• Nick

V13: Locking in the China Chip Choke, 20th Century War in the 21st Century

The US came out with new regulation at the start of October that has tightened the chip blockade on China. The new licence requirements limit items destined for Chinese fabs and supercomputer/ advanced logic end-users. These end users will no longer be able to access logic chips or equipment at 16 nm, or below, as well as high-end memory chips. US persons/entities can no longer support the development of the Chinese chip industry. And licences will face a 'presumption of denial'. The US also introduced a new rule that if US regulators are not given access to an unverified Chinese company within two months, then regulators will add the company to the dreaded entity list that crippled Huawei.

The new regulations target around 5-10% of Chinese semiconductor imports, which is 2-5% of global chip imports. China's declining access to leading-edge technology will continue. The restrictions put Chinese HPC and AI companies in a difficult situation and will result in several missed quarterly earnings for US-based companies. While the chip bans will take some Chinese demand for new-generation chips offline, older chips may fill in the difference. The restriction could lead to chip oversupply in the near term, but in the mid/long term, if Chinese product manufacturers can't access the chips they need, this could lead to a supply-side cost shock that will have downstream effects from increasing manufacturing costs in China.

China's window of opportunity for independent technology development is closing. Collaboration to design out US equipment is less likely as high-tech democracies distance themselves from China. And developing technology independently is an impractical and insanely expensive exercise. China is already spending almost 5% of its GDP on industrial policy, 12 times higher than the US. It would cost over $1T to onshore the entire chip supply chain. Any further investments will be yet another efficiency drag on the Chinese economy.

The formation of the Chip4 alliance is evidence that the world is not becoming multipolar or dominated by opportunistic coalitions. Initiated by the US, a new pole is forming as an economic bloc in the Pacific. NATO's resolve strengthened after Putin invaded Ukraine, and its members have come closer together, and a similar trend is occurring in the Pacific in resistance to China.

On the European front, Russia's military has over ten times the power of Ukraine's in many hard power metrics, but, supported by Western technology, the Ukrainians have been able to hold back Russian forces. The US has denied the Russian military access to critical digital technology and components for weapons manufacturing which has shown that a determined fighting force aided with leading technology can overcome a larger power.

The US has two examples in their recent history of using economic tools to confront a threat. Japan in WWII and The USSR in the cold war. Soon after the US completely cut Japan off from oil, the Japanese attacked Pearl Harbor and secured oilfields in Indonesia. After the war, the US took a more nuanced approach to managing the Soviet Union. The US avoided confrontation with the USSR at the peak of its power and weakened the Soviet economy over time. The US avoided pushing the Soviets to desperation while they were strong, so they had no feasible options for improving their position through war. If war were to break out in the Pacific, then unlike Russia, China could keep ships and tanks running, but it would be at a disadvantage with advanced drones and intelligence systems. Hopefully, the Ukrainian example can deter another war in the Pacific.

Full document link below.

Zen on Tech Newsletter V13 - Nov 2022.docx
Download PDF • 3.36MB

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