US attack on Chinese chip industry: ifo economist Flach sees great risk - "China has a lot to lose"

Created: 10/30/2022, 8:00 p.m

By: Patricia Huber

Lisandra Flach, Head of the ifo Center for Foreign Trade.

© Lisandra Flach

With new trade restrictions for semiconductors, the USA is increasing the pressure on China.

Ifo expert Lisandra Flach explains what consequences this could have for China and Germany.

Washington/Beijing – The fronts between the USA and China are hardening.

Joe Biden is attacking China's chip industry with new trade restrictions.

Important components for the coveted semiconductors may therefore no longer be delivered to the authoritarian country.

In addition, US citizens are no longer allowed to work in China in the production of semiconductors.

If in doubt, they are threatened with the withdrawal of their American citizenship.

Is China's semiconductor industry in danger of collapsing?

This left China overnight without the most important specialists for chip production and the maintenance of the highly complex machines.

A Chinese tech influencer even sees this as the "wiping out" of the Chinese semiconductor industry, as he writes on Twitter.

But is it really that serious?

What are the real effects of US trade restrictions on China?

And what does that mean for the German economy?

The foreign trade expert Prof. Lisandra Flach from the Munich ifo Institute answered these questions to

from

.

Prof. Flach, in the fight against China, Joe Biden is increasing the pressure.

Largely unnoticed by the public, US President Joe Biden issued strict restrictions on China's chip industry at the beginning of October.

How dangerous is this for the Chinese chip industry and the Chinese economy?

China is also dependent on other countries for important parts of the supply chain.

The semiconductor supply chain is highly segmented across countries, so intermediate products cross multiple borders to make a semiconductor.

For example, the chemicals used to manufacture semiconductors come mainly from Japan and Europe.

The wafers come mainly from Taiwan, Europe and South Korea.

US and UK companies dominate the supply of intellectual property and software for electronic design automation.

So, in the event of a trade war, could China stop producing semiconductors at all?

There are several types of semiconductors with different functionality, and China has mainly specialized in the production of so-called "old" semiconductors.

The top semiconductors are mainly manufactured in Taiwan and South Korea.

This means that China would not be spared from a trade war either.

China also has a lot to lose.

ifo expert Flach: "Bloc formation would lead to major losses in prosperity"

What does that mean for German companies?

Do they now have to review their commitments in China?

For German companies, it is particularly important to reduce critical dependencies.

In February 2022, we asked German companies whether they depend on important inputs from China.

Almost 50 percent of the companies that depend on important inputs from China want to reduce this dependency.

They are primarily looking for suppliers in the EU in order to diversify their supply chains more.

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Many economists fear that the world economy could split into two spheres of influence in the long term.

One led by the US, the other led by Beijing.

Do you share this vision?

Forming a bloc would lead to major welfare losses for Germany, but also for other countries involved.

In the short term, a decoupling from China would be a heavy blow due to China's importance as a supplier and as a destination country for German products.

But after some time, the intensification of trade relations with other trading partners could mitigate the negative consequences.

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