‘An Act of War’: Inside America’s Silicon Blockade Against China

Yet beneath China’s strength is a crucial vulnerability: Nearly all the chips that power the country’s most advanced projects and institutions are inexorably tied to U.S. technology. “The entire industry can only function with U.S. inputs,” Miller says. “In every facility that’s remotely close to the cutting edge, there’s U.S. tools, U.S. design software and U.S. intellectual property throughout the process.” Despite decades of effort by the Chinese government, and tens of billions of dollars spent on “indigenous innovation,” the problem remains acute. In 2020, China’s domestic chip producers supplied just 15.9 percent of the country’s overall demand. As recently as April, China spent more money importing semiconductors than it did oil.

America fully grasped its power over the global semiconductor market in 2019, when the Trump administration added Huawei, a major Chinese telecommunications maker, to the entity list. Though the listing was ostensibly punishment for a criminal violation — Huawei had been caught selling sanctioned materials to Iran — the strategic benefits became immediately obvious. Without access to U.S. semiconductors, software and other essential supplies, Huawei, the largest telecommunications-equipment producer in the world, was left struggling to survive. “The Huawei sanctions immediately pulled back the curtain,” says Matt Sheehan, a fellow at the Carnegie Endowment for International Peace who studies China’s tech ecosystem. “Chinese tech giants are running on chips that are made in America or have deep American components.”

Export-control law had long been seen as a dusty, arcane backwater, far removed from the actual exercise of American power. But after Huawei, the United States discovered that its primacy in the semiconductor supply chain was a rich source of untapped leverage. Three firms, all located in the U.S., dominate the market for chip-design software, which is used to arrange the billions of transistors that fit on a new chip. The market for advanced chip-manufacturing tools is similarly concentrated, with a handful of companies able to claim effective monopolies over essential machines or processes — and nearly all of these companies are American or dependent on American components. At every step, the supply chain runs through the U.S., U.S. treaty allies or Taiwan, all of them operating in a U.S.-dominated ecosystem. “We stumbled into it,” Sheehan says. “We started using these weapons before we really knew how to use them.”

In May 2020, the Trump administration tightened the screws further, this time by making Huawei subject to a formerly obscure provision of export-control law called the foreign direct product rule. Under the F.D.P.R., foreign-made items are subject to American controls if they were produced using American technology or software. It is a sweeping assertion of extraterritorial power: Even if an item is made and shipped outside the United States, never once crossing the country’s borders, and contains no U.S.-origin components or technology in the final product, it can still be considered an American good.

For Huawei, the application of the F.D.P.R. meant the company was virtually cut off from semiconductors. “That rule subjected all semiconductors on the planet to American law, because every foundry on the planet uses U.S. tools at least in part,” Kevin Wolf, a former assistant secretary of commerce for export administration at the B.I.S., says. “If you have one U.S. tool and 100 non-American tools in your fab, that taints any wafer moving across the line.”

In 2020, according to the market-analysis firm Canalys, Huawei was the largest smartphone seller in the world, with an 18 percent market share, besting even Apple and Samsung. Huawei’s revenues plunged by nearly a third in 2021, and the company sold off one of its smartphone brands in a bid to stay afloat. By 2022, its share had fallen to 2 percent.

The Oct. 7 rules represented the sum of everything U.S. policymakers had learned about semiconductors, supply chains and American power. The measures were announced as an “interim final rule,” meaning they took effect immediately — a direct reaction to a perceived weakness in the Huawei controls. “There was a lot of notice before the Huawei rule came into effect, and they spent the time beforehand stockpiling,” says Peter Harrell, a former senior director for international economics at the National Security Council who was involved in crafting the Oct. 7 rules. “That was a tactical lesson — that you need the element of surprise.” More important, the United States had learned that hobbling one company, however large, simply created room for new competitors to step in. A more comprehensive approach would be needed. “The Trump administration went after companies,” says Allen, the CSIS expert. “The Biden administration is going after industries.”

Source: New York Times

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