The impact of sanctions on China's technology industry

If you are from the generation who were riveted by the movies such as "Back to the Future" (1985) or "Blade Runner" (1982) in their teenage, you would know the futuristic sensation brought on by the concept of flying cars.

In "Back to the Future", flying hover-cars in 2015 is a common sight.  Set in futuristic Los Angeles of 2019, "Blade Runner" also shows that flying cars are commonplace of the time. 

But who could have thought that just around that time there would be a shortage of microchips - an essential element for modern digital devices, from cars to smartphones to home appliances - let alone flying cars?

Who could have envisaged such a boring future? Exactly that's why comedian Lewis Black said: "This new millennium sucks! It's exactly the same as the old millennium! You know why? No flying cars!"

Yes, we are having a global chip shortage. True, this is boring but you should nonetheless care about this. Because next time you go buy a tech product you will definitely be hit at least from its high cost.

So, why is there a shortage?

The scarcity is the result of a confluence of causes, including shutting down plants during the coronavirus pandemic. The US imposed sanctions against Chinese technology firms has escalated the crisis. Reprisals on part of the two biggest economies of the world loom largest.

The scarcity, which began in the automotive industry, has now expanded to a variety of other consumer electronics. Businesses and customers around the world are bearing the brunt of an acute shortage of semiconductor microchips, from sluggish vehicle orders to a production shortage of home electronics and more expensive devices.

The new sanctions

In early April, the United States banned trade with top Chinese high-performance computing centers, citing the potential for these technologies to be used in the construction of new arms and domestic surveillance systems.

No sooner than the US imposed sanctions on 7 Chinese tech firms, one Chinese official scoffed off the latest imposition as "mosquito bite".

"It's as if we're being bitten by mosquitoes. They've been bothering us for years, so it doesn't matter if we get one more bite" Mei Xinyu, a senior researcher at China's Ministry of Commerce said. The Global Times quotes.

But is it just a mosquito bite? Or is it just China that is reeling from the impact of the sanctions?

The geopolitical tensions

The latest round of the sanctions comes in the midst of growing tensions between the two countries over topics such as human rights abuses, trade, and the military aggression of China.

And the growing tensions are escalating further with no sign of amelioration at sight. Further, the field which is most visible is the microprocessor industry. Production of microchips is still one of the few areas where the US maintains its supremacy.

China has become a true peer competitor of the US in terms of its economic, military, and technological strengths. Nonetheless, one particular field that they lag behind significantly is designing and manufacturing the most advanced microprocessor and memory chips.

To understand how US-China relations will unfold in the upcoming decades, one must first understand the strengths and weaknesses of the two states.

These microprocessors and memory chips are at the core of artificial intelligence, machine learning, robotics, supercomputing, etc. - the defining features of the world we will live in (and to some extent we are living in).

Sabyasachi Karmaker, journalist. Sketch: TBS

Up to this point, China's effort to produce (design and manufacture) sophisticated microchips largely failed.

How is it affecting China?

Chips are the brains of electrical devices - laptops, smartphones, TVs. Almost half the chips sold globally are by the American manufacturers. But China is racing to change that. The country is pouring money into its semiconductor companies, like the Chinese biggest manufacturer SMIC.

"SMIC is china's only hope to win the race," Lingling Wei, WSJ's senior China correspondent.

Even though China has been seeking to improve semiconductive self-sufficiency in recent years, it still relies heavily on overseas chips. According to Francis Lau, professor of computer science at the University of Hong Kong, Chinese supercomputers largely use chips from Intel, AMD, and IBM.

"The sanctions would definitely affect China's ability to keep to its leading position in supercomputing because all current supercomputers use mostly US-built components," he said. "Although there are alternatives made by other countries such as Japan and South Korea, the best components are still by the US."

However, these latest sanctions are not significantly different from those already levied by the US, according to Mei Xinyu, a research fellow at China's Ministry of Commerce, in speaking with the Global Times.

He also pointed out that the US has already imposed several penalties on Chinese military technology, including computers, and that this latest action merely strengthened existing sanctions rather than introducing new ones.

Despite US pressure over the years, Chinese technology firms have made strides under the threat of sanctions. China shows no sign of stopping just here.

Instead, rising US sanctions would only encourage Chinese firms to increase their own activities in order to close the technological gap in fields such as semiconductors and computing, most international relations experts suggest.

China, on the other hand, is stepping up innovation in physics, nanotechnology, and material sciences, which will power the next generation of chips and chip-making machines. However, it might take China a decade or more to catch up with the rest of the world.

China however is not sitting quietly. It is putting all its effort into research. It could take a while before it stands on par with the US in producing next-generation micro conductors that will fuel future developments.

The SCMP quoted Xiang Yun, a telecom expert based in Hong Kong, saying: "This will of course further obstruct SMIC's production of 7- or 5-nanometer chips in the near term. But at the same time, because of such obstruction, China should speed up research of mask aligner technologies, which might make a breakthrough in the next three to five years."

The upshot: Tech decoupling?

In the short times, as maintained by analysts, those sanctions might be effective. In the long run, however, they have ways to evade rules. These only make China stronger and more independent.

One of the prime examples is how Huawei navigated US sanctions to make a profit in 2020. Making market resilience a top priority with a campaign to improve its software capability, Huawei is trying to address US sanctions that have destroyed its smartphone business.

Although its recent success is mainly based on its sale of products and software on the mainland, it shows a level of resilience.

Moreover, geopolitical tensions are pushing technology companies to revisit their global strategies. This means that two countries are getting separated in technological development and we could wind up with two different sets of ecosystems or hardware.

This separation process is called decoupling. They are both trying to be more self-reliant with little care for their scuffle's impact on the global stage but with full attention to individual gains. Because what matters most is the supremacy in artificial intelligence, nano-tech, supercomputing, etc. Whoever avails to make the best out of it wins the battle.