Biden’s chip limits on China mark a war of high-tech attrition

The US is escalating the technological cold war with China through new sanctions to squeeze the flow of high-end semiconductors and semiconductor-manufacturing equipment to Beijing.

Don't let the technological arcana fool you: Since advanced semiconductors power information-age societies, the US is seeking to hinder Chinese economic dynamism and military muscle alike. Washington's new policy is a warning to Beijing about the long reach of US power in a globalised economy. It also reflects a sobering recognition that the US can't win its competition with China simply by running faster; it must also slow Beijing down.

This isn't the first time Washington has used its influence on semiconductor supply chains as a geo-economic weapon. Beginning under President Donald Trump, Washington sought to kneecap the Chinese tech behemoth Huawei Technologies Co by denying it the cutting-edge chips it needed to dominate the world's 5G telecommunications networks.

But that was a very targeted denial campaign meant to cripple a specific company that represented an extraordinary national security threat. The new approach is broader: It is technological containment, pure and simple.

President Joe Biden's administration will use an obscure but potent regulation, the Commerce Department's Foreign Direct Product Rule, to prohibit firms from providing certain advanced semiconductors to Chinese companies unless they secure permission from Washington. The administration will also block the acquisition of sophisticated US-manufactured chipmaking tools by leading Chinese firms and slap additional restrictions on dozens of Chinese companies.

The US hasn't, so far, formally blocked the sale of foreign-made semiconductor manufacturing equipment to China by industry heavyweights such as the Dutch company ASML Holding NV. But these measures are a strong signal that if Washington can't persuade key allies such as the Netherlands to introduce their own sanctions, it may compel them to do so instead.

America's policy, National Security Adviser Jake Sullivan explained last month, is straightforward: "We must maintain as large of a lead as possible."

The odd thing about these new sanctions is that American companies aren't the world's leading manufacturers of the chips Washington is seeking to deny to China; firms in other countries such as Japan and especially Taiwan are. But US firms and technology are deeply involved in designing high-end semiconductors, which gives Washington influence over the entire supply chain.

The global reach of the dollar and America's vast network of allies and partners allow Washington to internationalise restrictions it unilaterally imposes. When it comes to economic sanctions, there's only one superpower.

Assuming this policy is aggressively enforced — the Commerce Department has undermined previous sanctions by approving a large majority of license applications — it is likely to be very bad news for Beijing.

Advanced semiconductors, as my colleague at the American Enterprise Institute, Chris Miller, has recently written, are foundational to modern economies and militaries. Despite enormous investments, China has so far struggled to master the design and production of the smallest, bleeding-edge chips, including those used in supercomputers, artificial intelligence applications and critical military capabilities such as nuclear weapons and hypersonic missiles.

Just days before President Xi Jinping seeks to extend his reign at a historic meeting of China's Communist leaders, the US is making it far harder to catch up.

In this sense, the new restrictions represent an awakening of sorts for Biden's team, which once argued that America could outcompete China by being the best version of itself. This thinking drove the administration's efforts to strengthen US technological competitiveness, through investments in the domestic semiconductor industry and scientific research and development.

Necessary as these initiatives were, they did not address the fact that Chinese firms were using nearly unrestricted access to advanced chips and manufacturing equipment made abroad to support Beijing's military buildup and surveillance state. So, the Biden administration concluded that preserving US advantages required constricting that access now.

This is an inversion of the post-Cold War formula for US relations with China, one that sought to use economic engagement and attraction to make Beijing accept the golden fetters of an American-led global system. Now, the US is developing a strategy of attrition meant to grind down its rivals' capabilities to wage the intense struggles ahead.

The extreme example involves Russia, where the US is applying draconian export controls and financial sanctions not to change an incorrigible regime's behaviour, but to drain its coffers and make it a geopolitical has-been.

The US hasn't gone nearly so far with China, which is far more important to the global economy — and to the bottom lines of American investors and firms. In fact, US money continues to fund many companies with close ties to Beijing.

Yet the administration does have the Russian precedent in mind. American export controls have been devastating Russia technologically, building Washington's confidence that it can use similar tools to hold back Chinese innovation — ahead of a period in which tensions will be high and the US will need all the advantages it can get.

This is normal in great-power rivalry: It is hard to check a competitor geopolitically, without also hamstringing it economically. The US is making a big move toward a strategy of technological containment. It won't be the last.