#News #Semiconductor #Trade

Preface Note This article was written by me on Aug, 6, 2023. Originally posted on Investor Inquiries (another project I started), I have decided to post all of my news articles and book reviews on my blog as well!

Introduction

Over the past few years, chips and AI have been hot topics worldwide. The emergence of generative AI, such as ChatGPT and PaLM, has captivated many with its futuristic potential. However, concerns have been raised regarding the military applications of AI.

The United States has been particularly vocal about its worries, especially concerning China’s utilization of AI. With potential AI applications in the military, like lethal autonomous weapons systems (LAWS), the US has taken measures to impede China’s AI technology development. Specifically, the US has targeted China’s access to advanced chips used in AI development, with President Biden citing national defense purposes for imposing sanctions on China.

These concerns are valid, given the instances of various militaries globally using AI to further their interests. For instance, the Kargu-2 drone attack in Libya involved autonomous drones (LAWS) operated by GNA-affiliated forces attacking HAF forces without requiring data connectivity between the operator and the munition. This example illustrates the growing use of AI in military settings.

In the AI training space, specialized chips are crucial for training and developing AI models efficiently. The US leads in technology used for training AI models, with companies like Nvidia, AMD, Intel, Micron, Amazon, and Google at the forefront. These US companies are leaders in chips and cloud services, vital technologies for AI model training. Consequently, many countries and companies, including China, depend on the US for AI development technology.

To limit China’s access to cutting-edge technology and hinder its AI research and development, the US has imposed restrictions on China’s access to advanced chips and other AI training technology. The goal is to prevent China from utilizing AI tools for military and other potentially harmful purposes.

Consequences

While these bans may seem like a good plan, their consequences are severe. The Semiconductor Industry Association (SIA), representing the US semiconductor industry, warns that the US’ actions may diminish its semiconductor industry’s competitiveness, disrupt supply chains, create market uncertainty, and lead to retaliatory actions by China. China accounted for over a third of the world’s semiconductor purchases, worth $180 billion, last year, highlighting its significant influence in the chip industry. Thus, the US’ bold moves could damage its share in the chip market.

The impact on US chipmakers has been profound, with stock prices experiencing volatility and losses, exacerbated by the ongoing chip shortage causing supply chain disruptions. For instance, Nvidia warned that the US sanctions would result in $400 million in potential lost Chinese sales.

While the full consequences of the sanctions remain to be seen, higher AI chip prices, hindered AI development, and supply chain issues are expected outcomes.

China’s Response

China has responded to the US sanctions with its own measures. It has banned exports of germanium and gallium, rare minerals used in chip production, which will impact the chip market due to China’s significant global share of production. Moreover, China threatens to ban the export of rare earth metals used in chip production, leading to soaring stocks of companies in these industries.

China has also banned Chinese companies from buying from US-based companies like Micron, promoting the growth of the Chinese market and retaliating financially against the US’ sanctions. These actions have dealt significant blows to US companies’ bottom line.

China’s firm stance on the US sanctions further deepens the divide between the two economic powerhouses. Chinese ambassador Xie expressed reluctance to start a trade or technological war, indicating that a trade war would be detrimental to both sides. Thus, the US would be wise to reconsider its sanctions.

Flaw in Sanctions

A significant flaw in the series of sanctions is the lack of unity among US allies in implementing them. East Asian allies like South Korea and Taiwan are critical players in the chip industry, and if they don’t join the US in its sanctions, it will lead to significant market share losses for the US while China seeks ways to bypass sanctions. A lack of unity in implementing the sanctions poses a great risk to the US’ policy.

The US is pushing these sanctions to its allies, subjecting US allies operating in China to sanctions and limitations. Japan and the Netherlands have already agreed to restrict some exports of advanced chip-making technology to China. While this will impact the Chinese chip-making industry, the US allowing South Korea and Taiwan to maintain and expand their chip-making operations in China weakens the US’ strategy compared to an “all-or-nothing” approach.

Company Responses

Nvidia has been lobbying for looser regulation as the bans have severely impacted their bottom line. Due to the restrictions, Nvidia can’t sell its flagship AI chips, the A100, in China, leading them to develop the A800 chips, downgraded versions of the A100 with reduced performance.

The bans are particularly challenging for smaller US companies with limited resources to outbid bigger industry giants. Startups have been forced to find creative ways to shrink AI models and improve efficiency, including buying their own physical servers or switching to less sought-after cloud providers. China has been a significant source of investment for US startups, and these sanctions could prove detrimental to the AI and chip startup industry, which thrives on technological innovation.

The negative effects may open opportunities for government-funded startups and companies in China to take the lead in AI research and chip development. The US sanctions have slowed AI research and chip development in the US, creating a void that many countries are eager to fill, including China and India, posing a risk to the US market share.

Government Response

The US government has taken steps to mitigate the effects of the sanctions. The House passed a $280 billion bill to boost US semiconductor manufacturing, including subsidies for expanding the domestic semiconductor industry and investment in science and technology research into AI. Many leading chip manufacturers, like Samsung and TSMC, have responded positively, investing billions in building new plants in the US.

However, this bill also faces challenges, including the clash between Asian and American work culture as Asian manufacturing companies establish fabs in the US. This worker problem could complicate matters and further impact manufacturing in the US. Despite these challenges, the surge of plants being built in the US could help alleviate supply chain issues.

The government’s goal is not only to halt China’s AI development but also to establish the US as the world’s leader in chip manufacturing and AI research. To maintain its lead over China, the US aims to foster technological advancements through these sanctions.

Conclusion

The US-China AI chip sanctions have ignited a global debate on the appropriate use of AI technology, particularly in military applications. While the US has taken decisive actions to curb China’s AI technology development, the consequences of these sanctions have been severe, impacting both nations and extending beyond their borders. Moving forward, a delicate balancing act is required to address these challenges while fostering international cooperation in the field of AI. Close monitoring and proactive measures will be crucial to mitigate potential risks and promote technological advancements.