Technology drives the world, and with this increasing reliance on it comes increasing sectors of contention between countries. With the United States Public Enemy Number One, the People’s Republic of China, currently manufacturing a quarter of the world’s semiconductors, it was almost to be expected that the US would attempt to break their hold over the global semiconductor industry. With mounting tensions between the two superpowers, the world can only watch them delve into the latest skirmish between the two countries — and hope that it doesn’t upset the economy too badly.
A little background knowledge for anyone who has not been following the news on this (although you can find a more in depth analysis in our previous post on the subject). The CHIPS Act of 2022 was passed by Congress earlier this year in July, aiming to strengthen the American domestic semiconductor industry while also ensuring the preservation of a stable supply chain of semiconductors, used in all sorts of technology, but most importantly in weapon systems like guided missiles. A point of concern for semiconductor manufacturers while the Act was being discussed was the clear cut “us versus them” mentality that it was enforcing, with companies that accepted aid from this Act having to legally declare that they were not to partner with China in any way, shape or form.
More recently, the US has implemented a series of sanctions as part of the Bureau of Industry and Security’s (BIS) continued efforts to “protect US national security and foreign policy interests”. The short of it can really be summarised in a couple sentences. In accordance with former President Donald Trump’s popular American First ideology, the US is restricting the PRC’s ability to purchase and manufacture high-end chips in the hopes that it will limit China’s ability to improve their military technology while also expanding the US’ share in this increasingly important industry. This has come as the latest in a series of targeted attacks aimed at crippling China’s semiconductor industry. With no access to US produced chips, fabrication equipment, and now a required license for “US persons” to work with Chinese semiconductor companies, the US has effectively crippled the PRC’s ability to progress in research and development.
What does this mean for the semiconductor industry? Well, China has already begun to see a downturn in economic growth, with further declines to be anticipated in the next couple years. Chinese companies like Biren have also been forced to tweak their most advanced chip designs in order to avoid the US-imposed sanctions on purchasing and manufacturing high-end chips, especially since most of their processors are produced offshore and would thus be applicable to these bans. Furthermore, other semiconductor companies not based in the US or China are facing an increasingly prevalent dilemma of having to take sides, which might not present a challenge to the giants of the industry, but are definitely causing issues to smaller companies reliant on economic ties to either or both superpowers. After all, the US may only be focusing on crippling China right now, but what’s stopping them from repeating the process to other countries in the name of national security?
Of course, this isn’t going to be all good for the United States. NEODYMIUM. TERBIUM. Despite Biden’s hawkish stance on semiconductor exports to China, the US undeniably falls behind when it comes to the rare earths industry. So what exactly are the rare earths? The term refers to a group of 17 elements (rare earth elements) with unique magnetic and conductive properties. REEs form a crucial part of any modern electronic device, from electric vehicles and mobile phones to radar systems and even fighter jets. Interestingly, these metal elements are not exactly “rare” - many are commonly found in the Earth’s crust or combined with other mineral ores.
Instead, the name alludes to the complex nature of extracting and purifying these elements. Most deposits are scat tered across many parts of the world with few being concentrated enough to justify the financial viability of mining operations. Currently, China dominates the export market for rare earths, with an estimated 80% of US imports originating from Chinese mines. Downstream processing and separation facilities are also mainly situated in China, where less stringent environmental regulations often mean that pollutive by-products are routinely ignored.
Undoubtedly, the US is highly concerned about national security implications stemming from the Chinese stranglehold on the industry. China has not hesitated in weaponizing its control over rare earths; back in 2010 Japanese exports were reduced over a diplomatic dispute. Abrupt announcements of production quotas have also sent prices soaring at times where multiple firms outbid each other for the limited supply available. As a result, consecutive administrations have poured millions into supporting the domestic rare earths industry in hopes of reducing America’s dependence. Yet, the results have been mixed at best. Molycorp, the former operator of the sole rare earth mine/processing facility in the US filed for bankruptcy in 2015, citing challenging market conditions.
Prices aside, technical expertise in processing rare earth elements to usable products such as magnets are also sparse outside of China. Even today, the new owner of the Mountain Pass mine continues to resell the concentrate to Asian refiners, citing the lack of processing capabilities in the West. The extraction of rare earths is also a highly pollutive procedure, further deterring firms from commencing operations in Western countries where they face tight scrutiny over their environmental footprint. For instance, Australian mining company Lynas’ operations in Malaysia form an ongoing controversy as it faces accusations of failing to properly store radioactive waste generated from its enrichment facility. While the US government rapidly inks deals in an attempt to wrestle more control of rare earths, the outcome of such investments remains to be seen given the obstacles present.
As we briefly mentioned above, amidst the havoc unleashed by Biden’s export controls, many Western firms with operations in mainland China have opted for the “Chinese Plus One” strategy aimed at shoring up supply chains through the diversification of manufacturing operations. First coined years ago, the business strategy involves maintaining additional bases for manufacturing, often in neighboring Asian countries apart from China as a form of supply chain security. The strategy has risen to prominence amidst China’s unyielding “covid zero” policy, in which snap lockdowns have severely disrupted factory operations. Southeast Asian nations including Vietnam and Thailand are also enhancing incentives to attract larger sums of foreign direct investment from Western firms looking to wean themselves off Chinese labor. However, full decoupling is still a long way to go, and might not even be possible for some companies to accomplish.
Despite what their slew of bans and sanctions might imply, the USA is still wary of further blanket export controls, fearing the consequences of maintaining such a hawkish position on China. Experts fear that China, fed up with US control and dominance over major industries, will accelerate its plans to develop its critical industries to meet domestic demand, essentially leaving the US in the dust and removing its heavy reliance on US exports for technological development. This works against the purpose of US’s export restrictions, essentially forcing China into the driving seat to develop its technological sector. America needs to look at its past mistakes, especially the Huawei ban in late 2021. By restricting Huawei from the US market, as well as from buying any US technologies, it backfired against them, causing Huawei to focus more on the domestic market and to develop its own operating system, which has seen some success. With Google now out of the picture in most Huawei phones, it has opened the door for China to perfect and market its cheaper alternative technological systems to developing countries, establishing even more dominance in the third world.
For now, Uncle Sam is mulling export controls that would hamper China’s ability to gain access to cutting-edge technologies, while its allies consider a deal to emulate USA’s export controls on semiconductor exports to China. Will these come to fruition? It’s highly unlikely, given that US allies were highly hesitant to follow in its footsteps to restrict commerce and trade with China, fearing economic repercussions. Even when the US announced its restrictions in October, it acted alone. Traditionally, US allies have always taken more conciliatory stances towards China, wary of angering Beijing and the possible economic clapback.
But let’s take a look at the bigger picture. The real battle for supremacy in tech manufacturing hasn’t even reared its head yet. But with increasing US encroachment, it just might, and it doesn’t look pretty for Uncle Sam. Basic commodities like Silicon, Boron and Gallium are crucial in chip manufacturing, and looking at the global map of reserves, the USA isn’t really favored in this supply chain battle. If they continue to provoke China and its allies, Washington’s modus operandi in diplomatic relations with countries like Russia and China will be well remembered for a very long time. What will happen in the future when the US has to ask for basic supplies from China and those around its geopolitical orbit? The answer seems obvious. This won’t be Biden’s problem to solve, but he plays a critical role in determining just how big of a headache this will be for future US presidents.
Credits
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