They are at the heart of the global economy and vital to technological advancement.

The US government recently implemented tight controls on chip exports to China in an effort to maintain its technological edge and curb China's rise as a tech powerhouse.

However, this approach may carry substantial risks not only to US businesses but to the rest of the world.

To understand the consequences of these export controls, let us first understand where the US is coming from.

These all started back in 2019.

The US government has steadily been tightening controls on chip exports to Asia's largest economy.

Initially, restrictions targeted Huawei, China's telecom giant, on fears of national security threats.

By cutting Huawei off from critical semiconductor components, the US aimed to weaken its capabilities in 5G, AI and cloud technology.

However, these measures soon extended to a range of Chinese companies across various sectors.

In 2022, new regulations were introduced that limited China's access to critical chip-making equipment.

These controls specifically blocked access to tools like those from ASML, which builds the high-tech machines essential for producing advanced semiconductors.

The intent was to stymie China's ability to manufacture its own high-performance chips, crucial for AI applications and military technology.

This action has since ignited a tech arms race, with China now pursuing a fast-track path to self-sufficiency in semiconductor manufacturing.

In July of 2023, the US had also escalated its restrictions on exporting advanced AI chips to China, impacting companies like Nvidia, AMD and Intel, all of which produce high-performance chips used in deep learning and artificial intelligence.

The US government now requires licenses for American firms to export chips with advanced processing capabilities, particularly those crucial for AI and machine learning tasks, which could give China a military or intelligence advantage.

Now let's talk about why all of these might backfire to the US.

The first reason is simple.

China is a major consumer market for US technology firms, especially for companies that produce high-end semiconductors.

Restricting access to this market could lead to revenue losses for American companies like Nvidia, Qualcomm and Intel, all of which count China as a significant part of their sales.

For instance, Nvidia's advanced AI chips, such as the A100 and H100, are in high demand across China for applications in AI development, data processing and machine learning.

Losing this market could hamper these companies' ability to reinvest in research and development, affecting their competitiveness on a global scale.

This situation not only threatens revenue streams but may also impede innovation.

US companies allocate a portion of their revenue toward research, enabling them to stay ahead in the technology sector.

However, as China is one of the largest consumers of AI chips and other advanced tech, US firms risk a weakened financial base without this demand.

This could cause them to lose ground to global competitors who retain access to the Chinese market or develop alternative revenue sources.

Then there is also global trade and the pressure on allied nations.

The US, as we mentioned, was reported to have extended its chip export controls by encouraging allies like Japan, South Korea and the European Union to adopt similar restrictions.

This approach has put these nations in a difficult position.

For instance, the European Union, which exports semiconductor materials to China, may face economic pressure if forced to comply.

Such pressures could strain diplomatic ties, particularly if European countries perceive the US as overreaching or disregarding their economic interests.

Moreover, countries like Japan and South Korea, both crucial players in the semiconductor supply chain, may feel conflicted about enforcing restrictions that could damage their trade relations with China.

South Korea's semiconductor companies, like Samsung and SK have invested heavily in China and compliance with US restrictions could strain their operations.

Thus, the US's efforts to rally allied support may backfire if these nations prioritise their economic ties with China over alignment with US policies.

Another risk is that restrictions may drive China to accelerate its domestic semiconductor production capabilities.

China has responded to sanctions by investing heavily in development aimed at creating indigenous technologies.

Companies such as Semiconductor Manufacturing International Corporation have made impressive strides, producing chips at 7nm, while some news reports even say that they are close to shipping 5nm chips.

To top it off, both Huawei and Xiaomi, which are China's largest consumer electronics producer, have been designing state-of-the-art chips.

Huawei, for instance, has been reported to have a patent that covers both 3nm and 5nm process technologies.

Xiaomi, too, has been reported by SCMP to have taped out the country's first 3nm-grade mobile chip.

These are all notable achievements, especially for Semiconductor Manufacturing International Corporation, which lacks access to ASML's EUV lithography tools.

In case you're not aware of these, ASML, which is a company from the Netherlands, is the world's leading supplier of photolithography machines used in semiconductor manufacturing.

ASML's machines are essential for producing advanced chips at the smallest nodes, specifically the EUV Extreme Ultraviolet lithography tools required for manufacturing chips below 7nm.

EUV lithography enables extremely fine patterns on silicon wafers, which are necessary for creating the high-performance, low-power chips used in modern devices and critical applications.

While ASML is the world's supplier, there are also reports that China's Shanghai Microelectronics Equipment, the country's leading lithography equipment producer, applied for a patent covering an EUV lithography machine, according to the South China Morning Post.

The patent, filed by SMEE in March 2023, focuses on Extreme Ultraviolet Radiation Generators and lithography equipment.

This includes a laser-produced plasma EUV source, which involves using a CO2 laser to target tiny tin droplets in a specialised chamber, creating a high-energy plasma.

This plasma emits EUV light at 13.5nm, which is collected and reflected using a mirror coated with molybdenum and silicon layers, key elements of an EUV lithography tool.

Currently, SMEE's most advanced lithography tool, the SSX600, supports chips with 90nm, 110nm and 280nm process technologies.

In 2023, SMEE announced its plan to debut a 28nm-capable system, though it's unclear if this has entered mass production.

For more advanced nodes, such as 7nm or below, EUV is crucial.

In the meantime, SMIC relies on multi-patent DUV Deep Ultraviolet for 7nm-class chips, which, while feasible, is time-consuming and impacts yield efficiency.

China's push for self-reliance has not been limited to semiconductors.

Recently, China has been prioritising the development of chips based on the open-source RISC-V architecture, which has gained popularity due to its cost-effectiveness and flexibility.

Unlike traditional chip architectures like ARM and x86, which are patented and controlled by US-based companies, RESC-V is free to use and modify, making it a strategic choice for China as it seeks to minimise dependence on US technology.

Chinese companies, with government support, are increasingly incorporating RISC-V architecture into their design processes for AI chips, aiming to reduce their vulnerability to future US sanctions.

As RISC-V gains traction in China, it could lead to a parallel ecosystem of AI chips that competes with American designs, allowing Chinese firms to innovate more freely and cater to a growing demand for non-US-controlled technology.

Chinese tech companies are also pursuing alternative technologies to offset the limitations imposed by US sanctions.

One example is the shift toward silicon photonics, a promising technology aimed at improving data transmission speeds without relying on conventional semiconductor processes.

If successful, silicon photonics could enable China to leapfrog traditional semiconductor manufacturing methods, providing a unique competitive advantage in emerging technologies.

But anyway, do let us know what you think.

Thanks for watching.