Tag: Apple

The U.S.-China trade war being fought over technology has been surprisingly one-sided. But that’s changing.

X

For nearly four years, Beijing held back — even after the U.S. went for the jugular last fall with broad-based bans on sales of design software, semiconductor manufacturing equipment and advanced chips from companies like Nvidia (NVDA) and Advanced Micro Devices (AMD) to Chinese firms.

Those measures amounted to a “policy of actively strangling large segments of the Chinese technology industry — strangling with an intent to kill,” wrote Center for Strategic and International Studies senior fellow Gregory Allen.

China Appeared Penned In

Yet Beijing appeared to be in no position to retaliate. It was penned in by its harsh Covid lockdowns and a more unified front among the U.S. and allies amid China’s implicit support of Russia’s Ukraine invasion.

China finally returned fire March 31, announcing a security review of U.S. memory-chip giant Micron Technology (MU).

Less than a week later came news that China may restrict exports of rare earth metals. It’s the world’s main source of the metals, which are crucial to semiconductor manufacturing, EV motors, missile systems and much more.

China’s return fire puts American multinationals at higher risk. Beijing is driving home the message that nations lining up behind the U.S. trade war will pay a steep price. The U.S. also faces the threat of wider economic disruption if China battles back against decoupling by closing off exports of indispensable technologies and materials that it dominates.

U.S.-China Trade War Over Tech

The heating up of the U.S.-China trade war for technological supremacy comes as Congress and the White House move closer to banning TikTok or forcing China’s ByteDance to sell it.

Yet Congress has proceeded with little concern about retaliation.

“Chinese leaders are worried about skilled high-tech manufacturers relocating production to India and Vietnam and will not want to accelerate these trends,” wrote Adam Segal, who chairs the Council on Foreign Relations program on national security and emerging technology.

If that’s right, Beijing may see little upside in going after Apple (AAPL) or Tesla (TSLA), which both manufacture products in China for export as well as domestic sales.

Beijing Fires Back After China Semiconductor Bans

But Beijing appears to have settled on ways to retaliate against U.S.-led chip restrictions without facing such blowback. A ban on exports of rare earth metals might give tech manufacturers more reason to stay in China. China processes 90{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} of rare earths.

Targeting Micron offers Beijing a way to punish the U.S. while strengthening Chinese chip firms. China also delivered an implicit threat to South Korea, whose memory giants Samsung and Hynix have major operations there.

In fiscal 2022, companies based in China and Hong Kong accounted for nearly $5 billion, or 16{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, of Micron Technology’s revenue. Those sales could be in jeopardy if Beijing restricts Micron. An outright ban, even on sales to foreign firms whose products are made in China, could be a much-bigger blow.

Micron Technology supplies memory chips for the Apple iPhone. Despite recent Apple efforts to ramp up production in India, most iPhones are still made in China. Since one memory chip can be subbed for another, blacklisting Micron wouldn’t cause major disruption for its customers. So China wouldn’t risk an exodus of high-tech manufacturers.

U.S.-China Trade War Background

As recently as September, Apple planned to use cheaper chips from China’s Yangtze Memory Technology for iPhones sold locally. But Apple had to quickly reverse course after the U.S. unloaded its ultimate weapon against China’s technology ambitions.

Until then, the U.S. had moved to block access to key technologies for hundreds of entities on a case-by-case basis. Export bans targeted firms or research centers linked to China’s military. Also those engaged in surveillance of the Muslim Uyghur population or charged with violating export rules or intellectual property theft.

Yet those restrictions were too porous to seriously blunt China’s technological progress. That may explain why Beijing resisted the urge to retaliate.

“Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce,” President Xi Jinping said in a May 2021 address.

---

Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live

---

‘Strategic’ Turn For U.S.-China Relations

China looked likely to prevail, according to a December 2021 review from Harvard’s Belfer Center for Science and International Affairs. In key 21st century technologies, such as AI, semiconductors, quantum computing and green energy, the authors concluded that China “had already become No. 1” in some areas. And it was on a path to overtake the U.S. within a decade in others — unless something major changed. And something major did change starting last September.

In a Sept. 16 speech, National Security Advisor Jake Sullivan said U.S. export controls previously aimed to maintain technology leadership — staying “only a couple of generations ahead” of geopolitical rivals — but didn’t strive for dominance.

“That is not the strategic environment we are in today,” Sullivan said. Instead, he said, the U.S. faces a competitor willing to devote nearly limitless resources to achieving leadership in technologies that can act as “force multipliers.”

The new goal must be to “maintain as large of a lead as possible.”

Biden China Semiconductor Restrictions

The Biden administration in September blocked sales of high-end AI chips from Nvidia and AMD to Chinese companies. Then on Oct. 7, the U.S. announced sweeping export rules aimed at blocking China’s chip progress at every chokepoint.

The rules don’t just establish a presumption of denial for Chinese purchases of the most advanced AI chips. They also deny China the software to design those chips and the equipment to produce them. They also cut off the key components that go into high-level chip equipment and access to the world’s most advanced chip fabrication facilities. Lastly, the rules aim to deprive the Chinese chip industry of brain power. They require a license for any U.S. citizen, resident or firm to contribute to advanced semiconductor production in China.

The export rules set the floor for chip equipment exports above the 14-nanometer production achieved by China’s largest chipmaker, SMIC, as early as 2019. As the industry strives to make ever-smaller circuits, which translate to faster and more power-efficient semiconductors, the U.S. aims to degrade China’s semiconductor capability. When the U.S. first restricted exports to the state-owned SMIC in 2020, it allowed equipment sales above 10 nanometers.

Taiwan Semiconductor (TSM) recently celebrated the start of mass production using its 3-nanometer technology. TSMC is building a 3nm fab in Arizona as part of a $40 billion investment.

---

Catch The Next Big Winning Stock With MarketSmith

---

Allies Join U.S.-China Trade War Over Tech

Success of the U.S. export controls depends on the cooperation of key allies. News on that front has been largely positive. Taiwan, Japan and Netherlands are largely acceding to U.S. wishes. Netherlands is home to ASML (ASML), the only supplier of extreme ultraviolet lithography equipment needed for the most-advanced chips. In fact, ASML has agreed to go further. It’s also restricting exports of deep ultraviolet lithography equipment. That gear reportedly let SMIC achieve 7-nanometer production.

South Korea, though seeking assurances about its chipmakers’ ongoing investments in China, also appears to be on board.

In a March speech to Chinese businesses, Xi blasted the U.S. policy of “all-round containment, containment and suppression on our country, bringing unprecedented severe challenges to our development.”

France Grumbles

French President Emmanuel Macron, fresh from a China trip with a delegation including CEOs from Airbus (EADSY) and Alstom, voiced his own frustration with U.S. strategy and the presumption that Europe will fall in line.

“Is it in our interest to accelerate (a crisis) on Taiwan? No,” Macron was quoted as saying.

Carnegie Endowment for International Peace fellow Matt Sheehan had cautioned that America’s “strongly zero sum approach” to confront China on technology might not be popular.

That approach “isn’t equally compelling to countries that don’t see themselves as locked in a battle to be the one dominant global superpower.”

Yet Macron’s criticisms have been an outlier in the escalating U.S.-China trade war. In a March 30 speech, European Commission President Ursula von der Leyen painted a picture of “a China that is becoming more repressive at home and more assertive abroad.”

Xi has maintained his “no limits” friendship with Russian President Vladimir Putin, imposed control over Hong Kong and signaled that Taiwan’s turn may come sooner than later. All that has built support for America’s escalation of the technological cold war with China.

---

Five Best Chinese Stocks To Watch Now

---

China-Taiwan Flashpoint

Some analysts believe Biden is taking a calculated gamble. The bet is that slowing China’s technology progress in the intermediate term is worth the risk that China’s semiconductor sector will emerge stronger and self-sufficient in the long run.

Yet near-term concerns are preeminent. Taiwan boasts 90{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} of the manufacturing capacity for the world’s most advanced chips, a 2021 Boston Consulting Group study estimated. The U.S. has embarked on a major expansion of semiconductor production to de-risk its supply chain. That includes $52 billion in subsidies from the 2022 Chips Act. Europe and South Korea are making similar efforts.

That may not be Biden’s only gamble. As the U.S. essentially weaponizes Taiwan’s advanced chipmaking, might Beijing try to assert its will over Taiwan by force?

That’s an almost unimaginable scenario, one that seems certain to plunge the global economy into chaos.

Yet China is “seriously” considering an economic blockade of Taiwan, with the idea of “winning the war without an actual fight,” deputy foreign minister Roy Chun Lee told Bloomberg this week. However, a blockade could easily escalate into military confrontation, he said.

Early this year, a scenario only moderately less explosive briefly seemed like a real risk. The U.S. aired intelligence suggesting China might begin arming Russia to try and help Putin finish off Ukraine.

Both U.S. and European officials warned Beijing that crossing that “red line” would bring serious reprisals.

China Flexes Its Economic Power

Yet, for now, Xi is showing no inclination to cross red lines as he prioritizes China’s economic strength, undercutting America where he can.

China scored a PR coup of sorts in March, seemingly filling the vacuum left by U.S.-Saudi frictions, when it brought together Iran and Saudi Arabia as they restored diplomatic relations. Then, claiming neutrality in the Russia-Ukraine conflict, Xi paid a visit to Putin to discuss China’s peace plan.

Although Kyiv sees the plan as a nonstarter, Macron, on his Beijing visit, credited Xi for a serious peace effort. And that wasn’t Macron’s only gift. Airbus announced plans for a second assembly line near Beijing as the European aerospace giant supplants Boeing (BA) amid heightened U.S.-China trade and geopolitical tensions.

Beijing is seizing every opportunity to use its economic might to drive a wedge between the U.S. and its allies.

U.S.-China Trade War Complicates Battery Charge

A few days after the Airbus news, Tesla (TSLA) CEO Elon Musk tweeted that the company will break ground this year on a new Shanghai factory that will produce 10,000 Megapack battery units to meet growing energy storage demand.

Meanwhile, Ford (F) has reached a deal with China-owned Contemporary Amperex Technology, also known as CATL, to produce lithium ferrous phosphate EV batteries at a new factory in Michigan. Tesla reportedly has had similar discussions with CATL. Yet the Ford-CATL partnership has drawn fire from U.S. lawmakers angry that a Chinese firm might benefit, if only indirectly, from Inflation Reduction Act subsidies. Beijing, for its part, reportedly plans to scrutinize the deal out of concern Ford will gain access to sensitive technologies.

The Ford-CATL partnership is “a symbol of how difficult it is for the United States to balance the interests of private industry with the desire to reduce dependence on Chinese technologies,” wrote Council on Foreign Relations researcher Seaton Huang.

China Considering Restricting Exports

As the federal government puts up hundreds of billions of dollars in subsidies to accelerate the build-out of a U.S.-centric supply chain, Beijing may be mulling ways to disrupt things.

China is considering restricting exports of technology and equipment for making photovoltaic cells for large solar panels.

Micron, which is building a $20 billion chip factory in New York, recently warned about the impact of a ban on Chinese exports of rare earths.

The U.S. is working to diversify its rare earth supply. MP Materials (MP), a major rare earths miner via its Mountain Pass, Calif., complex, has long shipped its unseparated bulk concentrate to China for processing. But it’s beginning to separate the rare earths it mines. The next step is completing a Texas manufacturing facility that will produce enough magnets to power 500,000 EVs per year. General Motors (GM) is a strategic partner.

U.S.-China Relations Tense, Economies Intertwined

In rare earths and solar, the U.S. has the capacity to diversify away from China, analysts say. But the process may be a multiyear one with high costs.

Five years after former President Donald Trump launched his China trade war, the world’s two biggest economies are still very much intertwined. Two-way U.S.-China trade, including Hong Kong, hit a record $725 billion in 2022, up 2.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} from 2018.

That’s not to say there’s no decoupling. Trade in semiconductors and Boeing jets has tumbled. Agricultural exports to China have surged, but that’s thanks to food inflation.

Over the same period, U.S.-Vietnam trade exploded by $80 billion to $139 billion. China’s exports to Vietnam, however, more than doubled over the past five years, note Carnegie Endowment fellows Yukon Huang and Genevieve Slosberg. Much of the growth in exports to Vietnam came in areas like computer accessories and telecom equipment, where Chinese exports to the U.S. fell.

The implication: “China may be exporting less to the United States directly, but it is now indirectly exporting more.”

YOU MAY ALSO LIKE:

Why This IBD Tool Simplifies The Search For Top Stocks

Best Growth Stocks To Buy And Watch

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today

Time The Market With IBD’s ETF Market Strategy

How To Handle This Volatile Market; Five Key Earnings Ahead