A leading South Korean lawmaker and former Samsung executive is the latest public figure to criticise the United States’ effort to hobble the Chinese economy by cutting off its access to semiconductors. Yang Hyang-ja pointed out in an interview with the Financial Times on Sunday that these efforts are counterproductive because “the more the US sanctions China, the harder China will try to make rapid technological progress.”

Yang, who is obviously familiar with the semiconductor business, points out that if America tries to stop China from importing chips, the Beijing government will expend enormous resources to produce their own. Once this happens, it is likely that these will be cheaper than chips manufactured in other countries, including South Korea. “China will provide more national support for the goal,” said Yang, “Then it will pose a crisis to South Korea, given China’s abundant talent and raw materials.”

News reports since the imposition of sanctions have tended to confirm what the South Korean politician is saying. In 2020, for example, the United States placed sanctions on the Chinese mobile phone company Huawei. The idea behind the measure was to stop the company from competing in the market for 5G. Initially this worked and Huawei’s revenue fell, but recent stories suggest that now — only three years later — the company has found ways of producing the 5G chips domestically.

This suggests a very poor economic trade-off. By imposing sanctions on Huawei, the United States slowed its business model for a mere three years. Now the company is developing the capacity to produce these chips itself, and will likely soon sell them on the international markets at a cheaper price than the current Western equivalents. These attempts to sanction Chinese technology are extremely short-termist, and are only leading to the country’s economy becoming stronger and more capable of competing with the West.

The latest round of semiconductor sanctions against China is set to produce the same result. Industry insiders like Yang are fully aware of this, and have been warning the American government for weeks. Yet, so far, they are being ignored. What’s more, the Chinese have already started to deploy counter-sanctions against the United States: in May of this year, they placed restrictions on buying from the American semiconductor producer Micron. Losing the Chinese market would significantly impact Micron’s revenues, leaving it with little money to invest and remain competitive.

The recent restrictions which China imposed on the export of germanium and gallium are even more problematic. These two elements are vital to produce many electronic products, including chips themselves, and cannot be easily replaced with domestic manufacturing in the US. They tend to be made as a byproduct of large-scale industrial production of aluminium and zinc, and domestic production would require the United States to revive its entire heavy industry, something that could take decades.

Recently Greg Hayes — the CEO of Raytheon, one of America’s biggest weapons producers — emphasised how important Chinese trade was for components critical for American manufacturing. Hayes said that Chinese trade was “too big, too important and too necessary to the US economy”. When even its main armaments supplier is articulating  these realities, at some point the American government would do well to listen. Whether Washington likes it or not, thirty years of open trade with China have created dependencies that cannot simply be wound down overnight.

---

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

philippilk

---