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Entering a new phase of decoupling as the US – China trade war escalates

Oct 17, 2022

Economic warfare against China has been waged by the US for more than 4 years now. On Friday the 14th of October the Bureau of Industry and Security (BIS) announced new extraterritorial limits on export to China of advanced semiconductors, chip-making equipment, and supercomputer components. Broad changes in the Export Administration Regulations (EAR) constitutes an effective embargo with the purpose of thwarting Chinese capabilities.

Framed as national security measures, the new controls could suggest that even harsher measures are to come, that may stretch into other sectors like manufacturing and finance. The endgame of US trade policy towards China remains hazy, however, the US seems adamant on slowing down Chinese technological advancement at any price.

The new controls include restrictions on the participation of US companies in enabling any semiconductor development or production at a facility in China. BIS stated that: “These items and capabilities are used by the PRC to produce advanced military systems including weapons of mass destruction; improve the speed and accuracy of its military decision-making, planning, and logistics, as well as of its autonomous military systems; and commit human rights abuses.”

As a response to Washington’s new restrictions, the world’s most important semiconductor toolmaking firm, ASML, told its US’s employees to stop servicing Chinese customers. According to the new rules, it restricts the ability of US persons to support the development or production of certain chips without a license. As of now, the rules appear to be quite wide-ranging, and precisely what it means in practice is not clear.  

The actions taken is the Biden administration’s most aggressive yet and depending on how broadly the US enforces its new restrictions, the effect could extend into industries such as high-end-computing, aerospace, electrical vehicles and even smartphones. This sets up the next phase of decoupling as much riskier and even more unpredictable.


What next?

The restrictions are expected to alter supply chains and operations of major companies in the coming months. To limit the direct impact BIS has established a Temporary General License (TGL) authorizing specific manufacturing activities in China for items that are intended to be used outside of China.

The US will need the full support of its allies, meaning coordination of economic and industrial interests. An example is the launching of “Chip 4”, an alliance with Taiwan, Japan, and South Korea.

China will respond. As on the 16th of October, President Xi warned the US of further support for Taiwan. It is not unlikely that China resorts to reprisals against US allies such as South Korea, Taiwan, and Japan.

Private actors and companies will experience further geopolitical volatility and risks as decoupling is expected to continue. Follow-on restrictions are to be expected they may even affect financial ties across many sectors. Some experts have speculated that the next wave of restrictions and bans will target foreign investment in Chinese tech; venture capital firms supported by US citizens in countries like Japan, that invest in companies in China will need permission from the US government before acquiring Chinese companies.