How the US-China chip dispute could impact business

Since 2018, the US and China have been engaged in an increasingly bitter dispute over the trade and development of semiconductor chips.

These tiny electronic components are critical parts of modern technology – from smart phones and electric cars to artificial intelligence (AI) and advanced weaponry – and the impacts of a spiralling trade war could affect businesses around the world.

What’s happening?

Amid growing competition between the two superpowers, the US has slapped China with export controls. Washington fears that Beijing could use chip technology to develop autonomous weapons and surpass the military might of the US. Many analysts are likening the trade spat to an AI arms race.

The US, along with its allies the Netherlands and Japan, is introducing increasingly stringent restrictions on chip exports to China, including banning the sale of machinery used to manufacture semiconductors.

Meanwhile, China has hit back with export controls on gallium and germanium products – two metals widely used in the production of semiconductors and electric vehicles.

Analysts fear that curbs on rare earth elements (REEs) – many of which are used in computing and electronics – could be next. China is the world’s second-largest exporter of REEs.

How could it impact businesses?

Direct impacts

The latest flare-up in tensions, and any escalation of the trade spat, could have a direct impact on some exposed companies.

Of course, any tech firms trading between the US and China could be immediately affected. Companies in Germany, the Netherlands, Japan, France and the US could also be particularly hard hit, as these countries are the top importers of Chinese gallium and germanium.

Some industry figures, such as CEO of chipmaker Nvidia, have said that tightening restrictions could cause ‘enormous damage’ to the tech industry by hammering revenues and delaying innovation.

Affected companies, and other firms downstream, could face material shortages and higher prices.

On a more positive note, producers of gallium and germanium – as well as other REEs that may see restrictions in future – in places other than China could see an increase in demand, and perhaps even state incentives. Australia, Europe and the US could be tapped from more REE exploration.

Indirect impacts

The ongoing trade spat could have other knock-on effects, including disruption down the supply chain, particularly for companies that sell or use products impacted by chip shortages.

Likewise, higher materials and chip prices could feed through to products and eventually consumers, pushing up inflationary pressures. This could contribute to stubbornly high inflation rates, potentially meaning interest rates stay higher for longer.

Escalating trade restrictions would also ratchet up geopolitical tensions and risks. Since Russia invaded Ukraine, relations between Washington and Beijing have been strained. Fears of intensifying animosity between the two superpowers could weigh on market risk appetite, deterring investment in riskier, higher-yield assets and pushing traders towards ‘safe havens’.

What next for businesses?

Companies that are directly or indirectly impacted by the ongoing trade conflict should keep an eye on how it unfolds, as tighter restrictions could create challenges for them.

In many cases, it pays to be prepared. Affected firms could look to build their resilience, perhaps seeking alternative suppliers of REEs, diversifying their supply chains, or pre-emptively applying for trade permits.

As mentioned, the situation could also provide some commercial opportunities. German industrial association BDI has called on Europe to ‘reduce its dependency on critical raw materials’ from China, saying that the EU was more dependent on Chinese REE than it was on Russian fossil fuels.

A concerted effort from the EU saw it successfully wean itself off Russian oil and gas following Putin’s invasion of Ukraine, so could Europe and the US do the same with Chinese mineral exports? If it tries, it could present opportunities to investors and businesses.