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Will China dominate the world of semiconductors?

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DWING Donald Trump during the presidency, many people took a new look at China’s technological capabilities. Some have concluded that this poses a threat to Western economies and perhaps even to global security. In the headlines, Huawei, a brilliantly successful manufacturer of telecommunications equipment, has become the face of this threat. America has accused the firm of acting as a channel for Chinese government oversight and control. In 2018, America defeated Huawei. He banned the Chinese firm from exporting American microchips needed for its products. This seems to have had the desired effect. Last year, Huawei’s revenue fell for the first time in a decade, by almost a third.

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It was unprecedented for the state to confuse such a large technology company. Huawei’s revenue was about as large as Microsoft’s. But the feat was not without costs. Because the Trump administration acted without cooperating closely with America’s friends, it prompted investors from around the world to add missing links in the semiconductor supply chain that are beyond the reach of U.S. law.

Japanese firms, among others, have begun to quietly market their products in such a way as to evade the rules of the American Export Administration, qualifying them as ” EAR– for free ”. American firms, many of which sell billions of dollars worth of equipment to China each year, have begun looking for neutral territory from which they could continue to export supplies. Singapore and Malaysia led the way. “Who would willingly sign to be restricted USA the government? ” – smiles a lawyer from Washington, who focused on technical clients around the new restrictions.

Meanwhile, Chinese firms, driven by billions in government investment, have redoubled their efforts to develop their own versions of chip technology, which they previously imported through supply chains associated with firms in America. Ever since it all started to go, it looked as if the U.S. government would steadily lose control of the chip supply chain. To avoid such an outcome and maintain control over what technologies come to China, it must build consensus with friendly countries.

Since Joe Biden took office a year ago, his officials have raised the issue of chip control every time they talk to foreign allies. A lobbyist from Washington says he has never seen semiconductors occupy top positions on the diplomatic agenda in 25 years. Governments and companies are setting up forums to agree on policies regarding the trade in chips and the equipment and materials used to make them.

Some see a parallel with the Organization of the Petroleum Exporting Countries, better known as APEC. For decades, its members, all oil exporters, have rallied to try to control how much oil enters the world market to influence prices. Today’s new forums mark the first steps towards creating a similar structure to control semiconductor exports, hoping to maintain a technological advantage over China. It could be called the Organization of Semiconductor Exporting Countries: ASEC.

Diplomatic bodies involved in establishing multilateral agreements on technology exports already exist. But they do not manage the semiconductor trade well. In 1996, the Wassenaar Arrangements were established, among other things, to control trade that could have military applications. He is the successor to the Coordinating Committee for Multilateral Export Control, known as COCOM, a Cold War body that actually held the Western embargo on trade with the Soviet bloc. Officials are verbally talking about the idea of ​​upgrading Vasenaar so that it can help control the semiconductor trade. But few expect him to play that role, not least because Russia is a member.

Thus, new forums are emerging. The most formal is EUUSA The Trade and Technology Council, established last June with a working group on export control. Semiconductors are on the agenda. A joint statement after the first meeting of the council in Pittsburgh in September announced its intention to cooperate in “rebalancing” global chip supply chains. It was a diplomatic language to keep them away from China. The chip industry in the West and in some parts of Asia that are wary of China has welcomed the discussion, at least officially. He hopes that more precise export rules, which are applied all over the world, will reduce uncertainty.

But global chip diplomacy is still weak. When semiconductor trade is discussed, it is usually included in the agenda of other world forums. Export control lawyers and government officials huddle, often virtually, in the corridors of meetings of Quad, the club of countries that unites America, Australia, India and Japan. In September, it announced that one of its goals was to secure semiconductor supply chains.

Also on the sidelines of the meetings were chips to discuss sanctions that could be imposed against Russia if it invades Ukraine (see briefing). The U.S. administration has informed the Semiconductor Industry Association about how export controls used against Huawei could be part of a sanctions package against Russia to block its access to Western technology. Unlike China, Russia does not have an electronics industry that can be talked about, so such control would not hurt it so much. But this could complicate Russia’s cyber attacks on its enemies.

Agreements between the governments of the leading countries in the chip supply chain – America, Japan and the Netherlands – are still more important than any speech. This trio produces the lion’s share of machines used to make chips. Consensus between them on the chips trade was the first step toward deterring China until the end of Trump’s presidency. A large Dutch company, ASML (originally denoting Advanced Semiconductor Materials Lithography), was willing to sell its most sophisticated tools SMIC, The largest and most powerful chip maker in China. Japanese and US officials have resorted to the Dutch government, which duly refused to give ASML license to export its advanced machines SMIC.

U.S. officials with a more hawkish stance toward China, who want a clean break in supply chains, are in favor of this approach to diplomacy through a narrower coalition of volunteers. The small number of members who plan restrainedly facilitates the rapid overcoming of perceived threats. It also gives America a key word by echoing Mr. Trump’s attitude toward China alone, instead of spending time to spice up partners and find ways to write a book of clear chip trading rules. Both Europeans and Japanese want a more formal multilateral approach. But America believes its ability to respond quickly to the Chinese threat will inevitably be limited.

No bet, no chips

The snag, according to a former official in Barack Obama’s exports, is that the more insistently America wants to respond to China, the harder it is to attract America’s Western and Asian allies. Without America’s friends on board, America’s tough export line threatens to weaken its own companies. This is because it could direct investment to places inaccessible to America but still suitable for Chinese chipmakers. America was left between choosing a softer set of controls that could work better in the long run, or a tougher set that could do more damage to Chinese technology in the short term but could harm American industry as a whole. What’s worse, it could ruin the prospect of US-China chip trade ever reviving in the event that a better relationship is restored one day.

At the moment, the administration is looking for a compromise by closing the Chinese access to chips and tools for making chips above a certain level of complexity. For example, it completely blocks Huawei from getting chips running whizzy 5Mr. networking equipment, but allows the use of old technology. The same is true SMIC you can get old tools for making chips, but not the latest versions that can be used for chips included in iPhones and cars. However, friends of America have not yet agreed to this compromise, which is still imposed unilaterally through the rules of export control of the US government.

Mr. Biden’s administration is in any case strained by politics at home, no matter what new course America tries to put in its relations with China. “Many are skeptical because they’re not sure if Biden will be around,” said Richard Thurston, once a general practitioner at Taiwan’s semiconductor company.TSMC), the world’s largest chip maker. He says the administration may be losing its appetite for vigorous diplomacy, fearing that any agreement it concludes could be lifted later this year when Congress becomes a Republican.

Mr Thurston believes that controlling the export of specific machines and components is unwise in any case, because no control network can be stretched tight enough to prevent a determined, powerful country from somehow gaining tools. But it will still be difficult for China to acquire the knowledge to use these tools to produce chips in commercially viable volumes. Mr Thurston believes that governments, instead of restricting semiconductor supply chains, should focus on protecting trade secrets. American semiconductor companies and those in friendly countries could sell their most advanced chipmaking services to the Chinese market, but were still able to prevent Chinese firms from developing their most sophisticated production facilities on their own.

This is not a popular opinion in Washington, where Mr. Biden too easily tolerates headlines lamenting the flow of chips and tools to China. However, the inconvenient fact is that America’s own semiconductor tool manufacturers still consider China one of their largest markets. California-based firm Applied Materials, which makes machines used to heat minute circuits on silicon wafers, sold $ 5 billion worth of tools to China in 2020, more than in any other market.

Meanwhile, China continues to progress. The share of global chips sold by China is growing (see Chart 1). This is not true for any other major chip-producing country, despite Mr Trump’s campaign to destroy China’s indigenous industry and Mr Biden’s more multilateral attempts to achieve the same goal. America and its allies can still agree on how to curb China’s semiconductor ambitions. But it may be impossible for one state to control such a complex industry. If so, America may regret trying to intervene.

https://www.economist.com/international/2022/01/29/will-china-dominate-the-world-of-semiconductors

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