Tech industry squeezed by U.S.-China rift: "The music is going to stop"

Experts say it's also a cautionary tale for companies who still have a big dependency on China, either as a market for their products or as part of their supply chain.

• "The music is going to stop at some point," Martijn Rasser, a senior fellow at the Center for a New American Security (CNAS), tells Axios. "Instead of one chair getting pulled out, it’s going to be a lot of chairs."

Driving the news: The most recent round of sanctions, announced Oct. 7, focused largely on chips, with some additional restrictions on supercomputing.

• The new rules go further than past ones to limit China's access to chips and to chipmaking technology, as well as preventing U.S. citizens from working on key technology that is sold to China.
• Since then, the U.S. has made overtures to Japan and European allies seeking to get them to follow suit and also suggested that additional restrictions on China's access to other key technologies could also be in the offing.

"We are going to continue to look at not just what we did with semiconductors, but other areas that the Chinese are using to threaten the United States and its allies." Commerce undersecretary Alan Estevez said at a CNAS event last month, per The Washington Post.

State of play: The restrictions on chips are being billed as critical to national security. They aim to thwart Chinese military objectives, prevent the use of technology to further human rights abuses and prevent the U.S. from becoming economically dependent on China for key emerging technologies.

But the impact of the moves has been far broader, as they seem to push the long-term U.S.-China economic trend known as the Great Decoupling toward a deeper rift.

• Administration officials have stressed they're not seeking complete economic separation.
• But the restrictions have nonetheless sent companies in both the U.S, and China scrambling to chart strategies that don't rely on cross-border supply chains.

Of note: The new rules' limits on the work of American personnel added a fresh front to what had been an effort focused largely on preventing China from getting either leading-edge chips themselves, or the advanced equipment needed to make such chips.

• The U.S. is hoping that blocking China's access to U.S. expertise will impede China's effort to build off the gear they already have in their possession. "That’s going to do a lot to degrade their overall capabilities," Rasser said.

Flashback: Relations with China shifted considerably under the Trump Administration, which engaged in both a tariff war as well as targeted actions aimed at Chinese telecommunications giants Huawei and ZTE.

• The pandemic, meanwhile, served as a reminder of the risk of being dependent on China for so many different goods, as highlighted by early shortages of masks and other protective gear.

• Although the Biden Administration has chosen different areas to take action, it has embraced and extended its predecessor's recognition of China as a military and economic threat.

What they're saying: The administration's tough posture has won praise from those who have long urged deeper restrictions on China, such as former Google CEO Eric Schmidt.

• "The administration's decision is strategically coherent, absolutely necessary for our long-term security and competitiveness, and judicious in its application," he said in a statement to Axios. 

Meanwhile, most tech companies have remained silent, beyond acknowledging they will comply with whatever sanctions are imposed.

• A few companies most directly impacted by the latest sanctions have been forced to quantify the impact as part of their earnings reports.
• For example, Milpitas, Calif.-based chip gear maker KLA said the new rules will cost it $100 million in this quarter alone.

The big picture: While many chip companies have significant markets in China, plenty of other big tech companies don’t.

• Apple is an outlier: China provides most of its manufacturing but also serves as a significant market for the iPhone and other products.
• Like many other companies, Apple has begun shifting some manufacturing to India, Vietnam and other locations.

What's next: The U.S. may look to impose new restrictions on China's access to quantum computing technology, which threatens to break traditional encryption, Rasser said.

• Artificial intelligence is tougher to regulate, but the U.S. could look to place restrictions on some types of algorithms, he said.

And then there's TikTok, the Chinese-owned social media giant. Just this week, FCC Commissioner Brendan Carr told Axios he favors an all-out ban on the service in the U.S., something Rasser says looks increasingly likely.