Driving a wedge and choosing sides

Washington’s countermeasures aim to impede the Chinese Communist Party’s ability to promote US technology and intellectual property transfer to Chinese entities – either by stopping sales of technology, stifling investment flows into China’s semiconductor industry, or blocking the acquisition of strategic assets from US and foreign companies by Chinese state-backed entities.

This evolving trade policy landscape will inevitably lead to the reconfiguration of global value chains as companies comply with export restrictions. Foreign companies that seek to maintain their relationship with a restricted entity must reduce the value of US content to below an acceptable “de minimis” level, increase the value of non-US made products in their sourcing and production, or avoid doing business with US companies altogether. This has induced companies to move value-added operations out of the United States, to ring-fence operations in China, or to consolidate into more vertically integrated value chains.

In an attempt to close the de minimis loophole, the US government has modified the “foreign direct product” rule. In the example of Huawei, this change prevents foreign manufacturers from supplying Huawei, the Chinese tele-communications manufacturer, with microchips and other products, if the production of these items uses any U.S. technology, including manufacturing equipment, designs or software. U.S. firms dominate these technology niches.

This change was clearly aimed at Taiwan Semiconductor Manufacturing Company (TSMC), which manufacturers microchips for HiSilicon, Huawei’s subsidiary. Cutting off the supply of microchips to HiSilicon presents an existential crisis for Huawei, as no Chinese companies are capable of producing leading-edge microchips on par with TSMC and other foreign manufacturers.

Compliance has become more complicated as the ranks of restricted entities swell. Nearly 170 Chinese individuals and entities (across a wide swathe of industries) are on the US Specially Designated National list. US companies must navigate restrictions that are enforced by more than a dozen different US government agencies.

American firms are also concerned about diminished opportunities to do business in key global value chains, effectively ceding market share to Chinese and other foreign firms not under similar restrictions. Limited or foregone sales in China may reduce funds for R&D. Restrictions also choke off collaborative innovation across specialized clusters and between human capital networks. Huawei and other Chinese tech companies are looking to withdraw from US.-influenced supply chains, forming alliances with non-American technology companies, putting TSMC, Samsung and others in the position of having to choose sides.