USA vs. China – Carrot and Stick

I expect the new rule to stand.

• The USA has released new export rules that make good on the intentions released a few months ago that make life harder for China and incentivise other countries to join the struggle.
• I think it unlikely that the new administration will seek to overturn this new rule but will instead build upon it over the next four years.
• I also think that this has very little to do with military access and everything to do with limiting China’s rise as a technological and political power which has been vocalised multiple times by the incoming administration.
• The new rule creates a three-tier system to determine what licenses are required for the export of advanced AI semiconductors.
• The first tier consists of 18 countries that are all allied with the USA consisting of Western Europe, the UK, Australia, New Zealand, South Korea and Japan which will face no restrictions.
• The second tier is the countries whose relationship with tier 3 countries is less clear and exports to these countries will be capped and will need a licence from the Department of Commerce to go over that cap.
• Tier 3 consists of the now familiar group of countries considered to be hostile to the USA such as China, Russia, Iran and North Korea to which exports cannot be made.
• I see two main impacts of this rule:
  • First, loopholes: which have been exploited to get around the previous restrictions.
  • The main loophole is re-export to blocked countries from countries that are not on the blacklist which has been significant in recent years.
  • This is why there is a volume cap (estimated in-country demand) with a license needed to go over that cap (i.e. explain why you need more than we think you do).
  • This rule should make some headway in closing this loophole.
  • Second, the carrot: which was spelled out by the Department of Commerce in September of last year (see here).
  • While the USA has been able to unilaterally control exports of advanced semiconductors, it has had to negotiate with Japan and The Netherlands to extend the restrictions for 20nm – 10nm technology.
  • With quantum computing and other new technologies, more countries will be needed to keep exports to China at a minimum and so there has been a switch of strategy from the stick to the carrot.
  • The USA appears to looking to incentivise cooperation rather than threatening with the stick of the Foreign Direct Product Rule (FDPR see here).
  • The idea here is that those who join with the USA in posing harsher restrictions on China will find it easier to source technology and talent from the USA as well as presumably trade with the USA.
  • I suspect that this is what the list of 18 countries is all about and these are the ones that are expected to co-operate with the USA in aiding the prosecution of its China policy.
  • By swaying some of the less-willing participants, the strategy to limit China’s rise as a technological and economic power will be much more effective.
• I suspect that over time, the scope of what is covered by the rule will expand and countries will be moved up and down the list based on co-operation with the USA.
• The timing of this rule is poor as it looks like the old administration is trying to make things hard for the new one, but I don’t think that this is the case here.
• The one thing that the two sides of the aisle agree on is China and the Biden Administration has been more hawkish on China when it comes to execution of policy than the Trump administration that preceded it.
• In the short-term this could hurt demand for AMD and Nvidia’s chips and with half of the EU excluded from the list one can understand the concern expressed in the joint release from Nvidia and the EU.
• However, I don’t think this will hurt medium or long-term demand as the datacentres will simply be built elsewhere assuming the appetite remains as insatiable as it is today.
• Hence, I don’t think this harms the investment case for Nvidia or any of the others, but it does mean more bureaucracy to make sales that to date have been easier.
• The only real losers here are the tier 3 countries who will find it even harder to access advanced AI chips meaning that their AI development will fall further behind.
• This does set them up to fare better when the endless money being pumped into AI dries up as they are already being forced to do more with less but for the moment, they are falling behind.
• This will deepen the decoupling which is now well underway and divide the technology sector into two distinct and incompatible pieces.
• The Balkanisation of the global network inevitably means less growth for the technology sector in the long term.