wentao, the commerce minister, urged Japan to drop its export controls, underlining China’s “strong opposition” to the measures.
Beijing has also banned chips made by US company Micron from being used in critical infrastructure projects, in a move widely seen as retaliation to the US restrictions.
But Chinese businesses are still keen to get their hands on top-end chips and are using creative techniques to get around the export controls. Some are renting chips or buying them via intermediaries, according to the Financial Times. And there’s also a burgeoning black market for smuggled semiconductors.
What can we expect next?
The US government wants to close these loopholes and widen the scope of the restrictions. As well as restricting the sale of Nvidia’s A800 chips, the Biden administration is reportedly considering restricting the leasing of cloud services that some firms have used to get around the rules. The Dutch government is also expected to widen the scope of its export restrictions.
Beijing and Washington claim to be working towards a diplomatic rapprochement, but when it comes to the 21st century’s most critical technology, the two governments are moving further apart.