Is Biden’s chip ban a tipping point in US-China relations?

The Biden administration’s sweeping ban on high-end semiconductors and chip-making equipment earlier this month marks a tipping point not just in the tech wars, but in U.S.-China relations writ large. Previous export restrictions – most prominently, the Huawei ban – sought to prevent any chips for potential military use. But this move seeks to choke off entirely the high end of Beijing’s high-tech sector by banning export of any advanced chips for supercomputers and artificial intelligence.

Why is it important? Semiconductors are the DNA of the digital economy, enablers of the still unfolding technology revolution. The new and emerging technologies – artificial intelligence (AI), robotics, Big Data, biotech, 3D printing, the internet of things (IoT) – are the drivers of economic growth and national strength in this century, all based on semiconductors. The countries on the leading edge of these technologies will shape the world of the 2020s and 2030s.

The new policy marks a watershed in government industrial policy, unusually unilateralist for the Biden administration. It is the flip side of the $52.7 billion 2022 Chips and Science bill, which subsidizes semiconductor manufacturing in the U.S. and bolsters science research and development. Where that effort is aimed at boosting U.S. competitiveness, the China semiconductor ban seeks to strangle China’s ability to compete in critical sectors.

Biden’s move would block all key elements of the semiconductor supply chain for AI and supercomputers: AI chip designs; electronic automation software for chip equipment; and semiconductor manufacturing equipment and components. It applies to not only U.S. individual and corporations but any foreign company exporting to China that uses U.S. technology.

As virtually all these links in the supply use some U.S. technology, which is dominant, and as export licenses for these have a presumption of denial (with some waivers), it will force U.S. allies and partners to make choices about doing business with China.

In the debate about how much decoupling of the world’s two largest economies is desirable, Biden has opted for a total separation of the high-end tech sector. The U.S. move will at least temporarily freeze the high end of China’s semiconductor industry, already more than a generation behind the U.S. in key areas. It will likely be more than a decade before China attains a level of chips capacity equal to current U.S. levels. If other semiconductor players – South Korea, Japan, the European Union, Taiwan – do not fully comply with these U.S. extra-territorial demands, the new policy will have limited success.

In light of China’s relentless effort to catch up to and surpass the U.S. over the past three decades – in part through the use of intellectual property rights theft, cyber hacking of U.S. firms and forced tech transfer as the price for U.S. firms to thrive in the China market – it feels like a bit of payback. This is emblematic of Chinese leader Xi Jinping’s overreach that has triggered a global anti-China backlash. He pushed it too far against a stronger power.

Of course, China is pursuing its own version of decoupling in key sectors, evident in the growing retreat of U.S. and other foreign investors. And Xi Jinping’s remarks at the recent Chinese Communist Party (CCP) National Congress made clear that regardless of Biden’s new policy, Beijing would accelerate its quest for high-tech self-sufficiency.

Xi’s crackdown on China’s high-tech sector, and the private sector in general, will not help his effort. But China can be forgiven for thinking that U.S.-China policy is to contain or hold Beijing back.

This seems to contradict the major China policy speech Secretary of State Antony Blinken gave last May, in which he asserted, “We don’t seek to block China from its role as a major power, nor to stop China…from growing their economy or advancing the interests of its people,” Whatever the unintended consequences may be, that is precisely what Biden is doing.

Blinken’s speech sought to project a balance of strategic competition and the necessity for cooperation on global issues such as climate and non-proliferation. But inflaming Chinese hyper-nationalism – increasingly a major source of legitimacy for the CCP – will make such cooperation more difficult. Beijing’s sharp overreaction to House Speaker Nancy Pelosi’s (D-Calif.) August visit to Taiwan – simulating a blockade of Taiwan and suspending all channels of dialogue with the U.S. – had already demonstrated a deepening of distrust and excess vitriol.

The next stage of this drama is how China retaliates. Beijing could ban exports on rare earth minerals and other components on which the U.S. electronics industry as well as solar energy depends. Or China might stop exports of screens for TVs and electronic devices, in which it has a large share of the U.S. market. China could also cut purchases of U.S. airplanes or farm goods. Such a race to the bottom at a time of slowing global economic growth could be costly. In any case, China is likely to bring the large chip on its shoulder to other areas of the downward spiraling U.S.-China relationship.   

Relations between the world’s two largest economies will shape the world order over the coming generation. The trend toward fragmentation or a bifurcated world will decrease prosperity and security for both. Now that the U.S. has demonstrated its ability to do grave harm to China’s economy, it would make sense for Biden to offer to negotiate and test whether Beijing is willing to reform some of its industrial policies. But Xi appears to be doubling down on his party-state control of the economy, and the U.S. shows few signs of such economic statecraft.

Ultimately, the U.S. and China need to craft a framework to manage a competitive coexistence. The question is whether that happens before or after a catastrophic clash.

Robert A. Manning is a distinguished fellow at the Stimson Center. He served as senior counselor to the undersecretary of state for global affairs from 2001 to 2004, a member of the U.S. secretary of state’s policy planning staff from 2004 to 2008 and on the National Intelligence Council Strategic Futures Group from 2008 to 2012. Follow him on Twitter @Rmanning4.