On October 17, 2023, the Biden administration released new export controls on US advanced semiconductors to the People’s Republic of China (PRC). The US sees China’s growing ability to produce better semiconductors, along with the close relationship between its military and civilian sectors, as a risk to national security. High-end chips could give China a military advantage in missile technology and surveillance equipment. The PRC has condemned the export controls as the latest ‘weaponization of trade’ by the US. For China, US export controls limit China’s abilities to produce a domestic innovation system for chips which the Chinese leadership sees as critical. Xi Jinping has emphasized achieving greater self-sufficiency in high-end semiconductors by plugging $150 billion in subsidies since 2015. However, the loopholes from the US export controls indicate that sanctions are difficult to enforce, posing security risks to US allies.
China’s Civil-Military Fusion
The Biden administration export controls on AI and semiconductor implemented in 2022 are an
attempt to prevent the PRC from developing critical technologies with military applications. The PRC implements a “Civil-Military Fusion Development” doctrine where high-end technologies are coordinated for use between research institutes, private industry and the People’s Liberation Army (PLA). Blurring the line between civil and military application, semiconductors developed by Huawei could be used in advanced technologies on the battlefield, such as advanced missile systems, communication and navigation equipment.
The threat posed by the PRC’s growing technological capabilities are acute for US treaty allies in the Indo-Pacific. China’s military modernization raises concerns over its ability to project military force to secure its own interests. For the Philippines, the PRC harasses Philippine fishing boats and has had numerous stand-offs over territorial disputes in the South China Sea. Japan faces disputes over the Diaoyu or the Senkaku islands. While not a US treaty ally, Taiwan faces security threats from the PRC’s gray zone tactics to influence its politics or live under the threat of an invasion. The PRC’s access to sensitive technologies is therefore a concern for US national security and US-led order in East Asia.
Dodging Sanctions Strategies
U.S. efforts to limit technological exports to the PRC face the problem of enforcement. Since announcing export bans of U.S. machinery to the PRC, there are indications that China can still buy and use U.S. technology. On 5 September 2023, shortly after the release of the iPhone 15, Huawei released its latest smartphone, the Mato 60 Pro. The new phone included an advanced 7 nm chip produced by China’s largest chipmaker Semiconductor Manufacturing International Corporation (SMIC). Given that Taiwan’s Taiwan Semiconductor Manufacturing Company (TSMC) has been producing similar sized chips since 2018, SMIC’s ability to produce these chips at quantity demonstrated an ability to bypass U.S. export controls.
The question over how Huawei was able to develop the technology has led to a political debate on Taiwan. According to reports, Taiwan’s Cica-Huntek Chemical Technology Taiwan Co. won contracts to build systems for two Chinese, U.S. blacklisted companies. Current president Tsai Ing-wen, ahead of Taiwan’s presidential election in January 2024, has faced criticism for not taking Taiwan’s defense seriously. Without tighter controls on Taiwanese firms still doing business with Chinese firms, Taiwan’s semiconductors could end up in Chinese missiles aimed at the island.
Sanctioned actors also develop strategies to get around U.S. export controls which have been employed for a while. For example, in 2018, reports emerged of Russian and Chinese military-affiliates sanctioned by the U.S. created ‘shell companies’, intended to disguise ownership of Chinese or Russian firms to buy U.S. equipment. While this avoided direct sales from US companies to Chinese military-affiliated companies, it was easily bypassed through third parties created by Chinese military affiliated firms.
Blacklisted businesses can also purchase chips from black markets, outside of Chinese and American authorities. In the Huanqiangbei electronics mall in the southern Chinese city of Shenzhen, small scale sellers are filled with electronics components purchased under the radar. Reports have emerged that local sellers, though not advertising them, have bought Nvidia high-end AI chips in other markets and sell them at double the normal price. For smugglers, export controls provide incentives to gain chips via unofficial channels, for the right price.
Breaking the Supply Chain?
From the outset of the Biden’s administration export controls of US-made technology to China, East Asian electronics firms with a substantial dependence on China have been exempt. Samsung and SK Hynix secured exemptions from U.S. permission to ship U.S.-machinery to China. Samsung and SK Hynix face competitiveness issues in moving their production away from China; they produce 40% and 45% of their NAND memory chips in China respectively. Separating from China and moving to ‘friend-shoring,’ as the US is incentivizing them to do through subsidies, requires a significant reversal of supply chains built over the past 40 years. While this exemption gives East Asian and US companies time to reconfigure their supply chains, the timeline could take years given the billions of dollars involved.
US export controls are also imposed in advance. While this may give time to companies facing commercial losses, Chinese firms are able to buy some technologies in advance. For the Netherlands, ASML’s compliance with U.S. export controls will come into effect on January 1, 2024. According to reports, ASML sold 46% of all exports to China in the third quarter of 2023. The strong reliance of semiconductor companies on China indicates the difficulty of moving the semiconductor industry away from China to other countries, especially when its market is substantial for exporting companies.
The new export controls launched by the US on October 17, 2023 aim to improve enforcement for critical semiconductors. Loopholes and well-established rules on bypassing sanctions are still possible and carried out by shell companies, even for sanctioned companies. Given the threats posed by the PLA’s military modernization and ability to project power overseas, the US latest export controls are an important step in deterring future technological developments. According to the US and its allies, without effective monitoring of export controls, the PRC’s ability to get hold of semiconductors for military purposes poses a significant security risk to the Indo-Pacific.