Semiconductors at the Heart of the US-China Tech War

The United States and China are in the early stages of an historic tech war or era of techno-nationalism. Techno-nationalism is a new strain of mercantilist thought that links tech innovation directly to economic prosperity, social stability and to the national security policies of a nation. In this regard, government intervention in markets is justified as protection against opportunistic or hostile state and non-state actors.

Techno-nationalism seeks to attain competitive advantage for its own stakeholders, on a global scale, in order to leverage this advantage for geopolitical gain. At stake is supremacy in the industries of the future: data analytics, robotics, AI and machine learning, surveillance technology and 5G networks, to name a few. 

And at the core of all these future technologies are semiconductors, which provide the vital materials and circuitry necessary to produce microchips — which, in turn, are required to operate everything from a smart phone to an advanced satellite weapons system. In short, microchips are the central nervous systems and brains inside all new age technology.

In 2018, global sales of semiconductors and related technology topped $468 billion. China’s semiconductor market represents, by far, the world’s largest importer. Semiconductor-related technologies are China’s largest import products, exceeding even its imports of oil. As will be revealed in this study, China depends almost entirely on American and other foreign companies to supply its needs for integrated circuits, either as imports, or as foreign producers within China’s domestic market.

The intensifying nature of the US-China tech war, combined with the scale and depth of China’s market—and the massive economic gains it provides to American and foreign semiconductor companies—creates a collision of vested interests that has sparked a flurry of protectionist policies in Washington and elsewhere.

China’s Semiconductor “National IC” Plan

In an attempt to reduce its dependence on American and other foreign semiconductor technologies, as well as advance China’s own innovation, the Chinese Communist Party (CCP) has rolled out ambitious strategies to promote and fund the development of China’s technology in critical sectors. This funding is earmarked for attracting key investment and technology transfer into China as well as acquiring critical technology overseas, through state- backed acquisition initiatives.

One such initiative is the Made in China 2025 government plan, with some estimates putting the Chinese Communist Party’s funding commitment at $300 billion over a ten- year period. The Chinese Communist Party’s semiconductor financing efforts go well beyond Made in China 2025, however. For example, China’s official government numbers claim that, as of 2019, some $29 billion of funding has been provided for the China National Integrated Circuit Industry Investment Fund.

Simultaneously, the government has been pumping large sums of money into other technology funds, such as Tsinghua Holdings, the technology investment arm of one of China’s top state-led universities, which the Chinese Communist Party has charged with funding and advancing China innovation in the semiconductor industry.

U.S. Counter-Measures

In response to Beijing’s semiconductor initiatives, the U.S. passed the Export Control Reform Act (ECRA), in 2018. This was born largely from a broader narrative shift that links the level of development of a nation’s commercial technology directly with national security —which increasing numbers of policy makers in the U.S. military and security establishment argue is more important than trade deficits or tariff rates.

Under the ECRA, The Department of Commerce’s Bureau of Industry and Security (BIS) is currently reviewing the addition of new“emerging” and “foundational” technologies, for inclusion on U.S. Department of Commerce’s Controlled Commodity List (CCL), which would require export licenses for the sale and transfer of such technologies.

At issue is the relevance of “dual use,” which is defined as a commercial technology or product which can be used for military purposes–which would apply to virtually all of the industries of the future.These new measures will spill over into other markets, as the U.S. will likely propose that the ECRA’s newly added tech controls also be adopted by its allies under the multilateral framework of the Wassenaar Arrangement, which includes 41 other member countries.

Meanwhile, the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018, enforced by the U.S. Department of the Treasury, has led to a substantial increase in foreign investment reviews by the Committee on Foreign investment in the United States (CFIUS). As such, the number of high-profile acquisitions of US technology companies by Chinese entities have ground to a halt.

The Proliferation of Non- Tariff Measures (NTMs)

The US-China technology rivalry is driving an escalation of non-tariff measures (NTMs), which could have more profound effects on global supply chains than tariffs. The most noteworthy NTMs include:

• Sanctions
• Export controls
• Licensing requirements
• Restricted entity lists
• Blocked acquisitions and investments

By definition, an export control is simply a regulation that is put in place to protect national security, promote foreign or domestic policy, and, in some instances, control the export of items in short supply. An export control is not, by itself, a prohibition to sell or buy something.

Export controls, however, mean that an export license may have to be issued by the appropriate government licensing agency to allow an exporter to sell, transfer or transport a product to a foreign market, depending on where the final buyer is located, who the buyer is, and how the controlled item will be used. In almost all cases, when the facts surrounding a controlled item are reviewed, US government agencies issue export licenses in the vast majority of instances.

But NTMs such as export controls add a layer of uncertainty to GVCs and threaten to turn a long-time supplier into an unreliable supplier. Export controls also mean that a company’s global value chains will be examined under the proverbial regulatory compliance microscope, adding compliance costs, delays and risks.

Such was the case when the US threatened to block the sale of American technology to Chinese telecoms company ZTE (which was later rolled back). Subsequently, Huawei, HikVision, SenseTime and other key Chinese tech firms have been placed on the US Restricted Entities List. 

And then there are military, space and defense related articles as defined under the International Traffic in Arms Regulations (ITAR) in the US, which control the manufacture, sale and distributions of such items. Here, a simple transaction with a restricted party is forbidden. Many companies are asking how broad might the ITAR controlled list become?

Impact on Trade Flows and Global Value Chains

The world’s semiconductor companies are now caught in the middle of the US-China tech war. Export restrictions on Huawei and other Chinese entities have inflicted collateral damage on American semiconductor companies such as Broadcom, Qualcomm, Intel, Nvidia, and others, while the ripple effects of these actions are being felt throughout extended global value chains.

The US-China tech war presents an historic inflection point, therefore, for technology companies, with far- reaching consequences for trade flows. This rivalry signals the beginning of a momentous shift in global value chains. Multinational companies in the semiconductor industry and beyond will need to react and adjust to this changing landscape. The ensuing sections of this report delve into these issues and aim to answer the key questions, outlined below.

To view the full report, click here.