U.S.-China Trade War Over Technology Heats Up; What It Means For Apple, Micron, Tesla

Beijing is targeting U.S. tech firms in response to Biden's chip export bans. This could mean big trouble for companies like Apple, Micron, and Tesla.

U.S.-China Trade War Over Technology Heats Up; What It Means For Apple, Micron, Tesla

It is surprising how one-sided the U.S./China trade war over technology has been. This is changing.

Beijing held back for nearly four years -- even after the U.S. slapped a broad ban on the sale of design software, semiconductor production equipment, and advanced chips by companies such as Nvidia (NVDA), and Advanced Micro Devices(AMD) in China.

Gregory Allen, senior fellow at the Center for Strategic and International Studies, wrote that these measures were "a policy of actively strangling large sectors of the Chinese tech industry - strangling in an intention to kill".

Beijing seemed to be unable to respond. The U.S., its allies and China were united in their opposition to the invasion of Ukraine by Russia.

China has finally retaliated March 31 by announcing a review of security at the U.S. memory chip giant Micron Technology.

A week later, China was reported to be considering a ban on rare earth metal exports. The metals are the main source in the world, and are vital for semiconductor manufacturing, electric vehicle motors, missiles systems, and more.

China's retaliation puts American multinationals in greater danger. Beijing wants to send a clear message that countries who support the U.S. in its trade war are going to pay a high price. The U.S. faces the risk of wider economic disruptions if China retaliates against decoupling and closes off exports essential technologies and materials it dominates.

Congress and the White House are moving closer to banning TikTok, or forcing China's ByteDance company to sell it.

Congress has acted without much concern for retaliation.

"Chinese leaders worry about high-tech manufacturers moving production to India or Vietnam, and won't want to accelerate this trend," wrote Adam Segal who chairs the Council on Foreign Relations national security program on emerging technology.

If this is correct, Beijing might not see much benefit in going after Apple's (AAPL) and Tesla's (TSLA), both of which manufacture products in China that are sold for export and domestic consumption.

Beijing seems to have found a way to respond to the U.S. chip restrictions, without having to face such a backlash. An export ban on rare earth metals could give tech companies more reasons to remain in China. China is the only country that processes 90% of all rare earths.

Beijing can punish the U.S. by targeting Micron, while simultaneously strengthening Chinese chip companies. China has also sent a clear message to South Korea. Both memory giants Hynix and Samsung have large operations in South Korea.

Micron Technology will generate nearly $5 billion in revenue, or 16% of its total, from companies located in China and Hong Kong. Beijing could restrict Micron, putting those sales at risk. Even a ban on sales to firms outside China that make products in China could be much more damaging.

Micron Technology provides memory chips for Apple iPhones. Apple has recently increased production in India but the majority of iPhones are still manufactured in China. Micron's customers would not be affected by a blacklisting of Micron because one memory chip could be substituted for another. China would not risk a mass exodus from high-tech manufacturing.

Apple had planned to use cheaper Chinese chips for iPhones sold in the local market as recently as September. Apple was forced to change its mind after the U.S. unleashed a weapon that would cripple China's technological ambitions.

The U.S. blocked access to hundreds of entities, on a case by case basis, up until then. The export bans were aimed at firms or research centres linked to China's army. Those involved in the surveillance of Uyghur Muslims or those charged with export violations or intellectual property theft.

But these restrictions were not tight enough to seriously impede China's progress in technology. This may explain Beijing's reluctance to respond.

In a speech delivered in May 2021, President Xi Jinping stated that "Technological Innovation has become the primary battleground on the global playing fields and the competition for tech dominance is going to grow unprecedentedly fierce."

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According to the December 2021 report from Harvard's Belfer Center for Science and International Affairs, China was likely to dominate. The authors concluded that China had "already become No. 1" in key 21st-century technologies such as AI and semiconductors, quantum computers, green energy, and quantum computing. In some areas, China is "No. It was also on track to surpass the U.S. in other areas within a decade -- unless there were major changes. Something major changed starting in September.

National Security Advisor Jake Sullivan stated in a speech on Sept. 16, that U.S. Export Controls previously aimed at maintaining technology leadership - staying "only a few generations ahead" geopolitical competitors -- but did not strive for dominance.

Sullivan stated that "that is not the current strategic environment." He said that the U.S. is facing a competitor who will devote almost unlimited resources to achieve leadership in technologies which can act as 'force multipliers.

The new goal is to "maintain a large lead as possible."

In September, the Biden administration blocked sales of high-end AI chip from Nvidia to Chinese companies. On Oct. 7, the U.S. issued sweeping export regulations aimed at stopping China's chip development at all chokepoints.

These rules do not just create a presumption that Chinese purchases of AI chips are denied. China is also denied the software and equipment needed to manufacture these chips. The rules also deny China access to high-level equipment for manufacturing chips and the components needed for it. The rules are also designed to rob the Chinese chip industry's brainpower. The rules require that any U.S. resident, citizen or company contributes to the advanced semiconductor production in China with a license.

Export rules will set a floor for chip equipment above 14-nanometer production by China's biggest chipmaker SMIC as early as 2019. The U.S. wants to undermine China's semiconductor capabilities as the industry strives for ever-smaller semiconductor circuits that translate into faster and more energy-efficient semiconductors. The U.S. initially restricted exports in 2020 to the SMIC, a state-owned company. It allowed sales of equipment above 10 nanometers.

Taiwan Semiconductor celebrated the beginning of mass production with its 3-nanometer-technology. TSMC will build a 3nm fab as part of a 40 billion dollar investment in Arizona.

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The success of U.S. Export Controls depends on the cooperation from key allies. The news on this front has been mostly positive. Taiwan, Japan and Netherlands have largely agreed to U.S. demands. ASML, the only supplier of the extreme ultraviolet lithography (EUL) equipment required for the most advanced chips, is located in the Netherlands. ASML is going even further. ASML is also restricting the export of deep ultraviolet-lithography equipment. This gear, according to reports, allowed SMIC to achieve 7-nanometer manufacturing.

South Korea is also on board, even though it wants assurances that its chipmakers will continue to invest in China.

Xi, in a speech to Chinese businessmen, blasted U.S. policies of "all-round, containment, and suppression" against his country. This policy has brought unprecedented challenges to the development of China.

Fresh from a China visit with a delegation that included CEOs of Airbus (EADSY), and Alstom he voiced his frustration at the U.S. approach and the assumption that Europe would follow suit.

Is it in our best interest to escalate (a crisis) in Taiwan? Macron is quoted as saying "No".

Matt Sheehan, a fellow at the Carnegie Endowment for International Peace, warned that America's "strongly nil sum approach" in confronting China on technology may not be popular.

This approach is "not equally compelling for countries that do not see themselves as locked into a struggle to be the dominant global superpower."

Macron's criticisms are an exception in the U.S.-China Trade War. In a speech on March 30, European Commission President Ursula von der Leyen painted the picture of a "China that is becoming increasingly repressive in its own country and more assertive overseas."

Xi maintained his "no limitations" friendship with Russian president Vladimir Putin, imposed Hong Kong's control and indicated that Taiwan may be next. All of this has increased support for America's escalation in the cold war on technology with China.

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Biden's gamble is seen by some analysts as a calculated one. It is a bet that China's semiconductor industry will become stronger and more self-sufficient if China's technology advances are slowed down in the short term.

But near-term worries are paramount. A 2021 Boston Consulting Group report estimated that Taiwan has 90% of the world's manufacturing capacity for advanced chips. To de-risk the supply chain, the U.S. is expanding its semiconductor production. This includes $52 billion of subsidies from the Chips Act 2022. Similar efforts are being made in Europe and South Korea.

Biden may not have stopped there. Beijing might try to enforce its will on Taiwan through force, as the U.S. weaponizes Taiwan’s advanced chipmaking.

It's a scenario that is almost unimaginable, and one that appears certain to plunge global economics into chaos.

Roy Chun Lee, Bloomberg's deputy foreign minister, said that China was "seriously considering" an economic blockade against Taiwan. The idea is to "win the war without a fight", he explained. He said that a blockade can easily lead to a military confrontation.

A scenario that was only slightly less explosive appeared to be a risk early this year. The U.S. broadcast intelligence that China could begin arming Russia in order to help Putin finish Ukraine.

The U.S. government and European officials both warned Beijing of the serious consequences that would follow if it crossed that "redline".

Xi, however, is not willing to go beyond the red line, as he prioritizes China’s economic strength and undercuts America wherever he can.

In March, China achieved a PR coup, bringing together Iran and Saudi Arabia to restore diplomatic relations. Xi, claiming neutrality regarding the Russia-Ukraine crisis, then visited Putin to discuss China’s peace plan.

Xi's peace efforts are credited by Macron during his visit to Beijing, even though Kyiv views the plan as a non-starter. Macron didn't stop there. Airbus has announced plans to build a second assembly plant near Beijing, as it replaces Boeing (BA), amid increased U.S. China trade tensions and geopolitical tensions.

Beijing uses its economic power to create a wedge between America and its allies.

Tesla (TSLA), CEO Elon Musk, tweeted a few days after Airbus' announcement that the company would break ground on a new Shanghai plant this year that will produce 10,000 Megapack batteries to meet the growing demand for energy storage.

Ford (F), meanwhile, has signed a contract with Contemporary Amperex Technology of China, or CATL, for the production of lithium ferrous-phosphate EV battery at a newly built factory in Michigan. Tesla is said to have had similar talks with CATL. Ford and CATL's partnership has attracted criticism from U.S. legislators who are angry that a Chinese company could benefit from Inflation Reduction Act subsides, even if it is only in an indirect way. Beijing is reportedly planning to examine the deal, as it fears Ford could gain access to sensitive technology.

Seaton Huang, a researcher at the Council on Foreign Relations, wrote that the Ford-CATL partnership "is a symbol of the difficulty for the United States in balancing the interests of the private sector with the desire to decrease dependence on Chinese technology."

Beijing could be planning to disrupt the supply chain as the U.S. government provides hundreds of billions in subsidies.

China may restrict the export of equipment and technology used to make large solar panels.

Micron, a chip manufacturer in New York that is investing $20 billion, warned recently about the potential impact of a Chinese ban on exports of rare Earths.

The U.S. works to diversify its supply of rare earths. MP Materials, a major rare-earths miner, via its Mountain Pass complex in California, has been shipping its bulk concentrate to China since the 1970s for processing. It's now beginning to separate rare earths that it mines. The next step will be to complete a Texas facility that can produce enough magnets for 500,000 electric vehicles per year. General Motors is a strategic business partner.

Analysts say that the U.S. can diversify its economy away from China in rare earths and the solar industry. The process could take several years and be expensive.

Five years after Donald Trump's trade war with China, the two largest economies in the world are still closely intertwined. The two-way U.S. - China trade, including Hong Kong and Macau, will reach a record $725 Billion in 2022. This is an increase of 2.5% over 2018.

This is not to say that there is no decoupling. Boeing jets and semiconductors have seen a decline in trade. Food inflation is to blame for the surge in agricultural exports to China.

In the same time period, U.S. - Vietnam trade increased by $80 billion and reached $139 billion. Yukon Huang, a fellow at Carnegie Endowment, and Genevieve Slosberg note that China's exports have more than doubled in the last five years. Exports to Vietnam grew largely in computer accessories and telecoms equipment. Chinese exports in the U.S. declined.

It is implied that "China exports less directly to the United States, but now it exports more indirectly."

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