The Nexus of High Tech and International Relations

Less than a week ago, on August 16, US tech giant Intel
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canceled a $5.4 billion acquisition deal with Israel-based Tower Semiconductor after failing to reach a required agreement with Chinese regulators. China is one of Intel’s most significant markets. The latest salvo in a months-long series of hostilities, this cancellation marks a continuation of China’s unrelenting tactics in its chip war with the US and its allies. On July 3, Beijing declared a license requirement for exporters of gallium and germanium—rare-earth metals used in the manufacture of semiconductor technologies, including computer chips, spy satellites, and artificial intelligence. The rare-earths mandate fired back at the Biden administration’s mounting restrictions on microchip exports to China.

The chip war largely stems from the US’ concerns regarding China’s use of semiconductor technology in its military. In 2022, President Xi Jinping introduced his vision for the establishment of a “world-class” Chinese military. According to the 2022 China Military Power Report, Beijing aims to develop advanced dual-use technologies that could potentially surpass Washington’s. While the full extent of China’s military capacity is still unclear, its technological prowess positions it as a force to be reckoned with—TOP500, a ranking of the world’s 500 most powerful supercomputers, notes that while the US ranks number one with 150 supercomputers, China closely trails behind with 134.

However, China’s military industry possesses one critical weakness: foreign technology inputs, including microchip exports, underlie most of its cutting-edge applications. A report found that China produced a mere 5.9% of the semiconductors it used in 2020, while a separate report found that China imported $350 billion worth of semiconductors in 2020—more than the total value of its crude oil imports. In 2021, China was the world’s largest consumer of semiconductor manufacturing equipment, accounting for 26% of global demand.

Seeking to de-risk its relationship with China, the US government has instituted various microchip export restrictions that have kept Beijing’s rapid technological development in check. In October 2022, Biden imposed an export license requirement that curtailed China’s access to semiconductor technologies produced by US companies. Biden has since convinced other global players to follow suit. Namely, in July 2023, Japan officially banned the sale of 23 types of semiconductor equipment to China. Japan’s restrictions are far more extensive than the US’, hindering China’s production of advanced chips as well as basic chips used in technologies such as cars and smartphones.

Furthermore, on September 1, the Netherlands is set to begin curbing its semiconductor technology exports to China. This new regulation would prevent the Dutch ASML from exporting advanced chip manufacturing technologies without obtaining government-approved licenses beforehand. ASML currently produces the most cutting-edge photolithography scanner equipment, which is essential to the fabrication of microcircuits used in high-performance computing devices.

These export controls have compelled Beijing to take retaliatory action. Earlier this year, China’s government banned the import of chips made by the US corporation Micron and imposed trade and investment sanctions on Raytheon Technologies and Lockheed Martin
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. China’s latest regulation on gallium and germanium exports serves as a direct counterattack to the US’ global partners. Data suggest that, in 2022, Japan and the Netherlands were among the top importers of China’s gallium products.

Nevertheless, this regulation may not necessarily have severe impacts in the long run. Even before Beijing instituted the regulation, an extensive smuggling network existed for rare-earth metals. In 2009, smuggling accounted for 40% of China’s overseas exports, and, at its peak, the size of the rare-earth black market may have been close to half of all transactions. China’s crackdown efforts over the past decade have been ineffective: in 2014, smugglers allegedly exported as many as 40,000 tons of rare-earth metals out of the nation. Considering China’s historical inability to control smuggling, it is likely that illicit sales will intensify in the coming years as the market supply of gallium and germanium diminishes.

Besides smuggling, increased import diversification may also limit the effectiveness of China’s new export controls. Japan has, in fact, already taken steps to minimize the impact of China’s sanctions, having reached rare-earth development agreements with Australia, Mongolia, and Vietnam. And although import diversification poses time and monetary constraints, a united effort spearheaded by a coalition of countries could mark a tipping point in the future of the rare-earths market.

While China’s rare-earths controls may ultimately backfire, the US’ chip regulations may have unforeseen consequences, too. Left without foreign technological support, Chinese companies must come together and develop breakthrough approaches to semiconductor manufacturing. Biden’s sanctions may end up spurring long-term growth in China’s technology sector.

Other countries may experience ramifications as well. The failed deal between Intel and the Chinese government will hamper Israel’s chip manufacturing capacity. Additionally, with China producing 40% of Samsung’s memory chips and 40–50% of SK Hynix’s, South Korea’s chip giants may encounter supply shortages in the wake of the recent export restrictions. The implications are more severe for Taiwan. As it produces more than 90% of the world’s most advanced microchips, Taiwan faces a potential risk of military conflict should the chip war prompt China to take the offensive in the distant—but not imminent—future. However, former national security advisor Robert O’Brien posits that the US would destroy Taiwan’s semiconductor factories rather than let them fall into China’s hands in the event of an impending invasion. The chip war has further cornered Taiwan into an uncomfortable position in the evolving geopolitical landscape.

The past few months have given way to myriad uncertainties vis-à-vis the semiconductor industry and the federal government’s role in technological development. Yet, one insight is crystal-clear: the chip war is an issue that affects the global community, not just the US and China. Should tensions continue to escalate, the chip war could very well extend beyond semiconductors to industries like electric-vehicle technologies, wherein China has the upper edge. Thus, both countries must think twice before introducing further restrictions that may have implications that are much broader than intended.

It is clear that the future of high tech is at stake.

Special thanks to Mr. Jeffrey Xu for the exceptional editorial edits, content, research, and quantitative graphs that he provided. Jeffrey Xu is a Summer Analyst at CJPA Global Advisors and is a rising first-year student at Princeton University.