Why is Biden limiting more chip tech to China? it’s complicated.

Reuters recently reported that the Biden administration plans to expand the ban on imports of some advanced semiconductor chips and some of the most advanced chip-making equipment to China.

The goal is supposed to be the development and deployment of the most advanced computer and chip manufacturing technologies by Chinese companies. This is a very complicated issue and the outcome is not clear. But here are three questions.

1. Will export bans succeed?

From the perspective of the White House, export controls are an important tool to protect the nation’s technological interests, especially against unwanted military advantage. But the real question is how difficult it will be for Chinese companies to develop alternatives. Is there some technological bottleneck that ultimately needs to be overcome, or can alternative paths get you there?

To make the most sophisticated digital logic chips in ASML’s most expensive lithography machines, ASML and its supplier Zeiss have spent decades learning how to build the complex optical system and ultra-violet light source and putting it all together. Although there may be alternative ways, the problem is so demanding that it takes a fair amount of investment and time. Cutting off access to Chinese companies will likely hamper them for some time. Access to leading lithography equipment has long been limited, so companies like Shanghai-based Semiconductor Manufacturing International Company (SMIC) have consistently struggled to keep up with the latest chip generations.

Conversely, if there are alternative routes that take you there, export bans will end up diverting investment into them. A 2007 study by the US Department of Commerce’s Bureau of Industry and Security (BIS) with the US Air Force Research Laboratory examined the impact of export controls on the US space industry. An assessment of the impact of International Traffic in Arms Regulation (ITAR) export controls found that US satellite production revenues fell from 63 percent in 1996-1998 to 41 percent in 2002-2005 due to these controls. The report noted that “ITAR has impacted US competitiveness by encouraging other countries, in most cases our allies, to develop indigenous space capabilities and industries that are now traded internationally.

Many in Washington assume that American companies enjoy an overwhelming technological lead and lack the R&D to enable countries on the other end of the embargo to develop alternatives. That may have been in the late 1980s and 1990s, but as we know, many countries, including China, have developed remarkable capabilities in many fields. The United States should eliminate domestic companies that are global leaders today as harmful consequences.

2. How will new or additional restrictions affect producers?

For equipment manufacturers such as applied materials
Huge
or cow research
LRCX
, new licensing requirements for exporting will make their work more difficult. It also encourages more investment in Chinese government options, which could mean future competition. China is working hard to avoid attempts to contain them and is investing on a broad front to develop domestic capabilities. China’s semiconductor equipment market is huge, thanks to investment levels in new fabs. Companies like Applied and Lam benefit greatly by selling into this market. As many in Washington proclaim, it’s more than just a positive impact on their bottom lines. Selling there gives them the increased scale efficiency and necessary profits to invest in future technologies. Reducing their market share risks hurting these companies in the long run.

Equipment manufacturers can tell you that they benefit greatly from working closely with Chinese (and all) customers. This is because those customers can see and understand what they are doing. My understanding is that this aspect is widely underappreciated.

Chip companies like AMD and Nvidia are in a somewhat different dilemma. Limiting their sales would reduce their leverage in market size and increase China’s domestic options. We should not think that China is a developing country that does not have the knowledge to create new designs. Conversely, there are many modern engineers who know how to use electronic design automation tools and design alternative chips.

3. Is this a sustainable strategy in the long term?

The key to effective export controls is understanding where the United States has technological advantages, how we have achieved them, and how we can sustain them. Often this stems from past huge investments in basic scientific research and a foundation of deep understanding and intellectual knowledge that cannot easily be replicated. It also means working closely with partners on this front and coordinating policy.

Ultimately, the way to win this type of race is to run fast. As a chemist by training, I point out to my more technically inclined colleagues that when the universe cools to four degrees Kelvin, all gross margins go to zero. Innovations in this model are like hot spots (I often refer to the Boltzmann equation for this, but I won’t bother you with the details here). You can wrap that innovation in a blanket to keep it warm and cool, but eventually all that knowledge will leak out and the innovation will sell. This is another way of saying that almost all great proprietary inventions eventually become commodities, and the only future is to innovate. Ultimately, that’s the big hope for America, that we can continue to do that.