Chip Wars #4: Small Yard, High Fence

In recent years, the US has switched to what it calls the “small yard, high fence” policy. What this means is that in most areas, it will be as business as usual. But in a handful of areas, which the US deems as relevant to its national security, it will impose a lot of restrictions on what can or cannot be made available to others. This policy was clearly framed with China in mind.

 

High-end semiconductor chips fall in this “small yard, high fence” category. As the name suggests, the constraints and bans apply only to the highest end chips. Since most of the other countries involved in key parts of the chip industry fall under the American sphere of influence (Europe and Japan mostly; South Korea a bit more reluctantly), the “small yard, high fence” policies are enforced by those countries as well.

 

Not surprisingly, at the highest end of chips, this is having a crippling effect on China and Chinese companies, says Pranay Kotasthane in When the Chips are Down. Huawei is the most well know example of a Chinese company that almost shut down due to American restrictions.

 

This has forced China to turn its focus on building everything in-country. While that is impossible in the short or even medium term, who knows what may happen in the long term? When it comes to long term strategies, China is far more likely to stay the course than America. There are several reasons for that – China now views Western control of chips as an existential threat, so their focus is proportionally high. The West is democratic and its leaders (and thus policies) will change; and Western companies will lobby when they see huge market opportunities being lost by restrictions on China. Plus, both Western companies and China will keep finding loopholes in any restrictions being imposed.

 

This then is why the phrase “chip wars” is so much in the news these days.

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