Biden's semiconductor war with China slowly revealing cracks in the industry

The White House's trade war with China over semiconductor chip manufacturing has begun to take a toll on companies worldwide as they navigate the growing web of industry restrictions.

Over the past year, the United States has implemented controls and license requirements related to the sale of advanced chips and chip components to China. China reciprocated in kind, limiting who can buy the necessary components for chip manufacturing. The escalating restrictions have been justified by the Biden administration on national security grounds, but they may be costing U.S. companies.

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"Some of the most innovative and cutting edge American companies, particularly in the chip space, are these kind of fabulous guys like Nvidia and others who make a lot of money in China," Scott Lincicome, director of economics at the Cato Institute, told the Washington Examiner. "And we might not like that as a foreign policy matter, but hurting some of the most innovative American companies is not a great thing when you're trying to win a tech war."

Nvidia, one of the largest semiconductor manufacturers in the world, has had to adjust its business plans significantly to keep selling in China. The chipmaker initially predicted in August 2022 that it would lose $400 million in sales due to U.S. regulations, but the company quickly adapted its products to keep up sales. Nvidia adapted several of its processors in March so that they are well below the criteria listed by the Commerce Department's restrictions to be allowed in China, only for U.S. officials to order the company to stop selling in China altogether.

Nvidia was not the only affected company. The U.S.-based manufacturer Micron estimated that China's May ban on the company over national security concerns would cost it a "high single-digit" percentage of its annual revenue.

American companies were not the only ones to feel the pressure. The China-based company Yangtze Memory Technologies Co., which was placed on the U.S. list of restricted companies, had to lay off about 10% of its workers after the U.S. sanctions and slashed more than half of its orders for production tools as well.

Chinese companies have felt the brunt of the trade war as they attempt to rebuild their own ability to manufacture chips internally. The government quickly stepped in to provide financial support to Chinese chip manufacturers as they try to replace their plants. The companies have also had to find alternative tools to build more advanced chips due to the U.S. not allowing Chinese companies to buy the appropriate tools, slowing down production in the process.

The trouble for the tech sector began when President Joe Biden and Commerce Secretary Gina Raimondo decided to limit Chinese innovation through a series of tariffs and export controls over the parts required to develop advanced technology. The Commerce Department implemented rules in October 2022 that placed dozens of Chinese companies on an "unverified" list, which limited their ability to acquire semiconductors or advanced technology from the U.S. without a license.

The "unverified" list expanded over the year, with the Commerce Department adding dozens of additional companies to the list of Chinese firms now affected. This included placing companies like Yangtze on the list. The Commerce Department is expected to implement additional restrictions in August, including an executive order from Biden himself.

U.S. pressure on China also escalated with the implementation of a major infrastructure bill. The CHIPS Act, which Biden signed last August, provided $52 billion in subsidies to encourage the development of domestic chipmakers and suppliers. The law also offered incentives to U.S. companies to stop operating in China, including limits on how many subsidies a company can receive based on their investment in China.

China attempted to turn the pressure on the U.S. The Eastern superpower implemented restrictions on gallium and germanium, two metals necessary for creating high-level chips, in early July over alleged national security concerns. The country also banned the use of chips from Micron.

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It may take years before the final results of the trade war become visible, Patrick Gourley, an economic professor at the University of New Haven, told the Washington Examiner. But the industry's leaders are trying to get ahead of the long-term negative effects. CEOs from Intel, Nvidia, Qualcomm, and other chipmakers met with Raimondo and other federal trade leaders to try and discourage them from pursuing additional curbs on chip sales to China.

Chinese restrictions on the U.S. have not had as much effect yet in part due to the CHIPS Act offering some compensation to cover possible losses related to leaving China or building in the U.S. This relief can only last for so long, Lincicome said, as government subsidies are not a reliable long-term source of income.