On July 6, 2018, former president Donald Trump placed a 25% tariff on $34B of Chinese imports, citing “theft of intellectual property and technology” and “other unfair trade practices.”
The list of tariffed goods was specifically aimed at thwarting China’s Made in China 2025 plan, which intended to develop the country’s domestic high-tech industries. China soon responded with an identical tariff, and the trade war was born.
The back-and-forth continued in the following months. The US would place tariffs, only to be countered evenly by China. Over time, the US was able to leverage its steep trade deficit against China, and soon the burden of tariffs weighed heavier on Beijing.
On May 15, 2019, the US placed Chinese telecommunications giant Huawei on its Entity List, barring US-based companies from exporting goods to Huawei without a license. This mechanism of barring trade from an entity without a license is what the most recent trade restriction this October was built on, only more broadly.
In response, China announced that it would create its own “Unreliable Entity List.” The US added 46 non-US affiliates of Huawei to the Entity List three months later.
After 18 months of heated escalation, the situation seemed to advance a step in the right direction. On January 15, 2020, the US and China agreed to the Phase-One Trade Deal. As part of the deal, the US would lower some of their tariffs and cancel the 10% tariff on $155B of Chinese imports that it was planning. In turn, China would agree to buy at least $200B more of American imports.
Things seemed to cool down even more, as China halved a substantial tariff that it had placed the year before.
Then, on December 2, 2020, President Joe Biden announced that the “best China strategy” would be to get all US allies “on the same page.”
This strategy is now coming to fruition, as companies around the world fall in line with the US’s most recent restrictions on China, and the US pursues its Chip 4 Alliance: a supply chain partnership with Taiwan, Japan and South Korea that excludes China.
Later that month, the US placed China’s leading semiconductor manufacturer, SMIC, on its Entity List along with more than 60 other entities, citing concerns about allowing advanced US technology to bolster the military of “an increasingly belligerent adversary.”
After a year of extensive dialogue between Biden and Xi, a report surfaced in February that revealed China had bought only 57% of the US exports that it had committed to under the Phase-One Trade Deal. This means that China bought none of the additional $200B it had pledged. While much of this was due to the pandemic, it was publicly touted as a “historical failure.”
In the months of July and August, the US ramped up its offensive against China with a flurry of restrictions. They expanded the ban of semiconductor equipment used to produce 10nm chips to 14nm, then banned the sales of EDA tools used to design GAAFETs and followed up with another ban on high-performance GPU chips.
During this same period, the US also passed the CHIPS Act, which not only invigorated the domestic semiconductor industry, but also decreed that any recipient of the subsidies would be barred from expanding operations within China for 10 years.
Up to this point, the US bans only applied to certain Chinese companies, such as those on the Entity List, and kept the rest of the Chinese market open to the US.
On October 7, the US issued a ban that changed the entire landscape of the trade war, as well as the semiconductor industry.
This move banned the export of:
Logic chips with non-planar transistor architectures (i.e., FinFET or GAAFET) of 16nm or 14nm or below
DRAM memory chips of 18nm half-pitch or less
NAND flash memory chips with 128 layers or more
In addition to its unprecedented reach of applying to all companies within China, the restriction also has a monumental jurisdiction. It does not just enforce this ban over exports coming out of the US, but also over any company in the world looking to sell these advanced chips, as well as the equipment, software or blueprints needed to produce the chips, if they contain US technology.
With the US’s 47% market share in the semiconductor industry, it controls a significant portion of the flow of chips going into China. It also keeps companies like Applied Materials, who derive 25-30% of their sales from China, from selling equipment to them. Considering China is the largest importer of chips and chipmaking equipment in the world, this restriction lands a critical blow.
The rule places a massive legal hurdle in the path of any company looking to ship these chips to China by way of its “end use” clause. Simply put, when a company pursues a license to export any of the banned components, the onus is on the company to prove to the US that the “end user” of the exports does not intend to do anything with the chips that are against the national security interests of the US, such as resell the order to the Chinese military or manufacture high-tech products on their behalf. China’s military-civil fusion makes this a hazy and difficult process. Unsurprisingly, licenses to import to Chinese companies will be faced with a “presumption of denial.”
In an additional clause, any “US person,” including anyone with an American passport, green card, or residency, is prohibited from assisting in the development or production of advanced chips.
The nature of this ban, both in its broad scope and comprehensive detail, sends a clear message to China about just how serious the US is in limiting their technological advancements.
On November 14th, President's Joe Biden and Xi Jinping met for the first time as presidents of their respective countries. The pair met met for three hours and spoke on a host of issues around the issue. Read outs from the meeting suggested that both parties dug their heels in on these key issues, which does not bode well for the prospect of diplomatic de-escalation.
December 12th, the Netherlands and Japan agreed "in principle" to joining the US in issuing their own domestic export restrictions on China. The two countries hold the only three companies that supply the world with DUVs- the only chip making equipment that China can use since the Netherlands already banned the sale of EUVs to the PRC in 2019.
The coordinated restrictions lead many to believe that the restrictions included a halting of DUV exports, effectively ending the last of China's supply of manufacturing equipment.
December 13th saw news surface from China that they were planning a $143B stimulus to help Chinese manufacturers acquire equipment. China would later admit to audibling from these plans amid the news on the Netherlands and Japan.
On December 15th, China issued a lawsuit within the World Trade Organization against the US's semiconductor export controls against them that were levied on October 7th.