It was the ultimate chip war that never was: German officials denied that Berlin planned to stop exporting specialty chemicals for chip fabrication, Reuters reported on April 27 – a day after Bloomberg News claimed that the government of Olaf Scholz “was in talks” on the subject, presumably under prodding from Washington.
The stock prices of BASF and Solvay, the largest makers of the specialty products, plunged on Thursday after the Bloomberg report appeared but recovered sharply on Friday after the government’s denial.
More than a dozen chemicals including acids, bases and solvents are indispensable to etching microcircuits onto silicon wafers, and an interruption of supplies would cripple China’s fabrication capacity. Restricting these chemicals would escalate the chip war far beyond the scope of the Biden Administration’s October 7 controls on semiconductor equipment and design software for the most advanced chips, used in high-end smartphones, servers and artificial intelligence applications. The target would include all chips including so-called mature processes.
In related news, US Commerce Secretary Gina Raimondo announced on April 26 that the US will consider banning exports to Chinese cloud-computing companies, including Alibaba as well as Huawei. Raimondo responded to a letter from a group of Senators led by Bill Hagerty (R-TN) warning that Chinese cloud computing threatens US “national security and economic security.”
The Biden Administration is also expected to ban US investments in yet-to-be-announced high-tech industries in China.
Republicans on the House Foreign Affairs Committee meanwhile are wrapping up a three-month investigation of the Commerce Department’s enforcement of chip controls and have offered legislation that would give the Defense Department responsibility for enforcing the ban. Gregory Allen of the Center for Strategic and International Studies argued in congressional testimony April 13 that “China’s export control evasion activities are significant and growing. My primary recommendation is that Congress focus on concrete strategies to tighten this enforcement and shore up remaining gaps that risk allowing China to close the AI gap.”
Washington is scrambling to restore credibility to its effort to contain China after a streak of Chinese diplomatic victories, including the Beijing-mediated restoration of diplomatic relations between Iran and Saudi Arabia, French President Emmanuel Macron’s visit to Beijing in a show of independence from Washington and the visits of Brazilian President Lula and Malaysian President Anwar Ibrahim.
Ukraine President Zelensky’s telephone call with Xi Jinping and the dispatch of a special Chinese envoy to Ukraine, moreover, raise the prospect that China will pick up the pieces in Ukraine, after a drumbeat of damaging Pentagon leaks revealed how badly America stumbled.
In the advent of the 2024 presidential election, the Democratic administration is sensitive to Republican claims that it is too easygoing towards China.
China’s economic success in the Global South threatens to lure key countries out of the American orbit. As of March, China’s exports to ASEAN countries rose 35% year-on-year and exports to Central Asia (including Turkey and Iran) rose 55%, Asia Times reported April 25. China now exports more to the Global South than it does to developed markets.
Washington’s controls on the export of high-end chips and chip-making technology to China, announced October 7, 2022, were intended to deny China access to cutting-edge hardware that supported the most advanced AI applications. By contrast, the Commerce Department has shown flexibility in allowing semiconductor equipment manufacturers to ship machines that produce mature chips.
The Biden Administration adapted its strategy from a September 2022 report by the Special Competitive Studies Project, chaired by former Google CEO Eric Schmidt. This offered a response to China’s growing military power as imagined by Silicon Valley software venture capitalists: An “Offset-X strategy” including “distributed and networked operations, human-machine collaboration, human-machine teaming, primacy in software-centric warfare, resilience and greater technological interoperability and interchangeability and partners.”
That was a Silicon Valley futurist’s view of warfare, unrelated to military technology that will prevail for the foreseeable future. Both the US and Chinese military use older-generation chips for sensing, targeting and processing information. The older chips are more robust and easier to harden, as a February 2022 Rand Corporation study explained.
The Biden Administration gravely underestimated the power and importance of mature chip technologies (14 nanometers and higher), which comprise 95% of the global chips market and power 5G infrastructure, industrial productivity applications, and other so-called Fourth Industrial Revolution technologies. Semiconductor fabricators depend on mature chips for most of their revenues, and China’s massive investment in a domestic supply chain threatens to erode the financial base of the whole Western chip industry, as Dimitri Alperovitch of Silverado Incubator has observed.
One problem is that cutting off the Chinese market may have devastating consequences for the revenues of Western high-tech companies. The Atlantic Council warned in a March 2023 report, “While the steps taken by the Biden administration to constrain China’s progress in producing cutting-edge semiconductors appear calibrated to avoid widespread industry disruption, the policy has painful consequences that cannot be downplayed….the bottom-line impact may be felt in terms of what the industry terms a ‘significant loss of scale’ that could yield fewer resources for R&D and new investments…. It is essential that the semiconductor industry – and US allies, as discussed below – have a voice in assessing the potential impact of additional proposed constraints. Communication is essential to avoid unintended consequences.”
To make matters worse, American sanctions on the sale of high-end chips to China are extremely difficult to enforce. To comply with sanctions Nvidia reduced the clock speed on a variant of its GPUs, the standard for high-end servers, while selling substantially the same product to China.
In addition, the global market in chips is so complex and opaque that Chinese companies can buy whatever they want on the gray market, and the enforcement capacity of the Commerce Department is woefully inadequate to prevent this, Allen stated. Chinese sources say that high-end GPUs are freely available at a 10% premium to the going price.
Chinese commentators compare the chip war to China’s civil war. By concentrating on low-end chips, and undercutting the prices of Western manufacturers, “Observer” columnist Chen Feng says, China will “encircle the cities from the countryside,” a reference to Mao’s successful military strategy during the Civil War of the 1940s. The United States “can only go to Menglainggu [the site of a decisive 1947 Communist victory) by relying on high-end chips.” As noted, analysts like Alperovitch have already flagged the danger.
On March 27, Huawei announced that it had developed its own chip design software for 14 nanometer and wider mature nodes; if true, that would represent a major step towards Chinese independence from US design firms Cadence and Synopsis, which have had a near monopoly on the technology.
As the Atlantic Council suggested, the Biden Administration appears to have given US firms considerable leeway in exports to China. LAM Research, a leading US manufacturer of semiconductor equipment, predicted an increase in sales to China during the remainder of 2023, after receiving “clarification” of export rules from the Biden Administration. The Dutch chip lithography giant ASML also projected an increase in Chinese sales this year, and its CEO Peter Wennink stated that “the mature semiconductor space is very important and needs to grow. And this is where China is very strong.”
The reported Berlin ban on semiconductor chemicals might have misfired, but it was the first salvo of what will be a long tech war of attrition.