U.S. Targeting China's Access to Semiconductors: Effective Economic Coercion?

For the past year and a half the U.S. has been unilaterally attempting to obstruct China's access to domestic infrastructure and microchip technology through economic coercion by blacklisting Chinese tech companies and wide-reaching export controls. This is due to the U.S.’s concerns that Chinese companies like Huawei could use its installed technology as tools of surveillance on U.S. citizens or even to disrupt the infrastructure of states at the behest of the Chinese government and that imported semiconductor technology is being transferred from private Chinese companies to the Chinese military.

The U.S. took initial action in May of 2019 by designating Huawei to be added to the Export Administration Regulations Entity List. This was effectively a blacklisting of Huawei by the U.S. government.  A second round of export controls - first announced this past May - went into effect earlier this month. These are intended to cut off Huawei from overseas microchip manufacturers by imposing additional restrictions to make it so that foreign microchip suppliers who use U.S. software or technology in the manufacturing process cannot sell their products to Huawei without an export license from the U.S. Department of Commerce.

The U.S.’s export controls on microchips have naturally resulted in China focusing its efforts on the development of its domestic production capabilities.  It appears that the U.S. was not satisfied with just restricting China’s access to imports of microchips, as recent reports indicate that the U.S.’s next target in its unilateral trade campaign is one of China’s top domestic microchip producers, SMIC. The Department of Commerce announced on September 25th that it would be implementing export controls on SMIC which would require a company to obtain an export license in order to continue doing business with them. This measure is motivated by a review from SOS International which states that the sale of technology to SMIC poses “an unacceptable risk of diversion to a military end use in the People’s Republic of China.”  

In the short term these export controls may effectively slow China’s development of microchip production and cut off its access to the global market. However, these measures could have unintended consequences for the U.S. The internationally distributed supply chain of microchips has made it difficult for a nationally focused chip producer like China to effectively carve out its own niche in the market. The U.S. is jeopardizing this advantage with these actions. The Chinese consumer market is the largest in the world for microchips, so although companies will comply with the U.S.'s unilateral measures for now, it is incentivizing the development of technologies and alternative supply chains that circumvent the U.S. 

These export controls are hindering China’s production and development capabilities. However, the U.S.’s measures are adding uncertainty into the market and supply chains of one of its largest exports, and degrading the perceived reliability of U.S. microchip suppliers. While China’s supply of microchips will be hindered in the short term, these trade restrictions are practically conceding the U.S.’s market share to foreign companies.