Washington’s Semiconductor Sanctions Won’t Slow China’s Military Build-Up

The export controls won’t cripple the Chinese military. According to a recent RAND Corporation report, China’s military systems rely on older, less sophisticated chips made in China on which US export controls will have no effect. If China needs more advanced chips for AI-driven weapons systems, it can likely produce them, albeit at a very high cost. Many semiconductor industry experts agree that China has the technical capability to produce cutting-edge chips yet lacks the commercial capability to scale up production. This means that the US ban will have less effect on weapons systems, instead delaying the rollout of civilian applications such as autonomous vehicles.

Nor will US semiconductor firms emerge from the sanctions unscathed, given that many have China as their largest market. China accounts for 27% of sales at Intel, 31% at Lam Research and 33% at Applied Materials. Both Applied Materials and Nvidia expect the new export controls to cut US$400 million (6% and 7%, respectively) from next quarter’s sales. Lam Research—one of Yangtze Memory Technologies Corp’s largest suppliers—expects the controls to cut a whopping US$2.5 billion (15%) from 2023 sales.

These dramatic cuts come at a particularly difficult time for the US semiconductor industry, which is experiencing falling revenue and increased input costs. By one estimate, the damage US sanctions inflict on research and development and capital investment in the Western semiconductor industry ‘will exceed Washington’s modest subsidies for the chip industry by a factor of five or more’.

Tit-for-tat retaliation against the US is not an option for China, given its heavy reliance on foreign technology. Any reciprocal measure would inflict more damage on China itself. Punishing US companies with big exposure in China—like Nike or Apple—would harm the Chinese labor market since those firms employ many Chinese citizens. Other foreign supply chains and Chinese businesses supplying Nike and Apple would also suffer.

Imposing export controls on products China dominates, like rare earths or pharmaceutical ingredients, would accelerate the US movement to ‘reshore’, onshore and ‘friend-shore’ manufacturing of those products, as was the case with Japan in 2012.

Instead of overt retaliation, China will probably seek alternatives to US chip technology. But since alternatives are decades away, intellectual property theft and the nationalization of foreign semiconductor firms could spike.

Whether US chip controls represent a stand-alone policy or foreshadow sanctions across a wider range of high-technology sectors is unclear. In the run-up to the 2024 US presidential election, many Republicans will call for harsher controls. At his recent meeting with Chinese President Xi Jinping at the G20 summit, Biden sought to tamp down US–China hostilities. But unless he resists calls from the US ‘China hawks’, Biden could find himself dragged into a second cold war.

Gary Clyde Hufbauer is a non-resident senior fellow at the Peterson Institute of International Economics and Megan Hogan is a junior fellow at the Peterson Institute for International Economics. This article, aversion of which was published on East Asia Forum,is published courtesy of the Australian Strategic Policy Institute (ASPI).