THE CHINESE government was caught off-guard in October last year when America hit it with tough export controls on high-powered semiconductors. Communist leaders in Beijing took months to formulate a firm response. Today China appears far more prepared to fight the simmering war over the future of technology. A recent strengthening of those American chip controls by President Joe Biden’s administration was matched just three days later, on October 20th, with new restrictions on exports of Chinese graphite.
America’s latest volley, which restricts the types of chips that can be sold to China, has been anticipated for weeks. Its original controls curtailed sales to Chinese entities of the cutting-edge chips used in the development of artificial intelligence (AI). This included the A100 chip made by Nvidia, a Californian chipmaker. But the restrictions, known as “foreign direct product rules” (FDPRs), still allowed Chinese companies to buy less powerful integrated circuits. With ingenuity, many such chips could be strung together to produce greater processing power.
A recent home-grown chip that popped up in mobile phones made by Huawei, a Chinese telecoms giant first blacklisted by America in 2019, has fuelled concern in Washington that China was finding ways around the rules. To forestall more Huawei-like surprises, the latest FDPRs target broader performance measures, making it more difficult to combine punier parts into a more powerful whole. Chinese companies can no longer, for instance, buy Nvidia’s less advanced A800 and H800 chips as replacements for A100s.
This time China did not drag its feet. The ministry of commerce introduced licences for exports of high-grade graphite products from December 1st. The grey material may seem dull compared with powerful microprocessors. But it is commonly used in anodes of lithium-ion batteries. This makes it critical to many countries’ decarbonisation plans. And, because Chinese firms refine about 90% of the world’s graphite, it gives China leverage.
For several years China has been testing out the use of graphite as an economic weapon. Starting in 2020, after a small diplomatic row with Sweden, Chinese companies have been quietly prevented from selling graphite to partners there. Some insiders suspected that the informal ban was aimed at holding back the development of green technologies in Sweden.
The latest restrictions are much broader and more formal than those piecemeal ones. Unlike an all-out export ban, mandatory exports licensing does not completely undermine the domestic graphite industry, which sells a lot abroad. It also allows the authorities to target buyers as it pleases. The tool has become China’s weapon of choice in the economic war with America. Similar measures were applied in August to gallium and germanium. China controls 80% of the world’s supply of the two metals, which are used in chipmaking. Gallium, in particular, shows promise in next-generation semiconductors.
Foreign buyers of Chinese products are not the only collateral damage in the escalating economic conflict. On October 19th the Japanese government said that a businessman working for a Japanese firm who was detained in March had been formally arrested on spy charges. Three days later Chinese state media said that Foxconn, a Taiwanese company that assembles iPhones, was being investigated for possible tax and land-use violations. Executives at WPP, a British advertising firm, were recently detained too.
The Chinese government appears to be preparing for further escalation. According to Reuters, a news service, state-affiliated researchers have been looking for ways round the types of sanctions imposed by the West on Russia after its invasion of Ukraine. This is said to include building a global network of companies that can dodge sanctions and issuing gold-backed bonds in order to remain connected to the global economy, even if America tries to sever China’s commercial ties to the rest of the world. China’s leaders clearly envision darker days ahead. ■
Source: Business - economist.com
