It may seem as though there’s a fresh trade war ramping up with China over semiconductors, but if you dig deeper, it’s just an extension of long-standing feuds related to advanced technology. And it’s not only over complex end products like high-end chips for artificial intelligence (AI) applications –- critical minerals necessary for making chips are playing just as big a role.
A week before Christmas 2024, Bloomberg reported the Biden administration was set to launch a probe into Chinese-made semiconductors with the aim to reduce reliance on Chinese technology that U.S. officials see as a national security threat. The investigation was expected to focus on older chips and the products they’re used in, including smartphones, vehicles, medical devices and weaponry.
A likely outcome of the investigation is further trade restrictions to protect U.S. semiconductor manufacturing. While the probe is expected to be completed before Donald Trump takes office, the new administration would be responsible for making any policy decisions based on the probe’s findings.
The Bloomberg report comes on heels of recent trade war volley launched by China, which has opened an antitrust investigation into artificial intelligence (AI) chipmaker Nvidia. The core issue fueling this investigation is Nvidia’s purchase of Israeli networking company Mellanox, which China sees as possibly violating its anti-monopoly laws, although the country approved the acquisition in 2020.
This back and forth with China isn’t new, Patrick Moorhead, technology analyst and founder of Moor Insights & Strategy, told Fierce Electronics. “We’ve been in a tit for tat tech war foe decades.” It started with IBM and Cisco, he said, moved to search and social media platforms like Google and Facebook, and then onto to the Chinese carrier companies Huawei and ZTE. “The semiconductor conflicts are just an extension of the tech war,” he said.
The U.S. has had export controls around the number of FLOPS with “supercomputing” for decades, Morehead said, and with the advent of artificial intelligence (AI), there are new controls around FLOPS, TOPS, and density. “These are specifically focused on GPUs.”
Moorhead said given Nvidia’s market share in such an important piece of technology that impacts everything and everybody, the company will likely be investigated by every regulatory body eventually.
Jim Handy, principal analyst with Objective Analysis, said there aren’t that many restrictions on products going into China because it manufactures so much for the rest of the world using raw materials. “If they were to start putting too many restrictions on that, it would limit their ability to be the world's manufacturer.”
Sensitivities restrict manufacturing equipment
A lot of restrictions placed on China are intended to force China to come to the table to talk about intellectual property rights, Handy said. “China looks at them as being a threat to their sovereignty.”
He said the U.S. is aiming at things that could be used in defense applications, but it also has the advantage of having some control on leading edge manufacturing equipment supplied by its allies, which is why ASML, the only company that makes EUV lithography systems, are restricting what they are shipping to China.
Handy added that some NAND related tools are being restricted even as China’s YMTC is now producing its own blank wafers to ramp up 3D NAND production.
There are sensitivities around both DRAM and NAND manufacturing. Handy noted that although Micron Technology has a fab in Manassas, VA, that can make particularly sensitive semiconductors, mainly for government programs, most of their leading-edge stuff is manufactured outside of the country. The same goes for Samsung, SK hynix, and Kioxia, which includes Western Digital. “The United States dependency on foreign sources is very, very strong,” he said.
Ultimately, a lot of design work is done in the U.S., Handy said, but the systems themselves, like PCs, are produced largely in China using chips made in Taiwan, Korea and Japan.
Nick Baker, managing director for export control and sanctions at FTI Consulting, said that in general, the significance of the semiconductor industry from both an economic and national security perspective will spur both China U.S. to continue to look for creative ways to put broader pressure on the industry to influence the political objectives of their rivals. “In addition to trade and technology controls, there are ways to affect foreign investment decisions, anti-trust and anti-competition considerations, and other market-related controls as a show of force to use this powerful industry as a pawn in the larger political game.”
Mid and low-market chip restrictions could impact fabs
When it comes to actual chip production, Baker said, the ongoing between the U.S. and rest of world, including China, is not on the high-end of the market for lucrative deals in AI, data centers, or quantum computing, but on the second- and third-generation chips which are used in more mundane applications from automotive to industrial manufacturing and consumer electronics including “smart devices.”
Baker said those lower value but higher volume producers could be at risk if these retaliatory restrictions become broad enough to capture the market more generally. “Fabs that serve global customers across the spectrum of semiconductors such as the major players in Taiwan and Korea are likely having discussions about where their allegiances will ultimately be if, for example, U.S. and China implement reciprocal restrictions where those manufacturers cannot serve both markets,” he said. “With trillions of dollars at stake across the industry, semiconductor companies are actively lobbying and advocating both jurisdictions to try and influence the geopolitics that will have real financial impacts on their businesses for years to come.”
Recent geopolitical shifts and supply chain hiccups due to the pandemic provided impetus for the CHIPs Act, which was designed to spur more onshore investment in semiconductor manufacturing capabilities, but it can only offset the negative impacts of trade disputes countries like China.
“The CHIPS Act may have long-term benefits to support U.S. semiconductor fabrication, but the financial benefits are likely disproportionately targeted towards production rather than research and development,” Baker said.
Research and development are where the U.S. is really an industry leader on emerging and cutting-edge chip technology and should be investing heavily to maintain that competitive advantage, he said. “Our position as the R&D leader is what makes our export controls in this sector effective as we exercise extraterritorial control over how the tools and fabs can be used to make the most valuable chips, both from the view of monetary value and the value of supporting innovation like AI and quantum computing.”
Rare earth metals are getting squeezed
One stipulation around CHIPS funding is that none of the technology will enrich enemies of the U.S., noted Moorhead. “I do think we will see some additional funding around rare earth metals and around electronics final assembly, PCA and PCB.”
It’s the rare earth metals that may be the most critical pawn in a semiconductor trade war, not necessarily specific technologies or end product.
Derek Lemke, senior VP of product level intelligence, at supply chain software provider Exiger, told Fierce Electronics that the periodic table is a serious concern for the semiconductor industry. “As you look upstream into the critical mineral supply chains, we're seeing a lot of tightening,” he said. “This has been very strategic and deliberate across not only microelectronics, but all industries.”
Critical mineral and rare earths such as germanium gallium, antimony, and super hard materials have become pawns in what Lemke calls “the weaponization of the periodic table.”
He said export restrictions affecting the U.S. have been driven by concerns they will be use for military purposes, but as a side effect they are hitting the semiconductor supply chain, even though most microchips and circuits aren’t being built in the U.S. “We've seen this tightening over the last three years,” he said. “It’s almost like the new Cold War in the supply chain itself.”
These restrictions can affect other countries that are manufacturing chips, such as Taiwan and Indonesia, Lemke said. For example, Germanium headed to Taiwan could end up in a chip that goes to U.S.
Antimony, meanwhile, goes into hardening alloys, flame retardants, and bullets, he noted, but there’s also a level of antimony that goes into semiconductors. Similarly, gallium goes into thermometers, mirrors and coatings, but there’s also overlap with semiconductors that could drive some concern, Lemke said, as China dominates their production.
He added that even though Belgium is the U.S.’s second largest import partner, China owns some of mineral processing there. “All roads are leading to China when we start to look at critical mineral supply chains,” Lemke said. “They're hitting this at both ends.”
Lemke said there needs to be policies to incentivize U.S. mining production, which faces barriers given environmental, social, and governance (ESG) concerns. “China doesn't think about ESG concerns when it comes to these critical minerals.”
The tit for tat with China affects many industries, he added, such as defense and automotive because of their semiconductor requirements. Even if chip production can be moved, it’s still dependent on critical minerals. “There's a lot of work within industry right now to map the supply chains because they understand that the trade wars aren't just at that surface level,” Lemke said. “They're going deeper and deeper and deeper."