Developments at the United States Commerce Department underscore the expansion of the current US-China dispute regarding advanced technology fields. The Commerce Department has prohibited US firms from doing business with various Chinese counterparts that have been listed on its “Entity List.” Thus far, each of the restrictions have been tied to national security concerns. The National University of Defense Technology in China was added in 2015, and other Chinese entities have followed since. The telecoms provider Huawei and some of its partner companies were added in May of 2019. More recently, five new firms have also been included on the list since June 2019. These include the supercomputer firm Sugon, microchip designers Higon, Chengdu Haiguang Integrated Circuit, Chengdu Haiguang Microelectronics Technology, and Wuxi Jiangnan Institute of Computing Technology.
The five most recent additions occurred because of national security concerns surrounding the dual-use capabilities of many of the technologies in question. For instance, supercomputer firms around the globe, such as Sugon, are competing to produce the next generation of supercomputing, “exascale” machines, which would be many times faster than the fastest computer today. Once created, they could be applied to civilian aims, such as weather forecasting, but could also be used for military purposes, such as nuclear weapon simulations. The ban will affect sales of various US companies such as Intel, Nvidia Corp, and Advanced Micro Devices (AMD) in China. Investors worry about the potential long-term effects of such a ban. After the five new Chinese firms were added to the Entity List, shares of AMD fell by 3%, and Nvidia fell by 1.5%.
Additionally, the policy may impact the operations of US tech companies that have already formed joint ventures with and license technology to local Chinese counterparts. For instance, AMD has licensed the use of its microchips to Sugon since 2016. The inclusion of Sugon on the Entity List may disrupt the current licensing arrangement, and lead to losses for each company in the partnership. AMD earned $86 million in revenue in 2018 as a result of the contract with Sugon. The current policy change could lead to a drastic reduction in associated revenues. If current trends continue, more Chinese tech firms may be added to the Entity List in the near future.
In response, China’s Ministry of Commerce has contemplated the creation of its own “Unreliables List,” of banned foreign companies. Foreign companies that end business relations with Huawei or the five more recent Entity List additions may be included in this Unreliables List. The Ministry of Commerce has not released many details about the potential list, so foreign companies and investors are unsure of timing and scope. A complete ban on targeted US companies operating in China could significantly decrease their performance. While it has not yet been carried out, the possibility of such a response remains.
The current US-China conflict includes many facets, of which the conflict over firms in advanced technology fields is only one part. Trade barriers have been in place for months and are at risk of escalation. The Commerce Department has contemplated including two Chinese surveillance equipment firms on the Entity List for some time. Perhaps US and Chinese leaders can resolve many of the issues related to the Entity List and the trade war. If not, escalations on both fronts are possible.
