China Semiconductor Sanctions Cause Economic Headache for Asian Firms
China's semiconductor industry accounts for as much as 15% of the country’s gross domestic product. | Credit: VCG / Getty Images.
Key Takeaways
- A string of U.S. sanctions restrict semiconductors and related equipment sales to China.
- The export controls have major consequences for Asian firms, which rely on Chinese factories for manufacturing and are heavily exposed to the Chinese market.
- As major chip players in Taiwan, Japan, and South Korea seek to navigate U.S. sanctions, they have moved to cut ties with China in a way that minimizes the impact on their revenues.
Starting during Donald Trump’s presidency and continuing under the Biden administration, the U.S. government has imposed increasingly strict sanctions on the semiconductor industry to limit China’s access to advanced technology. And they don’t only apply to American firms.
Export restrictions covering computer chips and the equipment used to make them are a significant headwind for many Asian manufacturers for whom China has traditionally been a major market.
How U.S. Sanctions Affect Asian Businesses
Through a regulation known as the Foreign Direct Product Rule (FDPR), Washington has extended its export control powers far beyond the U.S. borders.
The rule means that even if a product was manufactured in a foreign country if American technology was used to produce it, the U.S. government still has the power to prevent it from being sold.
Considering the central role of U.S.-made software and hardware in the global semiconductor supply chain, pretty much every business in the industry is affected by FDPR, which the government has increasingly used to restrict shipments of semiconductor components to China. Washington has also lobbied local governments to apply their own sanctions in some countries.
Taiwan
Perhaps nowhere outside of China can the impact of U.S. sanctions be felt more than in Taiwan, where the semiconductor industry accounts for as much as 15% of the country’s gross domestic product.
Home to the world’s largest chip foundry, Taiwan Semiconductor Manufacturing Company (TSMC), the country exported chips worth over $47 billion to China in 2023.
Many Taiwanese companies, including TSMC, have significant business ties to the Chinese mainland, where they have traditionally outsourced parts of the manufacturing process. However, as U.S. sanctions have entered into force, restrictions on the export of manufacturing equipment to China mean this model has become increasingly untenable.
Unable to send crucial machinery to the country, in April, one of the world’s largest semiconductor assembly contractors, King Yuan Electronics Co. moved to divest its Chinese operations entirely, a regulatory filing shows.
Meanwhile, TSMC has accelerated its expansion in the U.S., banking on new foundries in Arizona to mitigate the impact of sanctions and reduce its supply chain dependency on China.
Japan
Japanese companies such as Tokyo Electron and Nikon are significant players in the semiconductor manufacturing equipment market.
Not being so reliant on American technology, Japan was initially less affected by semiconductor sanctions. However, under pressure from the U.S., Japan imposed its own export restrictions on chip-related equipment and materials in 2023.
Imposing retaliatory sanctions, China then restricted the sale of gallium and germanium to Japanese companies, setting off a tit-for-tat trade war that risks spilling out into other industries.
According to recent reports , Beijing has threatened to curb Japan’s access to more crucial minerals if it goes ahead with plans to further restrict sales and servicing of chipmaking equipment to Chinese firms.
Amid brewing diplomatic tensions, Toyota Motor has privately warned Japanese officials about the potential consequences for the country’s automotive industry, which is heavily reliant on Chinese raw materials.
In the latest development, the Financial Times reported on Tuesday, Sept. 17, that the United States and Japan are nonetheless close to a deal to further restrict exports to China’s chip industry.
South Korea
South Korean chipmakers such as Samsung and SK Hynix face an even more complex situation. These companies are among the world’s largest producers of memory chips, and they have substantial manufacturing operations in China.
In October 2023, both firms were granted special permission to ship manufacturing equipment to their Chinese facilities. While this somewhat eased industry concerns that U.S. sanctions could significantly disrupt South Korea’s semiconductor supply chain, a looming ban on selling high-bandwidth memory chips to China continues to create uncertainty.
As with Japan, Beijing has imposed retaliatory sanctions against South Korea. However, it has been careful not to push Korean firms out of the country, where in some regions they are among the largest employers.
Like TSMC, SK Group has sought to reduce its dependence on Chinese factories by investing in new U.S. facilities.
In 2022, the firm announced plans to invest an additional $30 billion in the U.S. by the end of 2025, nearly tripling its U.S. assets and quadrupling the number of employees in the country.
The Cost of Compliance
Between revenue losses and the cost of relocating manufacturing, Asian chipmakers have already experienced significant fallout from U.S. sanctions.
While firms including TSMC and SK Hynix have been significant beneficiaries of CHIPS Act subsidies designed to strengthen the U.S. semiconductor industry, there have been calls for Washinton to do more to protect the business interests of its Asian allies.
In a media interview this week, South Korea’s Trade Minister Cheong Inkyo suggested that “for countries or companies trying to comply with the U.S. in good faith, there should be some kind of carrots.”
The comments highlight the delicate geopolitical balance that needs to be struck. If the cost of complying with U.S. sanctions becomes too much, or Washinton doesn’t offer sufficient incentives, it risks alienating its partners in the region.
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