US ban on semiconductor tech puts the squeeze on China

Hey everybody, Peter Zeihan here coming to you from the Lincoln Memorial in DC. Now I know I’ve already talked about the Chinese semiconductor shift in policy here in the United States. But there’s been a lot that has developed over the last 48 hours…so I feel I need to do a quick update.

The biggest thing to understand is…not only is China now unable to import the equipment to make semiconductors, or the tools to maintain and operate the equipment, or the software that’s necessary to operate the equipment, or any mid or high-level chips at all. Now, any Americans who want to assist with the Chinese semiconductor industry have to make a choice. You can have your job with China or you can have your citizenship. As a result, within about 48 hours of the policy being adopted last Friday, every single American citizen who was working in China in the industry either quit or their companies relocated their entire division so they would have to lose their staff. For all practical purposes, the Chinese semiconductor industry of everything over like Internet of Things, level-of-quality is now dead. And that has a lot more implications than it sounds.

The Chinese have proven incapable of the last 25 years of advancing sufficiently technologically in terms of the intellectual heft that’s required to operate this industry, beyond being able to simply operate the facilities that make the low-end chips. And even that had to be managed by …foreigners. So there is no indigenous capacity here to pick this up and move on. And since the United States has basically corralled the Japanese and the Dutch, two very pro-American countries from a strategic sense, to join in this ban, really all that’s left is potentially Korea and Taiwan. And even if they were fully on board — which they’re not — that is not enough to carry all the water that needs to be carried.

In terms of industrial fallout, this doesn’t just mean that the Chinese are never going to be able to make the chips that go into cars or computers. It also means that any industry that is dependent upon the hardware, dies. So when you think of some of the technological advancements that the Chinese have made in recent years, things like AI and mass automation, monitoring their own population, the great firewall, hypersonic cruise missiles, a space program… supercomputers. If the Chinese want to do any of this, they have to buy chips basically on the gray market, purchase prefinished products and then pull out the chips and apply them to something they weren’t designed for.

We are looking at at least an order of magnitude drop in the Chinese capacity to operate in anything that is tech focused. This is a deal killer, not just for the industry but for a modern technocratic system. From a technological point of view, China is done. The question, of course is what do they do about it? We’re dealing with a one-man government here that’s a little petulant when they don’t get their way. And where the bureaucracy is either completely static or over-enthusiastic and does things like work well for your diplomacy.

So I would expect this kind of bag of **** public diplomacy that has evolved in China to hit this hard and loud, which will probably only encourage the Americans to act more harshly and start targeting some of the lower end semiconductors. And that’s going to have consequences throughout the world. But we’ll get to that another time. All right. Take care.