US-China tech war will hold Asian allies hostage

LG Chem

16/12/2024 12:30

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, Dec 16 (Reuters Breakingviews) - China will
turn Washington’s technology weapons on its Asian neighbours in
2025. U.S. curbs on imports of semiconductors and other goods
have hobbled advances in artificial intelligence in the world’s
second-largest economy. The People’s Republic is starting to
retaliate. Its leverage over corporate giants in Japan and South
Korea makes them prime hostage targets.
    In 2022, outgoing U.S. President Joe Biden introduced
sweeping measures to block China’s access to cutting-edge chips
and chipmaking technology. Since then, Washington has expanded
the controls to cover a broader array of equipment and
materials, including machines and tools made by Dutch giant ASML
 ASML.AS  and Japan’s Tokyo Electron  8035.T . In December, the
Biden administration added more than 100 Chinese entities to its
trade restriction list as part of its new package of controls.
    The tightening restrictions have prompted Beijing to
respond. In mid-2023, the government started requiring export
licences for gallium, germanium, graphite and antimony –
materials vital for making batteries, semiconductors, fibre
optics and weapons. But a closer look at the trade flows did not
show Chinese authorities systematically denied export licences,
according to Cory Combs, a researcher from analysis firm Trivium
China. That is about to change. In response to Washington’s
latest controls, the Chinese government announced an outright
ban on some of these materials being exported to the United
States – its strongest tit-for-tat measure yet.
    Further retaliation is likely as China falls further behind
in AI. Local technology giants like Tencent  0700.HK  and Baidu
 9888.HK  are running down their stockpiles of now-banned Nvidia
 NVDA.O  chips and will have no choice but to turn to domestic
alternatives to train their AI models. But the latest chip
designed by local semiconductor darling Huawei, the country’s
best answer to Nvidia’s coveted graphics processing units, is
three generations behind the $3.3 trillion U.S. market leader,
Bloomberg reported.
    Against this backdrop, Beijing has been quietly laying the
groundwork to weaponise its near monopoly on rare earths and
critical minerals. In June, the government unveiled a raft of
regulations aimed at protecting the country’s rare earth
supplies; these rules cover mining, smelting and trading and
establish state ownership of rare earths resources.
    The latest export ban from China’s Ministry of Commerce
follows an overhaul of existing rules. Whereas past curbs on
gallium and germanium have been piecemeal, the new unified
regime grants stricter government oversight on technologies and
goods that can be used for civilian and military purposes.
Businesses selling certain types of graphite, used in
electric-vehicle batteries, must first disclose details about
their overseas customers and the end use of the materials.
Taking a page out of Washington’s sanctions playbook, China will
also have a “control list” of foreign companies which are
subject to extra restrictions and licences.
    Yet targeting American firms like Micron Technology  MU.O 
or Tesla  TSLA.O  at a time when the struggling Chinese economy
needs trading partners, foreign investment and tech know-how
could be self-defeating. In 2023, Chinese infrastructure
companies were banned from buying certain memory chips from
Micron. Even so, a year later, the Idaho-based firm’s ties to
China have strengthened, with Chief Executive Sanjay Mehrotra
meeting with the Minister of Commerce and breaking ground on a
new factory in the country in 2024. Meanwhile, carmaker Tesla’s
China sales are on track to grow by 14% to $23 billion in 2025,
per Visible Alpha forecasts.
    Instead, Beijing holds far more leverage over U.S. allies in
Asia. A Japanese government white paper found that the country
relies on China for nearly a third of its imports, compared to
13% for the United States. These goods range from machinery to
organic chemicals to electrical equipment. And despite official
efforts to diversify supply chains away from China, a separate
study found South Korea’s dependence on the People’s Republic
for five out of six raw materials necessary for chipmaking
actually increased in 2023.
    That puts Tokyo and Seoul’s corporate champions in a
vulnerable position. Toyota has privately voiced concerns that
China would cut off the $220 billion carmaker’s access to
critical minerals, Bloomberg reported in September, citing
sources. In addition to supply chains, it also has factories on
the mainland. South Korea’s memory chip giants SK Hynix
 000660.KS  and Samsung Electronics  005930.KS , as well as
battery specialists LG Chem  051910.KS  and SK On, are in a
similar boat.
    Just a threat of export controls might be sufficient for
those countries to think twice about joining the tech war
against China. Beijing has plenty of weapons to fight back. In
2025 it will train them on U.S. allies.
    Follow @mak_robyn on X
    
    This is a Reuters Breakingviews prediction for 2025. To read
more of our predictions, click here.

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Graphic: Japan’s trade deficit with China is growing    https://reut.rs/3D1rQbl
Graphic: South Korea’s China trade surplus has become a deficit 
  https://reut.rs/3ZEP0Ny
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 (Editing by Peter Thal Larsen and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com))