USA vs. China – The screw pt. III

Existing rules made more effective.

• The tightening of restrictions on chip exports to China aims to close a series of loopholes that allowed China to work around the rules and is likely to make life more difficult but only represents an incremental increase rather than a large policy change.
• As it has signalled, the US Department of Commerce updated its Oct 7^th 2022 rules by tightening the criteria for chip exports to China as well as taking action on grey imports.
• On October 7^th 2022, new rules which limited the export of advanced GPU chips that were able to communicate with one another at more than 600 GB/s.
• This is a crucial factor for training AIs as this is often done on clusters of chips which all work together meaning that communication between them quickly becomes a bottleneck.
• Consequently, a limit on communication speed is a proxy for training performance but the ever-inventive technology sector quickly came up with alternatives that met the restrictions.
• Furthermore, China has been able to source chips through subsidiaries or suppliers based in countries where there are no export restrictions.
• The net result is that the development of AI in China has been mildly inconvenienced in the last 12 months which is not the objective of US policy.
• This became much more aggressive in October 2022 with a change from “keep China 2 generations behind” to “maintain as much of a lead as possible”.
• RFM Research and Alavan Independent have concluded that this is not just about semiconductors but also refers to other sectors of the technology sector such as AI, autonomous driving, quantum computing and so on where China competes much more closely.
• In effect, the USA is using its edge in semiconductors to limit and slow China’s progress to lessen the likelihood that it comes out ahead in technology areas outside of semiconductors.
• The new restrictions change the limit on advanced GPUs from communication speed to a measure of performance per unit area of silicon that aim to stop chip suppliers from tweaking their chips to meet the rules.
• It also places licencing requirements for chip exports to 40 more countries (21 countries for semiconductor capital equipment) that aim to stop the parallel importing that has been going on for the past year.
• The net result is that these new regulations tighten and make more effective what is already in place rather than open a new front in the technological struggle that is being fought with China.
• These new rules are not going to affect either the AI chip suppliers or ASML significantly in the short term as both have enough demand such that any capacity that is freed up as a result of the tightened rules can easily deployed elsewhere.
• This is due to the current insatiable demand for AI training chips as well as the current build-out of leading-edge semiconductor manufacturing capacity in The USA and Europe.
• The USA has said that it intends to review its export rules on an annual basis and so there is no reason to think that there is going to be a letup in the struggle between the two sides.
• This will serve to accelerate the decoupling which is now well underway as well as divide the technology sector into two distinct and incompatible pieces.
• Restrictions will only make China push harder for self-reliance, meaning that it will create its own standards wherever it can.
• The Balkanisation of the global network inevitably means less growth for all of the technology sector in the long term.