Beijing Has Few Good Options to Retaliate for Chip Bans

The sweeping U.S. restrictions on technology exports this month came while China’s leaders were busy preparing for the critical twice a decade meeting of the ruling Communist Party. Beijing will now need to consider how to respond given how far-reaching the chip curbs are: They will set China’s semiconductor industry back years, effectively crushing President Xi’s hope to become more self-sufficient in chip making if they are strictly enforced.

A tit-for-tat response in the semiconductor sector would be almost impossible given China’s still-heavy reliance on foreign technology. Many American semiconductor companies like

Qualcomm

make a significant proportion of their revenue in China, but refusing to buy from them would be self-defeating.

Going after other American companies with big exposure in China could be one option.

Apple,

which manufactures most of its iPhones in China and makes nearly a fifth of its revenue there, has long been highlighted as a possible target—particularly during President Trump’s trade war against the country. But nothing substantial has materialized. That is partly because Apple, and companies along its supply chain, employ a huge number of people in China. Getting too tough on the company would entail significant collateral damage to a Chinese labor market that is underperforming. And after all, American businesses are some of the few remaining advocates Beijing has in Washington. Full-blown retaliation could undermine that.

There wasn’t much punishment of American companies in the wake of the Trump administration’s sanctions on Huawei—but Beijing did let Qualcomm’s planned acquisition of

NXP Semiconductors

wither on the vine. Several other deals including Intel’s $6 billion purchase of

Tower Semiconductor

are now before Beijing for approval. Research group Gavekal says the fate of that deal could be a leading indicator of future treatment of U.S. companies.

Beijing could also impose its own export controls on products that it dominates like battery materials or pharmaceutical ingredients. But China’s previous experience with Japan—when it restricted supplies of rare earths—ended up pushing Japan and other countries to look for other sources. There is a movement to onshore manufacturing of products that are dominated by China, and more export restrictions could accelerate that. Gavekal thinks this option is unlikely but if Beijing does go ahead, it would be a sign that retaliation this time will be less restrained than before.

The devastating impact of the chip restrictions requires some kind of forceful response from Beijing. Yet there are no easy choices that won’t inflict damage on China itself. How far China will be willing to go will be a strong signal on just how bad the relationship between the two countries could get.

Write to Jacky Wong at [email protected]

The sweeping U.S. restrictions on technology exports this month came while China’s leaders were busy preparing for the critical twice a decade meeting of the ruling Communist Party. Beijing will now need to consider how to respond given how far-reaching the chip curbs are: They will set China’s semiconductor industry back years, effectively crushing President Xi’s hope to become more self-sufficient in chip making if they are strictly enforced.

A tit-for-tat response in the semiconductor sector would be almost impossible given China’s still-heavy reliance on foreign technology. Many American semiconductor companies like

Qualcomm

make a significant proportion of their revenue in China, but refusing to buy from them would be self-defeating.

Going after other American companies with big exposure in China could be one option.

Apple,

which manufactures most of its iPhones in China and makes nearly a fifth of its revenue there, has long been highlighted as a possible target—particularly during President Trump’s trade war against the country. But nothing substantial has materialized. That is partly because Apple, and companies along its supply chain, employ a huge number of people in China. Getting too tough on the company would entail significant collateral damage to a Chinese labor market that is underperforming. And after all, American businesses are some of the few remaining advocates Beijing has in Washington. Full-blown retaliation could undermine that.

There wasn’t much punishment of American companies in the wake of the Trump administration’s sanctions on Huawei—but Beijing did let Qualcomm’s planned acquisition of

NXP Semiconductors

wither on the vine. Several other deals including Intel’s $6 billion purchase of

Tower Semiconductor

are now before Beijing for approval. Research group Gavekal says the fate of that deal could be a leading indicator of future treatment of U.S. companies.

Beijing could also impose its own export controls on products that it dominates like battery materials or pharmaceutical ingredients. But China’s previous experience with Japan—when it restricted supplies of rare earths—ended up pushing Japan and other countries to look for other sources. There is a movement to onshore manufacturing of products that are dominated by China, and more export restrictions could accelerate that. Gavekal thinks this option is unlikely but if Beijing does go ahead, it would be a sign that retaliation this time will be less restrained than before.

The devastating impact of the chip restrictions requires some kind of forceful response from Beijing. Yet there are no easy choices that won’t inflict damage on China itself. How far China will be willing to go will be a strong signal on just how bad the relationship between the two countries could get.

Write to Jacky Wong at [email protected]