Why an accelerated US-China tech decoupling is truly worrying

A blanket ban on products that use US technology being sold to China would not just affect China’s tech development and hurt US companies with Chinese business
It would also rip up global tech supply chains, leaving the world economy with higher inflation and slower growth

Aidan Yao

Published: 12:30am, 20 Oct, 2022

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A sweeping ban on the sale of semiconductors and advanced chips to China marks a further escalation in an already tense Sino-US relationship. To be clear, tech frictions between the two countries are not new – many Chinese tech firms have been placed on the US entity list in recent years, restricting them from using US technology or operating in that market.

The stated US intention is to prevent sensitive technology with military applications from being acquired by China. However, the latest move – which US officials said was necessary to stop China from becoming an economic and military menace – threatens a significant spillover into non-military applications.

Much uncertainty still surrounds the scale of implementation, but if strictly followed through, the announced measures could effectively sanction China’s access to critical inputs for its technological, economic and social development, with far-reaching ramifications.

For China, the restrictions will slow its technological progress in the near term. In response, Beijing is likely to try to find alternative supplies of semiconductors and/or seek ways to circumvent restrictions, but its success will depend on how strictly the US ban is enforced.

For example, would other countries be liable if their products sold to China involve US technology? A blanket ban, enforced on a global scale, would have a significant impact on China’s tech development, with material ripple effects on its manufacturing and export sectors.

Over the medium to long term, the latest development will remind Beijing of the need to ramp up home-grown innovation. This has been one of the core focuses of China’s dual circulation strategy, although its progress has been hindered by corruption scandals in recent years.

President Xi Jinping’s speech at the 20th party congress stressed the importance of indigenising technological development, and we can expect Beijing to double down on its efforts to expedite domestic innovation in the coming years.

The latest developments will also affect the global production of and trade in tech products. The proliferation of global tech supply chains has been the backbone of globalisation, manifested in the creation of multi-country production networks and increased international trade cooperation.

In the region of Asia excluding China, for example, 54 per cent of its value-added trade with China is in tech and electronic products, according to our research. On semiconductors specifically, China is the world’s largest buyer, spending over US$350 billion on imports in 2020, about double what it spent on oil.

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Theoretically, not all of this trade would be affected by the chip ban, whose stated target on paper comprises the most sophisticated chips for use in artificial intelligence and supercomputers. However, banning China’s purchase of US chips would hollow out some of this trade and create disruptions for firms in China that rely on these specific US semiconductors – many of which could be US companies, such as Apple and Tesla.

Given time, these companies could be forced to shift their production out of China, but in the interim, a possible chip shortage could repeat last year’s disruptions to global trade and tech supply chains.

For the US itself, the implementation will not come without economic costs. Home to some of the world’s largest chip makers, the US is the world’s pre-eminent source of advanced semiconductor technology, even though production of these chips has long shifted offshore (to Taiwan, South Korea and Japan).

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China is the biggest customer of US chips, and sales to China can amount to up to 60 per cent of revenues for companies such as Qualcomm, Texas Instruments and Intel Corp. Strictly enforcing the chip ban could, therefore, inflict pain back on the US by inhibiting the growth of its own companies.

Furthermore, for those who make consumer products that rely on US technology (for example, smartphones, electric vehicles and sophisticated electronics), moving operations out of China – if that is ultimately required – would take time and incur costs. The latter would eventually be passed on to consumers, adding to inflation pressures. Higher inflation and slower growth could be the general consequence of a fragmenting global economy in the years ahead.

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The ramifications of an accelerated tech decoupling between China and the US are truly worrying. While the scale of implementation of the ban remains unknown, it’s fair to say that markets are not yet pricing in a worst-case scenario of a strict and blanket ban, enforced on a global scale.

As we move into US election season with the impending midterm elections, commentary could escalate further – although over the longer term, there remains scope for resistance from Silicon Valley to temper implementation.

However, this remains a further ratcheting higher of US-China tensions in what is already a geopolitically and economically unsettling world. It serves as a reminder that, besides the Ukraine war, there are plenty of other geopolitical risks for the global economy and financial markets to consider.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers