In efforts to cripple the technological advancement of the Chinese government, the Biden administration has implemented new foreign policy surrounding the sale of semiconductor chips.
This surprising and bold move from the Biden administration could potentially cripple the global tech industry and affect manufacturers even in the US, as the airtight deal prevents any sort of trade of semiconductors with China, a leading tech manufacturer.
There has already been significant pushback from within the US, as sales to China are a major revenue stream for major chip manufacturers, and could potentially cripple their businesses, and are already in talks with Biden surrounding the policy and its potential impact on the US economy.
What is a semiconductor and why is it important?
From the phone in your hand to the transportation you use, even your washer and dryer are a product of one of the most complex supply chains today, known as the semiconductor supply chain.
A semiconductor is a small chip about the size of a grain of rice that is efficient at controlling and processing electrical signals. It's like the brain of an electronic device; without it, a device's functionality would be extremely minimal.
However, semiconductors aren’t just used for household purposes. Semiconductor chips are the building blocks of modern military technology, enabling advanced weaponry, secure communication, surveillance, missile detection and deployment, and even nuclear deterrence.
What exactly prompted government intervention?
In a bid to curtail the technological advancements of the Chinese government, the Biden administration has implemented a new foreign policy regarding the sale and distribution of semiconductor chips. This move is part of a series of efforts aimed at constraining the technological and military capabilities of the Asian global powerhouse.
This audacious step from the Biden administration could potentially disrupt the global tech industry and impact manufacturers, even within the United States. The stringent policy effectively prohibits any trade involving semiconductor chips between the United States and China, a leading tech manufacturer.
The law places a complete ban on the sale of semiconductor chips manufactured in the United States or using its machinery, to China. It also includes robust protections and regulations to ensure that US technology remains far from China's reach. This restriction extends to various everyday devices, from phones and headphones to computers, health devices, and even cars.
Given the two countries are nuclear powers, the move is aimed at limiting further development of China’s military capability, to prevent them from overtaking the US as a global military superpower.
Unsurprisingly, this move has already encountered significant resistance within the United States. Sales to China constitute a substantial revenue stream for major chip manufacturers, potentially endangering their businesses. Notably, major semiconductor companies like Nvidia, Intel, and Qualcomm are engaging in discussions with the Biden administration regarding the policy and its potential impact on the US economy.
Curiously, the Biden administration also aims to bolster the semiconductor industry in the United States to prevent technology from falling into the wrong hands. Critics argue that this approach may harm the US chip industry as sales decline, prompting manufacturers to seek supply elsewhere.
Clearly, this situation will significantly affect the tech industry, given that China dominates in 37 out of 44 technology production categories. While details remain speculative, this article explores the potential ramifications for the supply chain should this ban persist.
The Biden administration's dilemma revolves around the economic interdependence of the United States and China, where actions in one sphere can substantially influence the other, and vice versa.
Why Now?
Truthfully, Biden has been working towards this for a while, and given that US-China relations continue to deteriorate, it is important for Biden to continue to maintain the upper hand, in order to ensure national security.
The Biden administration has been hard at work trying to change foreign policy relating to China, in order to limit the military capability, amidst increasing tensions between the two global superpowers over the past decade.
The move is not a surprise, as the Biden Administration has been making consistent efforts in this direction, and has continuously hinted at trying to halt China’s technological development program, which has been associated with increased military capability.
At this particular pi
The move has prompted the launch of a large lobbying campaign by the three industry giants to curtail the regulations and convince Biden of another way to restrict China’s development.
Understanding the Tech Supply Chain
The very complex supply chain starts with design and research development, then functionality perfection, followed by Wafer Fabrication, which is what the new law seeks to limit the distribution of.
Wafer fabrication factories, or fabs, do the assembly of the semiconductor chips which is an extremely key component for the device you are reading this on. However, this is only step 2 in a complex 6-step process from raw material to the phone in your hand or computer in your lap.
Next is semiconductor testing and packaging followed by their distribution, and then integration of the chips into hardware and finally into the Apple store or Best Buy where you purchase your technology.
Given the sheer magnitude of the tech industry, complicating the process at such an early stage can have really serious effects on the production of the latest technology.
Potential Impact on Supply Chains.
China stands as one of the largest purchasers of semiconductor chips, and this pivotal role has prompted the most prominent semiconductor manufacturers to engage in discussions with the President. These discussions aim to assess the potential impacts on the economy and chart a path forward in light of the new policies.
In the realm of supply chains, there's always a lurking risk that a particular policy could sever a critical limb. It's not uncommon for companies to swiftly adapt, seeking new buyers and rerouting sales to alternative manufacturers when such disruptions occur. However, the sheer scale of China's involvement in this industry is substantial. In 2021, the US exported semiconductor chips worth a staggering $858 million to China. Even with a rerouting strategy, this represents nearly a fifth of the entire industry's revenue now at stake.
Should the Biden Administration and China fail to reach a reconciliation, the tech industry could find itself navigating treacherous waters. In such situations, trade might persist, but it would entail a significantly more intricate and costly supply chain rerouting process. This complexity could generate substantial losses for all parties involved, inevitably leading to an increase in the final product's price for consumers.
Consequently, we might witness a noticeable impact on all technologies that rely on semiconductor chips, including but not limited to computers, laptops, smartwatches, televisions, cars, gaming consoles, washers and dryers, and even LED lights. The ripple effects of this policy change could extend far and wide across various sectors of the tech industry.
Lead Image by Umberto on Unsplash