Dual-use goods, semiconductors and deglobalization – 07/24/2023 – Why? Economês in good Portuguese

In 2017, when I was one of the executive directors of the World Bank, I visited the Gaza Strip, in Palestine, on a work mission. A Bank-financed sanitation project for a residential area prone to flooding of faeces when it rains heavily was stopped by a ban on the entry of water pipes. When we spoke with the Israeli military authority responsible for blocking the tubes, he told us that the problem lay in their possible dual use, civil or military.

I am reminded of this when I see references to national security in arguments against free trade in dual-use goods. As we’ve discussed here, national security is the most powerful argument against unrestrained, market-driven globalization. It is also the most difficult to assess, as it cannot be analyzed directly by researchers, market analysts or journalists – you have to take what government intelligence sources say.

The argument has found bipartisan support in the United States over China. A serious problem can always arise if a broad interpretation of “dual use” results in the restriction of many goods and services – from even clothes or medicines used by the military. As the concept has the potential to lead to wide-ranging restrictions across multiple sectors, there is a risk that it will spur economic wars in the form of retaliation.

The main category targeted so far is the semiconductor sector. Semiconductors are an integral component of many consumer products such as cars and smartphones, but they can also be used in dual-use goods such as civil and military aircraft. Furthermore, they are used in supercomputing and artificial intelligence, areas with potential implications in terms of national security.

The dispute in the case concerns the most advanced segments in the semiconductor industry. A distinction must be made between more advanced semiconductors 3-14 nanometers in size and the simplest and cheapest chips above 14 nanometers.

Taiwan and South Korea dominate the cutting-edge chip manufacturing technology and occupy close to 50% of the world semiconductor market. The United States accounts for 12% of the global market, but its local companies do not produce advanced chips on a large scale. On the other hand, many stages of the semiconductor production process rely on US-originated technologies, including the equipment needed to produce the most advanced chips.

In the recent past, China has occupied a large share of the markets for cheap semiconductors with higher nanometers. One can see in this case an attempt to repeat the trajectory in which the country made good use of globalization to ascend in the value-added scales – and consequently in the per capita income ladder. The difficulties created by the United States in the case of semiconductors consist precisely in cutting off access to the stairs that are abroad. China will have to build them itself.

In October 2022, the United States announced extensive export controls on the semiconductor industry targeting China. The United States does not export many semiconductors directly to China. However, the export controls targeted third countries, i.e., not the United States itself or China, but chip manufacturing countries that use US software and/or machinery in their manufacturing facilities.

Under the restrictions, any semiconductor made with American technology for use in supercomputing or artificial intelligence can only be sold to China with an export license issued by the United States, a license that is difficult to obtain. Given that nearly all semiconductors are produced using US technology, this rule effectively covers the entire global industry.

Third countries are subject to the following choice: seek the export licenses required by the United States or stop using technology and equipment from the United States. Hence a growing use of the phrase “armed interdependence” to characterize how the United States has used the inherent interdependence of global trade and supply chains to force its trading partners to align with its economic war against China. Furthermore, its citizens are prohibited from working with Chinese chip makers unless specifically approved. With these measures, the US seeks to prevent China from advancing technologically using what already exists on the border on the American side in sectors that are crucial to national security.

An alternative interpretation of recent semiconductor export restrictions is that they have little to do with national security, but are aimed at curbing China’s economic development path through the creative absorption of technology available abroad. If so, the new restrictions mark the end of an era of globalism and economic cooperation and the beginning of another cold war.

Given the critical character assumed by semiconductors today, their advanced versions and their manufacture became a kind of substitute for weapons and armies used in “proxy wars” during the cold war between the United States and the Soviet Union. Hindering China’s progression in the sophistication of semiconductor production has become a centerpiece of US policy toward the country. It was also notable how easily Biden’s fiscal package dedicated to semiconductors received bipartisan support in the country.

The case of semiconductors fits like a glove in what we observe to be a reversal of globalization in high technology segments, considered sensitive from the point of view of national security, with costs still considered justifiable by government authorities. As in the case of the hydraulic pipes in the sanitation project in the Gaza Strip, in Palestine, everything will depend on which of the dual uses is considered a priority.

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