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The American and Chinese flags are shown against the backdrop of a printed circuit board. (Reuters/Yonhap)

The additional restrictions on semiconductor exports to China that the US government unexpectedly announced on Tuesday show that the power battle between the two sides is heating up.

The market reacted sensitively, with share prices for the US semiconductor company Nvidia plunging by as much as 8% during trading after the additional restrictions were announced. Based on the history of Washington and Beijing repeatedly exchanging offensive and defense gestures over the past three years, observers are now watching to see how China reacts.

For now, the Chinese government has indicated that it plans to take “all necessary measures” in response.

The new restrictions include low-performance artificial intelligence chips on the list of items barred from being exported to China. This gesture is intended as a response to certain semiconductor companies manufacturing lower-end AI chips for sale to China after previous restrictions on exporting high-end chips were instituted in October 2022.

The main products targeted by the additional restrictions are Nvidia’s A800 and H800. This means that China — which has been responding to existing restrictions by combining low-performance density AI chips — will need to seek out a new response strategy.

The nature of the restrictions is evident in the fact that they exclusively target AI chips for data center use. This signifies that the US’ focus is on stopping its chips from being diverted toward military purposes. In contrast, the commercial semiconductor chips used in smartphones, computers and electric vehicles were not included among the targets.

In a briefing, US Secretary of Commerce Gina Raimondo said the measures were intended to prevent the Chinese military from gaining access to key AI technology and advanced chips.

Additionally, the measures include content restricting semiconductors exports and the transportation of certain semiconductor manufacturing equipment into China by businesses with parent companies located in China, Macao, and countries subject to US arms embargoes. They are meant to stop indirect exports and deal a blow to the growth of China’s semiconductor industry.

US curbs on China have continued — albeit with differences in intensity and content — since May 2020, when a ban was imposed on supplies of US-made components to the Chinese IT company Huawei. China has responded in kind with measures such as restrictions on exports of semiconductor raw materials such as gallium and germanium and on the use of semiconductors produced by US companies.

That means the new restrictions could provoke additional tit-for-tat measures from Beijing. In a message posted on the Chinese Ministry of Commerce website on Wednesday, a ministry spokesperson said that China would “take all necessary measures to firmly safeguard its interests” and that the US was “abusing export control measures to one-sidedly harass” China.

The battle between Washington and Beijing appears likely to be a complex one influenced by numerous variables. Stronger measures may succeed in choking off the other side but also put a damper on domestic industry and draw objections from businesses.

Indeed, the immediate response from US businesses has not been favorable. In a statement, the US Semiconductor Industry Association warned, “Overly broad, unilateral controls risk harming the US semiconductor ecosystem without advancing national security as they encourage overseas customers to look elsewhere.”

The market response has likewise been chilly, with Nvidia share prices finishing down 4.68% on the New York Stock Exchange despite the company’s reassurances that the measures would not have a major impact on its short-term financial performance.

The restrictions appear unlikely to have a direct impact on South Korean semiconductor businesses. Almost no companies in South Korea actually produce AI chips directly.

“Domestic production of AI chips is minimal, and consumer chips are not targeted for restrictions,” explained an official with the Ministry of Trade, Industry and Energy trade controls policy division.

Kim Yang-paeng, a senior research specialist at the Korea Institute for Industrial Economics and Trade, similarly explained, “South Korean companies don’t directly produce AI chips such as neural processing units, and demand for Nvidia’s graphic professing device components does not appear likely to drop over a short period.”

But the situation changes if the continued conflict between the US and China leads to a widening scope of restrictions. That could have an effect on high bandwidth memory exports by SK Hynix and Samsung Electronics, and the South Korean semiconductor industry may take a hit if the US demands that businesses in partner countries join in its restrictions.

“There are still risk factors, such as the possibility of China pushing back or the US demanding that South Korean businesses participate in its export restrictions,” Kim warned.

By Ock Kee-won, staff reporter

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