China & Semis – No Score Draw

China and semiconductors are unlikely to change much.

• A change of administration is likely to mean that there is more noise and bluster but no real change when it comes to policy towards either China or the subsidisation of the semiconductor industry overall.

Semiconductors

• Despite only a few days having passed, the outgoing administration is now hurrying to complete its deals with semiconductor companies for fear of the 2022 Chips and Science Act being repealed by the new administration.
• Here, negative comments surrounding this bill are already being walked back meaning that the probability that this is repealed and replaced with a tariff regime is very unlikely.
• This makes complete sense because subsidies and state support of this sector are a factor everywhere in the world and are so important that they have a material impact on the total cost of ownership of a fab.
• Furthermore, a large amount of the chips that are imported into the US are designed by American companies and so imposing tariffs on them is self-defeating as an action to benefit the US economy.
• When this administration was in power last time, it imposed tariffs on China but then exempted Apple from those tariffs so I would expect to see something similar in the extremely unlikely scenario where tariffs are imposed.
• The incoming administration is also keen to return manufacturing to the US which is precisely what the Chips and Science Act has been doing even though a good proportion of the money is earmarked for non-US companies like TSMC and Samsung.
• The net result is that a major change here would be counterproductive to the aims of the new administration and less effective than what is already in place meaning that it makes no sense to change it.
• However, the outgoing administration is taking to chances and so I expect that the rest of the funds to be allocated before January 20^th.

China

• There are also big question marks surrounding the policy towards China where many are wondering if the new administration will be more hawkish than the old one.
• I think that this is extremely unlikely as while the old administration didn’t say very much, it presided over the largest hardening of policy that has been seen for many years.
• It was in 2022 when the policy switched from “keep China at least 2 generations behind” to “maintain the biggest lead possible” which led to a line in the sand being drawn at 20nm.
• This position has been reinforced by negotiating with Japan and The Netherlands to convince them to implement similar restrictions and by and large, these have been reasonably successful.
• The Department of Commerce has fallen into an annual rhythm of updating and extending the restrictions and given that China is the one thing that both sides seem to agree on, I don’t think very much is going to change.
• What will change is the commentary both in terms of its content and its delivery, but these are just words, and I think that it is only policy that matters.
• Hence, I expect that China policy will remain unchanged (as it did in 2021) but is likely to be expanded as new technologies emerge and as China finds loopholes to circumvent the restrictions.
• Hence, the long-term outlook remains largely unchanged with the US using the technology sector (and semiconductors specifically) to contain China’s rise as a geopolitical and technological world power.
• This also means that China remains likely to seek its own technological standards, which could fracture the global technology ecosystem and weaken the network effect that has driven growth to date.
• The net result is lower long-term growth in the technology sector overall which will benefit no one.