Tariffs and Trump's executive order have replaced 40 years of economic integration. Vulnerable China could blink first in a trade war
While China remains central to the global chip industry, the cross-border nature of semiconductor manufacturing in which IC design operates around the clock, wafer shipments circle the planet and all are part of an integrated supply chain that may help to obviate some of the worst effects of the current U.S.-China tariff war.
Nevertheless, the damage done, the two sides irreconcilable, a permanent trade war would be the 21st century equivalent of the Cold War competition between the U.S. and the Soviet Union. In that contest, the U.S. simply outspent the Russians. It’s not clear the same strategy would work against Chinese leaders willing to invest billions on wafer fabs, only to close them a few years later.
Investors sensed the reckoning in recent days, heading for the exits after China responded in kind to the Trump administration’s tariff increases on $200 billion in Chinese-made products. The Philadelphia Semiconductor Index dropped 4.73 percent on May 13 after Beijing responded with tariffs on $60 billion in U.S. goods. (By week’s end, the chip index had made up part of that loss.)
'The soft approach hasn't worked'
Fueling the uncertainty is the suspicion that hardline U.S. trade advisors ultimately seek to undo the commercial links between the U.S. and China, the so-called “decoupling” of trade between the world’s two largest economies. That commerce is largely driven by technology.
“We’ve tried the soft approach for 40 years and is hasn’t worked,” said James Lewis of the Center for Strategic and International Studies (CSIS) and author of a recent report on China’s chip ambitions. “The Chinese [leadership] will just blow you off if they think you’re not serious.”
Lewis notes that stories of China strong-arming U.S. tech companies have long made the rounds in Washington, fueling a consensus in Congress that Chinese powerhouses like Huawei should be banned from the American market. The race to deploy 5G networks and Huawei’s first-mover advantage have further hardened that stance, with lawmakers now convinced U.S. allies must choose sides when deploying emerging technologies like 5G wireless.
Meanwhile, established technology segments are also suffering as a result of trade tensions and a slowing Chinese economy. For example, industry analysts cite geopolitical events as one factor suppressing the previously booming microcontroller segment. China is the world’s largest MCU market, but “tariff-and-trade battles between the United States and mainland China have added to uncertainty in the market,” IHS Markit reported in mid-May.
Hence, the industry tracker is forecasting zero growth in MCU demand over the next year.
That pessimism also reflects heavy chip-maker reliance on Chinese assembly networks. So, too, do consumer electronics giants like Apple and Dell. The iPhone maker and server vendor each saw their stock drop by more the 4 percent in response to growing trade tensions.
Computers and electronics constitute the lion’s share of U.S. imports of Chinese products, accounting for estimated $186.5 billion of the $539 billion in goods and services imported from China in 2018, according to U.S. trade figures. U.S. technology exports to China totaled $17.9 billion last year. Among them are Intel processors manufactured at its fabs in Hillsboro, Ore., where it recently announced expansion plans.
That huge trade deficit is among the political forces driving the current U.S.-China trade war.
While China is a leading exporter of finished electronic products, it remains a net importer of chip technology as it seeks to move up the technology value chain. According to the CSIS report, only about 16 percent of semiconductors used domestically are produced in China. Beijing’s aspirational goal is to produce 70 percent of the chips it uses by 2025.
China’s aggressive stance toward U.S. chip makers seeking access to its huge market has heightened current trade frictions. “Part of China’s exploitative trade policy is to squeeze U.S. semiconductors out of the China market while sucking Western semiconductor technology in,” Lewis noted. “There should be no doubt as to which outcome is best for the United States.”
The Semiconductor Industry Association estimates the Chinese market accounts for as much as 35 percent of global sales. With more electronics assembled there, “China is central if not absolutely critical to both the market and the supply chain,” said Jimmy Goodrich, SIA’s vice president of global policy.
Trade stalemate splits the world's economies
The overriding concern is that a trade stalemate would effectively separate the world’s two largest economies, a scenario for which neither side has a template. Such a split means U.S. trading partners would eventually have to decide, for example, whether to buy 5G wireless chips from Qualcomm or Huawei.
The Trump administration tightened the screws on May 15 with an executive order effectively banning Huawei from the U.S. telecommunications market. The sanctions also block Huawei’s access to U.S. technologies, including systems that incorporate components made in the U.S. Huawei is thought to source as much as 20 percent of its components from U.S. suppliers, including processors deemed “critical to Huawei’s product offerings,” according to international trade attorney Lawrence Ward.
Global chip suppliers, too, are under pressure to choose sides. German chip maker Infineon Technologies, for example, confirmed a report by Nikkei that it has suspended shipments to Huawei of products it makes in the U.S. in compliance with tightened export rules announced last week by the Trump administration.
There’s little doubt some in the Trump administration wish to sever trade ties with China after 40 years of economic integration. “But it won’t be easy,” notes Lewis, who suspects we may end up with a “de facto decoupling.” President Xi Jinping has economic problems, and China is more vulnerable on technology trade because U.S. electronics companies possess what China wants.
“We’re in a game of chicken [but] neither side wants a head-on collision,” Lewis added. Reflecting the uncertainty on both sides, and the prospect that an early-morning tweet from a protectionist U.S. president could scuttle a face-saving compromise, Lewis concludes, “I have no idea how this will end.”