146. Semiconductors and US export bans – from Huawei to SMIC

Episode Summary

Executive Summary: The episode examines semiconductors as a strategically vital, globally fragmented industry and focuses on U.S. export controls aimed at Huawei and SMIC. It explains how American tools, software, and licensing power let Washington restrict Chinese access to advanced chips, while also risking collateral damage to U.S. firms and global supply chains. The core question is whether these measures can achieve national-security goals without backfiring commercially.

Main Topics: Why semiconductors matter economically and strategically (Priority: 5/5): The hosts frame chips as essential inputs to smartphones, computers, cars, and emerging digital infrastructure, making them central to modern trade and national security. How the semiconductor industry is structured (Priority: 5/5): Chip production is split across design, fabrication, software, and tools, with high fixed costs and global supply chains creating major barriers to entry and heavy international interdependence. The U.S.-China conflict over Huawei (Priority: 5/5): The discussion traces how U.S. export controls escalated from targeted restrictions to broader measures that cut Huawei off from chips made with U.S. tools or software. Export controls and the entity list (Priority: 4/5): Kevin Wolf explains how the entity list works, how it is supposed to create leverage, and how the Huawei case stretched the traditional logic of sanctions and export control policy. Economic tradeoffs for U.S. semiconductor firms (Priority: 4/5): The episode highlights the risk that broad restrictions could reduce U.S. chipmakers’ access to Chinese customers and signal that American technology is politically unreliable. SMIC and the next phase of controls (Priority: 4/5): The hosts examine SMIC’s addition to the entity list as a more traditional national-security move aimed at preventing Chinese military use of advanced semiconductor technology. Possible alternatives: subsidies and OpenRAN (Priority: 3/5): The episode considers less punitive options, including supporting competitors and encouraging OpenRAN interoperability to reduce dependence on Huawei equipment.

Key Arguments: Semiconductors are foundational to the digital economy and therefore a natural target for trade policy and security policy alike. Because chip production depends on expensive R&D, specialized tools, and fabs, the industry has high barriers to entry and a highly concentrated global supply chain. The U.S. can exert unusually strong leverage because American firms dominate key chip-design software and semiconductor manufacturing equipment. The Huawei restrictions were broader than classic export-control policy because they appeared aimed at damaging the company’s business generally, not just changing a specific illegal behavior. Using export controls to pressure Huawei may protect national security, but it also risks harming U.S. firms that depend on Chinese demand for chips and related equipment. Huawei’s reliance on foreign chips and U.S. technology makes it vulnerable, but the long-term effectiveness of the controls remains uncertain. The SMIC designation appears more directly tied to military end use and more narrowly tailored than the Huawei case. A more targeted policy or non-export-control options might have reduced collateral damage, but they may not have produced the same degree of pressure on Huawei. OpenRAN is presented as a potential structural alternative that could reduce vendor lock-in and make telecom networks less dependent on any single supplier such as Huawei.

Data Points: R&D share of annual sales revenue: 15% to 20% - Estimated annual R&D intensity in the semiconductor industry. Equipment/capital costs as share of annual revenue: 10% to 15% - Cost of outfitting semiconductor fabs with specialized machinery. Cost of a new fab: more than $10 billion - Approximate cost to build a new semiconductor manufacturing facility. U.S. share of globally installed manufacturing: around one-eighth - Share of semiconductor manufacturing capacity located in the United States. Asian share of globally installed manufacturing: more than 80% - Concentration of manufacturing in Taiwan, South Korea, and China. China’s share of global semiconductor consumption: over half - China consumes more chips than any other country. Semiconductors used in smartphones and tablets: about one-third - Share of chips going into mobile consumer electronics. Semiconductors used in computers: almost another third - Share of chips going into computers. Huawei handset ranking: biggest supplier in Q2 2020 - Huawei was the world’s largest handset supplier in the second quarter of 2020. Companies dominating EDA software: 85% of world supply - Cadence, Synopsys, and Mentor Graphics dominate chip-design software. Chinese market share of U.S. semiconductor sales: more than a third - More than one-third of U.S. semiconductors are sold to a company in China in dollar terms. Chinese device-company share of U.S. semiconductor sales: more than one in five - A large share of U.S. chip sales goes to Chinese device makers. SMIC threshold for denial: smaller than 10 nanometers - Technology used to produce chips below this size is denied under the newer controls.

Pivotal Quotes: "If data are the new oil, chips are the internal combustion engines that turn them into something useful." — The Economist colleague (quoted by host): Used to explain why semiconductors are economically central. "We simply no longer could stand by and watch our adversary using our technology to support its military capabilities." — Senior Commerce Department official: Explaining the rationale for adding SMIC to the entity list. "The entity list means that any export from the United States ... cannot go to an entity on the list without a license." — Kevin Wolf: Definition of how export controls restrict sales to listed firms.

Implications: U.S. export controls can seriously disrupt Chinese tech champions by exploiting dependence on American tools, software, and licensing power. But they also expose U.S. firms and may accelerate decoupling, supply-chain shifts, and alternative telecom technologies like OpenRAN.