Biden has further restricted China’s access to sophisticated chips. China placed exports controls on crucial minerals in return.
On June 27, The Wall Street Journal reported U.S. Considers New Curbs on AI Chip Exports to China
The Biden administration is considering new restrictions on exports of artificial-intelligence chips to China, as concerns rise over the power of the technology in the hands of U.S. rivals, according to people familiar with the situation.
The Commerce Department could move as soon as early next month to stop the shipments of chips made by Nvidia and other chip makers to customers in China and other countries of concern without first obtaining a license.
The move could further crimp China’s ability to build its AI capabilities after restrictions last year that cut off the most advanced AI chips made by Nvidia and Advanced Micro Devices.
Nvidia responded to that move by making a version of its AI chips for the Chinese market called the A800 that fell below performance thresholds outlined by the Commerce Department. The new restrictions being contemplated by the department would ban the sale of even A800 chips without a license, according to the people familiar with the matter.
The administration is also considering restricting leasing of cloud services to Chinese AI companies, which have used such arrangements to skirt the export bans on advanced chips, some of the people familiar with the discussions say.
China Retaliates
In response, China Retaliates Against Biden’s Chip War with export curbs on gallium and germanium.
China’s export controls on metals used in making semiconductors are “just a start”, an influential trade policy adviser said on Wednesday, as it ramps up a tech fight with the US days before US treasury secretary Janet Yellen visits Beijing.
Shares in some Chinese metals companies rallied for a second session, with investors betting that higher prices on gallium and germanium, which Beijing’s export restrictions target, could boost revenues.
Germanium is used in high-speed computer chips and plastics, and in military applications such as night-vision devices as well as satellite imagery sensors. Gallium is used in building radars and radio communication devices, satellites and LEDs.
Analysts have described Monday’s move as China’s second, and so far the biggest, countermeasure in the long-running US-China tech fight, coming after it banned some key domestic industries from purchasing from US memory chip maker Micron in May.
On Wednesday, former vice commerce minister Wei Jianguo told the China Daily newspaper that countries should brace for more should they continue to pressure China, describing the controls as a “well-thought-out heavy punch” and “just a start”.
“If restrictions targeting China’s high-technology sector continue then countermeasures will escalate,” added Wei, who served as vice commerce minister in 2003-2008 and is now the vice chairman of state-backed think-tank China Centre for International Economic Exchanges.
So far, the market reaction has been relatively tame. But it won’t be if China escalates its threat.
Critical Materials Assessment
On June 12, I commented on the Critical Materials Risk Assessment by the US Department of Energy
The Department of Energy says there are six critical materials in the short term, which include cobalt, dysprosium, gallium, natural graphite, iridium, and neodymium. The uses for these critical materials are spread across rare earth magnets, batteries, LEDs, and hydrogen electrolyzers. Germanium is used in microchips.
To create the above chart, I took the short term importance and supply risk factors from the Department of Energy and multiplied them together.
Using this alternate method, the top five risks are Dysprosium, Cobalt, Gallium, Neodymium, and Lithium.
Gallium and Germanium Producers
- Germanium ores are rare and most germanium is a by-product of zinc production and from coal fly ash. China produces around 60% of the world’s germanium, according to European industry association Critical Raw Materials Alliance (CRMA), with the rest coming from Canada, Finland, Russia and the United States.
- Gallium is found in trace amounts in zinc ores and in bauxite, and gallium metal is produced when processing bauxite to make aluminum. Around 80% is produced in China, according to the CRMA. Only a few companies – one in Europe and the rest in Japan and China – can make it at the required purity, says the CRMA.
The above producer comments from Reuters.
Trump “Trade Wars Are Good and Easy to Win”
In case you forgot, please recall my March 2, 2018 post Trump Tweets “Trade Wars are Good and Easy to Win”
On January 11, 2021, Bloomberg reported How China Won Trump’s Trade War and Got Americans to Foot the Bill
I disagree with Bloomberg because no one wins trade wars. But that headline is closer to the truth than Trump’s vision.
The same applies today. Placing tariffs and sanctions on China when China produces enormous percentages of materials you need is more than a bit empty headed. Yet Biden escalated Trump’s failed policies.
The result is sure to be more inflation. Nearly everything Biden does is inflationary.
China is in a much worse position to retaliate than it appears. https://www.youtube.com/watch?v=GJ8zSljxJZE Not to say free trade is a bad idea, its a net positive if done correctly. Jobs lost because of exporting low skill jobs should be replaced with higher value/skilled jobs producing a more profitable end result. Creative destuction is a necessity for economic advancement.
Peter Zeihan is amused by this “clunky” Chinese threat. He points out that 90% of the world’s semi-conductor-capable silicon comes from North Carolina…
“If there is really a materials war as part of the struggle for the digital age, China is not even going to have computers…”
https://www.youtube.com/watch?v=GJ8zSljxJZE
LOL I didn’t read your post and reposted the link.
To be fair to Trump and his policy with China, Trump was not pushing an unrealistically aggressive renewable energy and EV policy like Biden did. Biden’s policies made us far more dependent on the critical Chinese supply. Trump had far more negotiating power with conventional energy and fossil fuel dominance (and gasoline cars people can afford) on his side.
Sidenote: I still think the auto chip shortage during Covid came mainly because the auto industry didn’t set up its chip supply chains until the 2020 presidential election played out, as they waited for government to set their product direction: EV chips or ICE chips? (Smells like communism/fascism.) And now EV automakers are going out of business or having huge layoffs, because the politically-motivated EV and energy policies are unrealistically aggressive, and not yet supported by supply chains.
Tesla just reported their biggest selling quarter ever. As far as EV makers going under, since EVs are a new industry, you’re going to have a lot of upstart car makers in the EV business. Not any different than when cars first came out a century ago. Upstart car makers go under a lot. This has nothing to do with Biden’s policies. This is just the nature of the auto industry.
And the 2 best selling EVs, by far, the model 3 and model Y cost less than the average car.
Is that car or vehicle price?
I can’t seem to find a way to break out new car vs new vehicle prices. SUV’s and trucks are notoriously high compared to cars which is what I was trying to figure out.
I would guess vehicle. You can get a model 3 for as low as $35k bottom line after rebates. Not many new vehicles as cheap as that.
The last car my family bought was a gas Hyundai Kona SEL (gasoline ICE). A very capable small SUV. Edmunds.com lists that new for $25K MSRP. (And the base trim at $23.5K). To a lot of people, $10-12K is a significant savings, about a third less cost than the Model 3 you mentioned at $35K. And then there are other (debatable) factors about charging EVs vs. paying for gasoline, range, vehicle longevity, fire risk, that many people do not want EV’s for. I agree that for those who really like the idea of an EV, and have some extra discretionary income, the costs are not terribly high these days to afford an EV. But apples to apples, there are still significant savings on tried-and-true gasoline vehicles. Some also question paying taxes for US rebates that more wealthy people are getting on EV purchases, which amounts to govt-sponsored corporate welfare.
Being vertically integrated gave Tesla a huge advantage that the legacy car manufacturers have a very hard time to duplicate.
Agree about Tesla not being part of that cycle. They led, rather than followed govt policy, and their supply chains were better established than the followers.
“Upstart car makers go under a lot. This has nothing to do with Biden’s policies. This is just the nature of the auto industry”
This is the nature of every new industry or revolutionary change:
– Look at how many railroad companies went under.
– Look at how many dot com companies went bust in 2001-02.
– Look how many AI companies will go bust within next 5 yrs.
Trade wars are not about winning. They are more about not losing.
Europe used to be the top manufacturer of solar panels but when China broke the prices most of the companies had to close. When China was seen as a friendly power that wasn’t a problem but that isn’t the case anymore. Now the EU is putting a lot of money into reshoring manufacturing and will not hesitate to put on tariffs if they see the need.
Yes but Tariffs only hurt the consumer in Europe because they are forced to pay more for something. Of course they will need those tariffs because the onshore manufacturing can’t compete. That means Europe falls further behind.
Short term tariffs hurt the consumer but if they prevent the consumer from losing his job because the company moved production overseas to save a buck then it doesn’t work all that well for the consumer anymore doesn’t it?
That’s the whole union point of view.
That everyone else should spend a bit more to keep a handful of people employed in an industry that’s not competitive. Basically it’s welfare for those employed in those industries.
What’s meant to happen is that those people should be finding employment elsewhere.
It’s not the union point of view. It is just a renouncing of the free trade point of view which has shown to be very flawed. Call it rather a Hamiltonian point of view. If it doesn’t work then change it.
Tariffs support local manufacturing and are an effective method of moving money from the consumer’s pockets to the Government treasury.
I generally agree that tariffs are bad. But in this case I agree with Biden. We need to prevent China from taking over chip production like they have in other markets. They can make low end chips, but they don’t know how to make the best chips. And it will likely take at least a decade for them to catch up with the west. Probably multiple decades. Better to keep the technology out of their hands.
I don’t know how scarce rare earths really are. There’s a tremendous amount of money being granted for research to show how we can’t transition away from fossil fuels. I suspect almost all of it is coming from the fossil fuel industry. Because the oil companies have the most to lose. I haven’t seen any shortages manifesting in lack of product availability. At least not yet. So, until people can’t get solar panels or EVs, I’m skeptical.
“I disagree with Bloomberg because no one wins trade wars. But that headline is closer to the truth than Trump’s vision.”
Mish,
At some point, please write an article from the I’m president point of view.
We would all love to know how you’d run the economy and specifically deal with China. Granted, there are no easy answers, but you seems to be very anti tariffs / sanctions.
I personally would love to know how you’d counter China. Something pretty damn aggressive has to be done.
Thanks!
Trade is a tough job today, and a lot of the elements that go into a decision are not measurable. The goal is to get an asymmetric outcome in military power and economic strength.
Tariffs are a different kind of tax. If we are going to tax, it should address these unmeasurables. Classic case from econ class is taxing polluters for the downstream damage and clean up costs. Government is largely getting this right. Plus, I would rather tax the Chinese instead of my income.
ADP jobs report DOUBLE expectations…
https://www.cnbc.com/2023/07/06/adp-jobs-report-private-sector-added-497000-workers-in-june.html
Mostly low paying jobs that people now have to take because they have to start paying for things like student loans.
Nah…Bidenomics is working so much that the market thinks a 96% chance of a Fed rate hike now. If this keeps up, Joe Biden can sleepwalk to the next election and win. You’d like that wouldn’t you?
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Over 300k of the job gains were in Leisure\Hospitality and Education\Health Services. Low wage jobs.
High paying information jobs lost 30k.
“If this keeps up, Joe Biden can sleepwalk to the next election and win”
Regardless what happens over next 18 months, Biden will be sleepwalking.
At 3.5-3.7% unemployment, the job gains ARE mostly going to be they types of jobs you characterize. This is to be expected, and I’m not a Biden apologist.
Despite Mish’s claims of ISM this, ISM, that, etc, the economy is doing very well, at least for the top 50%. The bottom 50% are getting crunched and that’s Fed’s & Congress’ fault.
$1.5T structural annual deficits is a TON of inflation. And that Employee Retention Credit (ERC) gave out $29B in the first quarter and, I think, employers have until next April to file claims. So the biggest boon doggle (pandemic spending) keeps on giving, adding tons of inflation.
And think of all the local spending that’s supported by sky high real estate prices that in parts of the country are now rising again.
One further point is that you cannot look at this in isolation.
CPC China is determined to remove US from the number 1 superpower. Personally I would rather have the US than China.
Me too. So do a lot of people.
“CPC China is determined to remove US from the number 1 superpower.”
They’ve done that at least a decade ago. By now it’s not even close. China is far and away the “indispensable nation” now, in far and away most, and more every day, areas. While the US has gone nowhere but backwards since the ’60s.
Nah. You will be taken over by Mongols on motorcycles.
I have seen many Russian trolls here in the past (where are they today – I kinda miss the man from Brussels), but looks like they have been replaced by Chinese trolls.
I am an under-the-bridge troll.
I’m sure the US has plenty of said minerals. It just doesn’t have the mines, which will take some time. Likewise, the Chinese have advance chip capabilities, it’s just in the remote Chinese province of Tiawan…
You’re conclusion that everything Biden’s administration does is inflationary nails it. Is it intentional?
It’s just a start : Yellen is in China to reduce tension, but the Dow isn’t buying it. Globalization is down first slowly then faster.
Exogenous events cause inflation, not Fed printing.
I don’t think Globalisation is down at all. It is just being reconfigured. We have realised that we are do dependent on authoritative regime.
We need to shift the supply chains to democratic regimes which are willing to work with us as partners rather than supplant us.
I personally think that ‘de-globalisation’ is too convenient a hook. Humans have traded with each other from the day we evolved on this plant. What we cannot do is to allow authoritative regime to hold us to ransom.
We only need to have competition. Cannot rely solely on China. Need to diversify the supply chain only.
Do not need to shift supply chains to democratic countries, just shift to varied countries with excess labor, within different regions.
Yeah, switch from autocratic management that can get things done to democratic management that argues endlessly before even starting.
Yellen is in China to work on keeping China buying US bonds.
Of which there are going to be a lot more in the near future (thanks Joe).
China is doing what it can to retaliate but it is more a face-saving measure than one that would cause the West to change its embargo on certain chips and chip-making machines. The two rare earths that Mish mentioned are found elsewhere and although China processes them the processes themselves are old knowledge from the 1920s and to learn how to do it you just have to open a textbook and start building and pretty soon you can do it too. Chips and the machines to make them are another matter entirely. It is new knowledge and the ones who know how to do it are the companies that developed it and they do not tell everyone how to do it for obvious reasons. Of the two embargos it is easy to see that one is much harder to overcome than the other. The Chinese are not dumb but they had to be seen to be doing something and this is what they came up with.
About all the minerals in the upper right hand of the table have prices that peaked early last year and are now way below their peaks in spite of being highly in demand. The reason is that supply is meeting demand very nicely. I am not too worried about running out of them in the near term or the medium term.
That makes sense to me. Almost all of the “rare earth” minerals are available without China. What China has is the ability to process the minerals very cheaply. They do this by avoiding environmental controls, worker safety and slave labor.
In the long run, we are better off getting this minerals through supplies that are environmentally sound. I don’t understand the mentality of “out of site” is environmentally fine and it’s OK to exploit workers and use slaves as long as we don’t see it.
Well said Matt
“Of the two embargos it is easy to see that one is much harder to overcome than the other.”
If it was that easy, how come you got it so wrong?
Incrementally moving chipmaking forward, takes nothing more than smart engineers and scientists, combined with sufficient capital and productive organisations. China has plenty of all. Whatever technology some Dutch outfit may currently have a de facto monopoly on, takes a lot less to effectively replicate, than it took those Dutch to originally develop it in the first place. It’s not as if Moses revealed some unreplicatable magic spell to some dude in the Netherlands once and for all. Once Carl Benz demonstrated the IC engine, it didn’t take long before traffic jams were virtually everywhere. Chips are no different. Moore’s law is largely about just pounding away. And known, already demonstrated, solutions are always MUCH easier to effectively replicate or mirror, than finding once unknown ones, originally were.
Massive mining and extraction projects OTOH? Those are much, much harder to pull off, as they don’t deal solely with a few bright men in a room with little interference by idiots in communist parties and “investment banks.” But instead involves everybody and their illiterate-but-hysterical uncle, all “demanding” a say. Ambulance chasers, “investors”, politicians, grandstanding look-at-me “activists…” you name it. For everyone who can read, there’l be 50 who can’t; but who still have been handed all the “money” and “power” and “influence.”
Besides, such projects need competent managers. Of which The West has exactly a cold, hard, mathematical zero left; after decades upon decades of transferring all wealth, hence power and influence, to the rankest of “made money from my house and portfolio and kangaroo courts” idiots.
Whether one agrees with it or not; China could at least somewhat pull of zero covid. That takes some serious management (as well as other) and organizational resources. While in the West, we had: Trump drinking bleach……. Resulting in ultimate death rates an order of magnitude or two higher than the Chinese.
Sticking with Covid: What the West did have; was leftover-from-their-sixties-heyday scientific superiority. So the vaccines which did eventually end the pandemic, were largely of Western origin. But now, the Chinese have largely caught up with MRNA.Chances are they’re still a bit behind, after 3 years of pounding away. But the gap is massively shrinking. Which will be exactly the case with chips as well.
While, OTOH, the large-project-management skills of The West, are simply falling even further behind. There is zero indication that Western competitiveness vs China, in any complex venture, has improved one iota, over the past 5, nor 15, or 50 years. In the sixties, “we” could walk on the moon. Without even the benefit of cheap computing power. Now, “we” can’t even maintain a road, sewer, nor even build roofs over people’s heads.
So yes: One “side’s” currently asymmetric advantage really is much harder to effectively remedy, than that of the other.
Let us hold high our glasses of Clorox in salute Stuki!
You sound like a real Wolf Warrior specialized on making comments in the comment section of economic blogs. You use the word replicate a lot because that is what you want to do which is copy something you didn’t originate and make incremental improvements. It reminds me of the latest chip China spent a lot of time and money to produce. It was a 5 nanometer chip and heralded as a breakthrough. Chinese scientists created the chip using old technology that the leaders had already dropped because the most you could get out of it was 5 nanometers and nothing more. While China concentrated on making this chip that was limited the industry leaders began to use a new technology that allowed them to make chip much smaller than 5 nanometers. The embargo was made to keep China from that new technology so you will have to develop it yourself this time around.
China had the incredible luck of being able to import all the technology it wanted for forty years but that is over now. You grabbed the low-hanging fruit but the fruit now is higher up in the tree. If it was only a question of money, scientists and engineers it would be easy but it isn’t just that. You need the environment and Xi in his unwisdom has cut off the tech entrepreneurs at the knee because he is a control freak. Now any Chinese with an idea will think twice about building his company in China because sooner of later it will end up in the hands of someone close to power.
“You need the environment and Xi in his unwisdom has cut off the tech entrepreneurs at the knee because he is a control freak.”
There is more resources available for even pure pie-in-the-sky, completely unmeddled-with purely academic research in chip-related fields in China, than is available even to those working in the largest of the incumbent chipmakers in the US. And that despite chipmaking remaining one of America’s very few bright spots, no doubt about it. Those resources are why the silly fearmongering about China “invading” Taiwan is almost certainly just clueless drivel: For Taiwanese at the top of their field, in pretty much ANY field; China is where the resources are. The rest of the world, even mostly Taiwan, is a has-been backwater. For young people with a future; China is where the action is now. In chipmaking, as well as in darned near anything-making (rap music excepted for now….)
As well, there are more brainpower. For now, simply many more people. Generally better educated. With far fewer entangling hangups and distractions (even something as taken-for-granted as a decent place to live, is no longer so for even to talent in Silicon Valley; who instead spend half their darned time in rush hour wasting away attempting to figure out how their kids should get to school.)
But far and away most important of all: Xi personally may want to be a “control freak.” But he’s just some dude. Far, far away from most of the untold number of labs where MIT and MIT+ caliber hitters are pounding away on “chip-problems” day and night.
While OTOH; the problematic control freaks, are those much closer: In Silicon Valley they’re called “investors”. They like to call themselves “Angels.” Venture so called “Capitalists” (whose darned near every penny of “investable” funds were handed to them as pure loot by a run-amuck central bank, rather than anything more challenging.)
Chinese labs and institutions are still largely ran per the traditional model: World class talent in their field, is in charge. Just like in the Manhattan Project. The moonlanding. In Germany’s (pre 2008) Wirtschaftswunder. In Japan. In Silicon Valley back in its heyday. Etc.
Instead of by clueless hacks who “made money from their home and portfolio,” kowtowing to ambulance chasing dregs while wasting half of available resources, or more, on “rent”, “insurance”, “lobbying” and other harebrained efforts at cutting useless but connected nothings in for an ever rising share of what was once a good game, despite none of the nothings contributing anything of value whatsoever; instead only being in the way.
Again: There’s nothing magic about chips. Throw more well targeted resources at it, and you more forward faster. AND: It’s easier, and quicker (lots so) the second time. No different from any other field. China is where resources for both science and engineering is overwhelmingly available now. That’s not somehow magically NOT going to translate into Chinese labs and organisations moving forward faster than worse-ran, more-resource-starved colleagues elsewhere. And once you move faster, you eventually catch up. Then pass.
Silly mindless and uncritical regurgitation of “Scary Xi” and “Chinese who only can copy” and “The Chinese “stole” the wheel from some stone age guy! Bad bad Chinese. “We” and Massa Ambulance Chaser should force them to play petty kangaroo-court-room dramas with us, so we can deem and find and hold and judge (since we obviously can’t do anymore….) are just that: Silly. The Chinese are communists. So yes: They do suck at most things on an absolute scale. But in the hierarchy of economic insight, even hardcore communists are way ahead of idiots dumb enough to believe in either financialization or “legal activism.” So, as long as The West remains childbrained enough to fall for those, the commies will continue to be more efficient, “better” and freer than utterly useless little “us”, no matter how silly communism trivially is in the bigger scheme of things.
Entertaining to see you use an ad hominem attack right out of the gate.
Agree to disagree on much here…. But, I do agree that the US is sorely falling behind on competent workers as a whole.
Scary thought.
https://www.youtube.com/watch?v=tQ_HeCalYq8
And why would anyone here click on this link? Do you have a point to be made?
Another US shoot-yourself-in-the-foot program.
Block US AI chips from China forcing China to accelerate internal development of their own AI chips, effectively keeping US volumes lower and chip prices higher. China graduates about 600k engineers each year. India about 350K. The US about 69K. Of course the American engineers are much better because – well they’re American.