The U.S. government has effectively just created a massive market for a U.S.-independent semiconductor supply chain. The Chinese government has long pursued wasteful and largely ineffective industrial policies to boost domestic semiconductor manufacturing. In the wake of U.S. export controls, the Chinese government pledged another $140 billion in spending. U.S. controls supercharge the Chinese government’s efforts by creating incentives for the private sector as well, mobilizing the global marketplace to accelerate Chinese chip independence. Foreign companies have strong incentives to design U.S. components out of their supply chains over time to circumvent U.S. restrictions and sell to the Chinese market. Replacing U.S. suppliers will take time, but all of the incentives are now in place to do so.
Even if Japan and the Netherlands join the United States on tooling restrictions in China, foreign companies could build new fabs entirely free of U.S. equipment outside of China to service the Chinese market. Restricting access to foreign chips also turns China’s $400 billion of buying power inward, boosting domestic chip manufacturing. Chinese commercial data and cloud companies could choose to turn to second-tier domestic chip suppliers, rather than continue to rely on foreign chips whose supplies are uncertain. These market incentives could mobilize the private sector, inside and outside China, to finally achieve the chip independence the Chinese government has long sought yet been unable to achieve to date.
More targeted controls on military applications and human rights abuses while permitting commercial use would be a better approach and could keep China dependent on foreign chips produced with U.S. equipment. Targeted controls are more cumbersome, as the United States is forced into a game of whack-a-mole while the Chinese military tries to circumvent U.S. restrictions through other buyers.
However, the United States just created a powerful tool to crack down on China’s military-civil fusion. As part of the October 2022 controls, the Commerce Department established that firms that do not cooperate with end-use checks would be placed on the Unverified List and, after 60 days, would transfer to the Entity List if they still have not complied. The U.S. government already successfully used this tool in December to verify and clear 27 Chinese companies that demonstrated compliance with end-use restrictions while escalating others, including Chinese chipmaker YMTC, to the Entity List. The United States has the tools it needs to enforce compliance with targeted restrictions. A more targeted approach that allows sales of high-end chips to China’s commercial sector could suppress demand for chips made without U.S. technology, delaying China’s chip independence.
The United States should seek to foster strategic dependencies by China on U.S. technology. In the U.S.-China tech competition, the leverage the United States used to kneecap Huawei is a priceless strategic advantage. Yet the Biden administration’s new chip restrictions undermine the United States’ long-term position. Because U.S. export controls will only have a temporary effect as global markets adapt over time, the United States is better off holding this leverage in reserve for now. Artificial-intelligence capabilities are rapidly advancing, and computing hardware is becoming an even more valuable input for AI power.
The deep learning revolution is only a little over 10 years old, and the second decade looks to be even more dramatic than the first. The United States will be in a stronger position for the changes ahead if it retains the ability to deny China access to powerful AI capabilities, if necessary. Using narrower export controls today could still deny China’s military access to advanced chips while keeping Chinese commercial companies reliant on foreign supplies. Keeping China dependent on U.S. technology is a stronger strategy than decoupling and will give the United States more control over China’s access to advanced technology in the long run.