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For decades, U.S. semiconductor policy had been largely market driven and laissez faire. This shifted in 2022, when the United States announced a set of export controls designed to restrict China’s access to advanced semiconductors and associated technologies. Semiconductors are a foundational technology given their vital importance to many modern-day goods, while advanced semiconductors are also the key to unlocking new cutting-edge technologies such as artificial intelligence. By leveraging its leadership in certain chokepoints in the semiconductor supply chain, namely semiconductor design and semiconductor manufacturing equipment (SME), the United States is attempting to limit tech transfer to China in this critical industry.
There is, however, a balance to strike. The semiconductor industry is highly complex and competitive, with massive investments in research and development (R&D) and capital required to keep pace. Also in 2022, the United States passed the CHIPS and Science Act, appropriating over $52 billion to bolster its semiconductor manufacturing and innovation ecosystem. Yet just as the United States is prioritizing the redevelopment of its semiconductor industry, these export controls may undercut its innovation agenda: while export controls can adversely affect the target, they can also adversely affect the user.
It is well recognized that export controls can have an adverse effect on the implementer. Export controls deny affected firms in the implementing country economic opportunities that the market would otherwise allow. Thus, the United States must also consider the impact on U.S. firms when evaluating the outcomes of its semiconductor export control regime.
As the export controls were announced relatively recently, there is only one prominent study released to date that quantifies their impact on the U.S. semiconductor industry: an April 2024 report released by the Federal Reserve Bank of New York. This memo draws on the conclusions of that report, along with additional information provided by industry experts.
In broad terms, the economic impact of the export controls on the United States can be divided into three categories:
Loss of Revenue of U.S. Firms
U.S. firms may lose revenue due to both the direct and indirect effects of the export controls. As a direct outcome of the export controls, U.S. firms are prohibited from selling specified products to targeted Chinese firms without a government-issued license. If denied a license, the U.S. firms must identify other buyers for their products or else their sales revenue will decline.
Available evidence suggests that affected U.S. firms are not identifying new buyers. The April 2024 report from the New York Fed found that affected U.S. firms are terminating relationships with targeted Chinese firms but are not forming new relationships with other firms. Indeed, the report found a statistically significant drop in revenue, profitability, bank credit, and employment in affected U.S. firms following the announcement of the export controls on October 7, 2022.
As an indirect effect of the export controls, concerns of future restrictions may deter the formation of new commercial relationships between U.S. and foreign firms. For instance, the New York Fed’s report found a chilling effect on commercial relationships between affected U.S. firms and Chinese firms not targeted by the export controls. It is safer to avoid these firms, rather than risk investing in a new relationship only for future restrictions to prohibit it.
Further, the export controls may deter the formation of relationships between U.S. firms and firms in countries other than China for the same reasons. Rather than rely on U.S. firms over the long term, these third-party firms may prefer to identify sources of supply that are less likely to burden them with future restrictions. The New York Fed’s report indicated this may be the case, as it found that affected U.S. firms were not establishing new relationships with firms located in allied nations either.
The potential lost revenue could have a considerable impact on the U.S. semiconductor industry, as it undermines the economies of scale that the industry depends on. Given the huge up-front costs in semiconductor manufacturing—U.S. semiconductor firms spent nearly $50 billion on capital in 2022 alone—firms must maximize their sales to recoup their investment and remain price competitive. The more goods a company produces and sells, the more its per unit costs will be spread out and absorbed, allowing it to offer more competitive prices. Furthermore, that firm will also earn more revenue, giving it more money to invest in additional capital and R&D.
Thus, as the export controls may directly or indirectly reduce sales to the Chinese market, they may undermine the competitiveness of U.S. firms. The potential impact could be quite large as China is the largest semiconductor market in the world. In 2022, China accounted for 31.4 percent of all semiconductor purchases, with U.S. firms capturing 53.4 percent of the Chinese market. In a worst-case scenario, this could lead to a “death spiral,” where export controls reduce U.S. firm competitiveness and revenue, which leads to less money to invest in R&D and capital, which further reduces competitiveness and revenue, which leads to less money to invest in R&D and capital, and so on.
Notably, however, the New York Fed’s report found that capital expenditures by affected U.S. firms have remained stable, suggesting that the export controls have yet to impact certain long-term investment plans. A report from Silverado Policy Accelerator also found that U.S. SME exports to China fell from $6.4 billion in 2022 to $5.9 billion in 2023—a modest drop that may reflect Chinese firms buying more mature, non-controlled technologies in larger numbers.
Loss of Stock Market Capitalization of U.S. Companies
As the export controls restrict operations and introduce uncertainty into the U.S. semiconductor industry, the announcement of the export controls resulted in a loss of stock market capitalization for U.S. semiconductor firms. The PHLX Semiconductor Sector Index, a market cap-weighted index of the 30 largest U.S. semiconductor companies, fell 8 percent following the October 2022 announcement and 3 percent following the October 2023 updates, although the index subsequently recovered.
The April 2024 report by the New York Fed determined that the announcement of the semiconductor export controls on October 7, 2022, was followed by a 2.5 percent drop in stock market valuation for affected U.S. semiconductor firms that persisted for at least 20 days. This drop translates to an aggregate decrease in market capitalization of $130 billion for the affected U.S. firms.
China’s Response
Beijing has responded to the U.S. export controls in two ways. First, it has retaliated against U.S. companies. In May 2023, China announced that U.S. chip maker Micron failed a cybersecurity review, a dubious claim that resulted in a ban on certain domestic sales of Micron’s memory chips. This likely contributed to a 49 percent drop in revenue year-on-year for Micron in FY 2023. China also blocked a planned merger between U.S. semiconductor giant Intel and Israeli firm Tower Semiconductor by failing to rule on the transaction before a deadline set by the companies. The two companies had waited over 18 months for a ruling.
Second, the export controls have galvanized China’s industrial policy and innovation agenda, which may threaten the U.S. semiconductor industry in the long term. China is channeling tens of billions of dollars into its domestic semiconductor industry through state-led investment funds, while forming new public-private partnerships and updating its tax incentives to boost its research capabilities. Meanwhile, it is pressuring its domestic companies to buy Chinese semiconductors, manufacturing equipment, chip design software, and other critical inputs, which provides those companies with more revenue to invest in R&D and capital. The U.S. export controls may be helping China achieve this goal. The New York Fed’s report found that Chinese firms targeted by the U.S. export controls formed new relationships with local Chinese firms to replace the now-prohibited commercial relationships with U.S. firms. These commercial relationships may not have formed if the targeted Chinese firms could still purchase U.S. products.
The export controls also heavily incentivize Chinese firms to innovate themselves. As these companies cannot rely on U.S. firms for advanced semiconductor technologies, they must innovate in-house or partner with non-U.S. firms to develop these technologies. In one prominent example, Chinese companies Huawei and SMIC partnered to develop a 7nm chip, an advanced semiconductor with capabilities that U.S. export controls were intended to prohibit. Preventing China from producing 7nm chips indefinitely was unrealistic, as these chips can be manufactured with equipment unrestricted by U.S. export controls. Nevertheless, the chip represents a breakthrough for the Chinese semiconductor industry, which it achieved at an impressive speed despite U.S. export controls. Huawei previously relied on Qualcomm for chips of this caliber, which may lose over $10 billion in revenue in 2024 due to lost sales.
The United States has lofty goals for its semiconductor industry, and for good reason. Semiconductors are the lifeblood of the modern digital economy, with profound implications for emerging technologies essential for both economic and national security. To meet these goals, the United States needs its semiconductor companies and its allies’ semiconductor companies to succeed. Thus, this analysis raises several questions.
First, the United States should consider the longevity of its export controls. Per U.S. national security adviser Jake Sullivan, current U.S. semiconductor policy toward China is to maintain “as large of a lead as possible” given “the strategic environment we are in today.” Accordingly, there is no indication of an end date for the export controls, or an end state where the controls will be withdrawn. If the United States intends to maintain the export controls in the long term, it must reconcile this objective with the impact of the controls on its own companies and its broader semiconductor innovation agenda.
Second, the United States should consider the economic impact of the export controls as it works to persuade other countries to implement similar semiconductor export controls on China. Several U.S. allies occupy key nodes in the semiconductor supply chain, and their participation in the export control regime is critical to its success. Yet, while some allies such as Japan and the Netherlands have implemented similar export controls on China, others such as Germany and South Korea have not. The United States should assess how it can entice these countries to join the export control regime despite the potential for economic blowback on their own companies.
Kirti Gupta is senior adviser (non-resident) with the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Chris Borges is a program manager and associate fellow with the Geoeconomic Council of Advisers at CSIS. Andrea Leonard Palazzi is a research associate with the Geoeconomic Council of Advisers at CSIS.
