China Suffering From US Restrictions on Chip Exports

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President Donald Trump has embraced and continues to enforce the Biden administration’s ban on the sale of advanced semiconductors and semiconductor manufacturing machinery to China. Though at first the embargo seemed to be more posturing than anything else, recent reports out of China suggest that the policy is beginning to bite.

Chip shortages have slowed the overall pace of Chinese technological development, especially in artificial intelligence (AI). That may warm the hearts of those who would interfere with any Chinese advance, but, like China’s use of its near monopoly on rare-earth elements, the leverage will only last so long. China, like the United States, will develop workarounds to address interruptions in rare-earth supply. Ultimately, technological solutions will likely disarm both advantages.

For the time being, China is hurting. Shortages of advanced semiconductors have become so acute that the regime in Beijing has taken control of distribution for China’s No. 1 chipmaker, Semiconductor Manufacturing International Corporation. It is hardly surprising that Beijing has given priority to Huawei Technologies, the nation’s technology champion. For the rest, Chinese technology companies are battling each other for access to advanced computer chips. Shortages even forced AI star, DeepSeek, to delay the release of its latest model earlier this year.

China’s authorities and business community are naturally looking for ways to relieve this strain and catch up to American-controlled production capabilities. They have a long way to go. The country today, according to government sources, has only about 25 percent of global chipmaking capacity across all types, and much less of advanced chips.

China’s catch-up will be that much more difficult because Washington, in addition to blocking the sale of advanced chips to China, has also blocked the sale of chipmaking equipment, most notably extreme ultraviolet lithography machines.

Nor is there any sign that Washington will relent on its ban. Although Nvidia, eager for the revenues that Chinese sales would bring, has spent millions lobbying Congress and the White House to relax the sales ban, Washington has not moved at all and even interfered with Nvidia’s sale of the less powerful H20 AI chip to China. It is noteworthy in this regard that when Trump recently met with Chinese leader Xi Jinping in Busan, South Korea, during the Asia-Pacific Economic Cooperation (APEC) summit, the American ban attracted no attention.

Beijing, unsurprisingly, is keen to erase the impediment that chip shortages pose to Chinese technological progress. To encourage domestic development, Beijing has forbidden the use of existing Nvidia chips in China. In place of advanced chips, Chinese tech companies have developed methods to bond older, less powerful chips together to deliver the computing power needed for AI applications and other advanced technologies. This workaround has, of course, greatly increased Chinese demands for older, less powerful chip designs, also straining domestic production capacities.

At least access to American sources of these older chips is not banned, though this solution is less efficient than using advanced chips and more prone to error, drawbacks that have also slowed the advancement of Chinese technology.

Between American chip bans on the one side and Chinese threats of rare-earth supply interruptions on the other, it would seem that each country holds a trump card (no pun intended) against the other in this trade war. Either country, however, needs to remain aware that the other is pulling out all the stops to end-run the limitations imposed and threatened by the other. It is a neat, if ironic, parallel. The more either pulls the lever at its command, the faster and more thoroughly the other will strive to erase the effect. It is a good bet that, in one or two years, neither will have much leverage against the other.