What you need to know
China’s political game isn’t working out in its favor. Instead of harming Micron and influencing U.S. policy, the ban will harm Chinese buyers.
As the U.S. and China vie for dominance in tech, the Cyberspace Administration of China banned Micron from “critical infrastructure” projects in China, citing the chip giant’s failure to pass a cybersecurity review. Following the ban, the Office of Cybersecurity Review announced that it will be reviewing products sold by Micron in China to “prevent network security risks caused by hidden product problems, and maintain national security.” But on March 31, when the Office launched its cybersecurity review, it cited the “National Security Law of the PRC” and the “Network Security Law of the PRC,” rather than product-specific concerns, sparking international debate over the validity of the review.
China announced the ban on the same day as the end of the G7 Summit in Hiroshima. While Beijing maintains that this ban is purely in the interest of national security, the U.S. Department of Commerce believes that it is politically motivated and a form of economic coercion. Regardless of Beijing’s reasoning, it is a blow to bilateral trade relations and will harm the Chinese economy in the long run.
The PRC’s motivations for engaging in international trade have always been different from that of other countries. During modern China’s formation, Chinese Communist Party (CCP) Chairman Mao Zedong embraced domestic production and self-reliance, but this harmed economic development. His successor, Chairman Deng Xiaoping, while viewed outside of China as a reformer who embraced the principles of trade liberalization, viewed international trade as a way of gathering resources to fulfill Mao’s political goals. The CCP’s views on trade can be summarized with the phrase “hide your strength, bide your time (韜光養晦)”, coined by Deng.
China’s use of economic coercion to achieve political goals has been growing since 2018 following the reappointment of Chairman Xi Jinping. The European Parliamentary Research Service suggests that the most frequent targets of economic coercion are “symbolic industries that are easily identifiable with the coerced country,” according to a EU report.
In addition to launching economic coercion campaigns, Chairman Xi is also seeking to “strengthen China’s position as a global powerhouse in high-tech industries and reduce reliance on foreign technology imports” through the Made in China 2025 initiative. In effect, China believes it has largely attained sufficient development from international investment and can more effectively wield its economic power in political disputes with other countries. However, weaponizing its economic power will leave China in a weaker position relative to G7 member states in the long-term and will end up harming the Chinese people and the country’s manufacturing base.
One such example of the CCP using its economic strength to the detriment of its own people and industries is the 2020 ban on Australian coal. In 2020, China asked state-owned energy firms and steel manufacturers to stop importing Australian coal after Australia issued support for an independent investigation into the source of Covid-19. The ban immediately affected both nations, leading to a backlog of 46 vessels bearing approximately five million tons of Australian coal off the Chinese shoreline by December. The price of coal dropped significantly within Australia and surged in China, causing an $85 per ton price discrepancy to emerge between the two.
After the ban, China was able to find alternative sellers of coal like Russia, and Australia was able to find other buyers like Japan, some of whom bought Australian coal to sell to China at a markup. Chinese state-owned companies – China Datang Corp., China Huaneng Group Co., China Energy Investment Corp., and China Baowu Steel Group Corp. – only resumed importing Australian coal in early 2023 after Beijing lifted the ban.
The biggest loser in this political move was not Australia, which only saw a 2-3% dip in coal exports in 2021, but the Chinese people and private companies. State-owned enterprises are insulated from economic consequences by the Chinese government.
U.S. Response to China’s ban
The U.S. Department of Commerce has been particularly effective in working with Indo-Pacific Economic Framework allies on addressing Chinese economic coercion by holding a meeting with IPEF trade ministers to address China’s targeting of Micron. Washington believes the ban is politically motivated and targets Micron because it is a well-known American brand, which is consistent with the European Parliament briefing on Chinese economic coercion tactics.
While the Micron ban is one of many incidents bringing the U.S. and its allies closer together to address Chinese economic coercion as a whole. One can see this in how U.S. domestic policy lines up with international agreements and partnerships.
According to U.S. Commerce Secretary Gina Raimondo, the IPEF agreement on supply chains is consistent with the US$52 billion CHIPS Act. Both initiatives will bolster the U.S. domestic semiconductor manufacturing, increase foreign investment from U.S. allies, and reduce trade barriers between the U.S. and its 13 IPEF allies. By addressing Chinese economic coercion and increasing trade relations between friendly nations, the U.S. is taking the lead on disarming China’s economic arsenal while protecting global industries from politically-induced economic shocks.
Implications for the future
Analysts project that this ban will have a limited impact on Micron, with the financial cost only estimated to be in the single-digit percentages of the company’s revenues. Much of Micron’s revenue in the China market is not associated with critical infrastructure, the area of focus for China’s ban, and about 20% of Micron’s total revenue was from the “enterprise and cloud server” segment, which is likely what China regards as critical infrastructure.
China accounts for only 11-16% of Micron’s revenue, and when combined with distributor customers who sell to the China market, the revenue exposure is about 25%. Bernstein analyst Mark Li, estimated that if all servers in China are prohibited from using Micron products, it will only affect 2% of Micron’s revenue. If one considers the broader 25% revenue exposure, the restrictions will affect 5% of its revenue.
Memory units are a commodity whose prices are based on global supply and demand. Following the ban, China will have to buy memory units from Micron’s competitors, including South Korea’s Samsung and SK Hynix, at higher prices. Meanwhile, Micron will be able to find alternative destinations for its products, since the global demand for memory units remains the same.
As of 2023, China’s attempts to establish its domestic DRAM manufacturing base have failed. Relying on foreign suppliers, China’s restrictions for critical infrastructure are unlikely to extend to consumer products, likely minimizing the impact on Micron’s revenue to only around 2%.
In addition to being a close political ally of the U.S., South Korea has an economic interest in helping the U.S. contain the fallout of China’s economic coercion against Micron. The U.S. is already a larger market for Samsung and SK Hynix than China, so they are unlikely to seek to gain market share within the China market. In the worst-case scenario, the U.S. can step in with subsidies to help Micron mitigate the damage from this ban amid strong bipartisan support on countering Chinese economic coercion and support for building the domestic U.S. semiconductor industry.
There is strong evidence to support the view that China’s ban on Micron products in critical infrastructure is politically motivated. There is equally strong evidence that the political game the CCP is playing will not work out in its favor. Instead of harming Micron and influencing U.S. policy, the ban will harm Chinese buyers, have a limited impact on Micron’s revenue, increase U.S. domestic support for its own semiconductor industry, and bring U.S. allies together to counter China.
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TNL Editor: Bryan Chou (@thenewslensintl)
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