Freeze-in-Place: The Impact of US Tech Controls on China, Rhodium group, Oct. 21, 2023.
On October 7, the Biden administration unleashed a barrage of new controls on China-bound technologies, with a clear intent to constrain the development of China’s semiconductor industry and keep cutting-edge chips out of China’s hands. As we explained in a note published before the announcement of the controls, the evolving US technology strategy features both narrow and broad elements. The rules are narrowly focused on critical technology domains like high-performance computing, while at the same time far-reaching in their ambition to choke off China’s capacity to develop and scale leading edge semiconductors. This note explains the new controls, discusses the policy objectives behind them, assesses their potential impact—from short-term industry costs to broader spillover effects—and considers possible responses from foreign partners and China.
Below are our key takeaways:
The new controls are far-reaching and comprehensive. They target key semiconductor chokepoints and are designed to thwart attempts by China to innovate its way around the constraints. Even as Washington grants licenses to mitigate some of the immediate costs to US-based firms and those based in foreign partner countries, the restrictions could be tightened over time to steer firms away from China.
The immediate costs to US semiconductor manufacturing equipment (SME) firms arising from a narrow implementation of the controls would be fairly limited (between $1.4-$3 billion in annualized sales, according to our estimates). However, if these controls were to be applied more broadly, for example to target foreign fabs in China, costs could rise quickly (to $4.6-$5.2 billion in annualized sales, based on our calculations).
The memory chip industry could be most affected in the long-term, with the risk of collateral damage to firms based in US partner countries. Restrictions on Chinese memory champion YMTC could rectify market imbalances by keeping a highly subsidized Chinese NAND supplier out of the market. However, foreign chipmakers SK Hynix and Samsung, now at the mercy of US licensing decisions, are likely to face significant costs linked to the restructuring of their supply chains.
The US administration appears willing to bear the diplomatic and economic costs of imposing unilateral controls. There is a real risk that foreign SME competitors, over time, could remove US inputs from their supply chains. At the same time, the US has signaled that it will not hesitate to pursue extraterritorial measures if partners fail to fall in line with the new tech restrictions.
Beijing has few retaliatory options. Restrictions on critical inputs like rare earths would only accelerate diversification efforts and hurt exports at a time when China’s economy is already struggling. Still, US firms in China could be targeted as China intensifies its efforts to replace US inputs. Beijing could also use anti-monopoly tools to disrupt cross-border mergers and acquisitions in strategic tech areas.
More controls are in the pipeline. The White House is advancing plans to create an outbound investment screening regime to prevent US capital from contributing to the development of force-multiplying technologies in China, including advanced semiconductors, high-performance computing, and possibly bio-manufacturing and high-capacity batteries.
(To be continued… The full report is available here)