US Extends Chip Controls on China, What Now?
Washington continues to tighten the screws on Beijing, limiting access to advanced semiconductors. But that's only one part of a grander strategy.
The Promethean War Continues
The US recently imposed a fresh round of restrictions designed to limit China’s access to advanced semiconductor chips in the latest chapter of the Promethean War. The policies build on the framework outlined by Washington in October of last year.
The new controls also limit the trade of equipment used for chip production to other countries, including Russia and Iran. The provision was designed to prevent the circumvention of controls and exportation of advanced chips to China.
According to VOA, “The U.S. also put Moore Thread and Biren Technology, two Chinese developers of graphics processors, on Washington’s Entity List. This has the potential to bar them and 13 subsidiaries from access to things such as U.S. chip design software”.
Commerce Department Secretary Gina Raimondo also noted that these export restrictions will be updated “at least annually”. The surgical method to these measures is in line with Washington’s “tall fence around a small garden” approach.
Casting too wide of a net would risk the economic impact and China’s potential retaliation reverberating back to the US and hurting its own economy. The US is already facing inflation above the Fed’s 2 percent target and rising oil prices.
Raimondo also stated that the goal of the update was to curb China’s access to advanced chips which “could fuel breakthroughs in artificial intelligence and sophisticated computers that are critical for the Chinese military”.
The PLA’s military modus operandi “now characterizes and understands modern warfare as a confrontation between opposing operational systems [作战体系] rather than merely opposing armies” according to the Rand Corporation.
This new system rests on leveraging a multi-faceted and multi-dimensional approach to warfare that requires vast computational power to produce the optimal tactic. AI-interfacing chips and quantum computing technologies will therefore be the technological foundation on which this new system of ware will rely on.
Washington’s chip policy is therefore targeted at preventing China from and developing and operationalizing its Systems Confrontation infrastructure to a point where it undermines US security.
Market Reaction
Shares of Nvidia fell close to six percent after the announcement was made, along with AMD and Intel both shedding three percent off their market cap. As the AI craze in H1 2023 wears off, tech stocks are facing a tough macroeconomic environment.
Higher interest rates have led to tens of thousands of job cuts in the tech sector as companies figure out how to operate in an environment without ultra-accommodative credit conditions. Interest rates in the US are at their highest point in decades.
Policy-driven volatility emanating from the US-China rivalry is a secular risk chip-focused tech stocks will have to contend with for the foreseeable future, and a risk portfolio managers will have to incorporate into their investment strategies.
US Semiconductor Strategy as a Military Tactic
At the same that the US is placing chip controls on China, it is also expanding semiconductor cooperation in Asia. Amkor, a South Korean semiconductor firm recently announced the opening of a new $1.6 billion packaging factory in Vietnam.
Global supply chain shocks and fears about the US’ reliance on China for strategic resources are boosting investment in the growing semiconductor industry. Taiwan alone produces 70% of the world’s computing power, and is at risk of annexation by China. Taipei’s silicon shield acts as a deterrent - at least for now.
At the same time, the US is in talks with Vietnam over an agreement for the largest arms transfer in history between them. Washington is now exploring selling F-16s to its former Cold War adversary as tension with Beijing in the South China Sea rises.
Vietnam currently imports most of its military hardware from Russia, which while cheaper, is less advanced. Washington and Hanoi are in discussions for finding an acceptable price point in addition to discussing security implications.
It is no accident that the US is selling weapons to Vietnam while a new semiconductor plant from a regional ally is being built. The US’ efforts to decentralize supply chains out of China and distributing it around Asia is a techno-military strategy - and one with a legacy.
It is an echo of a tactic the US also used during the cold war: creating a string of pearls of semiconductor production in strategic Asian countries, and then selling weapons to those countries to secure them as critical nodes in strategic supply chains.
US foreign policy, specifically in semiconductor production in Asia will therefore also be a tailwind for defense stocks as regional risks demand a greater fusion of military strategy and technological integration.
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