China is in the midst of a military expansion and a certain amount of that expansion is dependent on access to US made technology, especially microchips. The Biden administration, to its credit, has recognized the problem and made some effort to both boost chip manufacturing here at home and to limit China’s access to chips it can’t produce itself. As this story from last October points out, this is in some sense an expansion of more specific limits put in place by the Trump administration.

The Biden administration on Friday announced sweeping new limits on the sale of semiconductor technology to China, a step aimed at crippling Beijing’s access to critical technologies that are needed for everything from supercomputing to guiding weapons…

The package of restrictions, which was released by the Commerce Department, is designed in large part to slow the progress of Chinese military programs, which use supercomputing to model nuclear blasts, guide hypersonic weapons and establish advanced networks for surveilling dissidents and minorities, among other activities…

Technology experts said the rules appeared to impose the broadest export controls issued in a decade. While similar to the Trump administration’s crackdown on the telecom giant Huawei, the new rules are far wider in scope, affecting dozens of Chinese firms. And unlike the Trump administration’s approach — which was viewed as aggressive but scattershot — the rules appear to establish a more comprehensive policy that will stop cutting-edge exports to a range of Chinese technology companies and cut off China’s nascent ability to produce advanced chips itself.

“It is an aggressive approach by the U.S. government to start to really impair the capability of China to indigenously develop certain of these critical technologies,” said Emily Kilcrease, a senior fellow at Center for a New American Security, a think tank.

But as we’ve all seen over the past several years, for instance with the NBA’s response to criticism of China’s behavior in Hong Kong, many companies would rather just keep their valuable contracts in place than rock the boat. So no surprise that some of America’s biggest chipmakers are not happy about potential limits on their sale of chips to China.

Since July, Nvidia, Intel and Qualcomm, three of the world’s largest chip makers, have pressed their case that cracking down on China would have unintended consequences. They have challenged the White House’s national security wisdom in meetings with officials like Secretary of State Antony J. Blinken and Commerce Secretary Gina M. Raimondo, wooed think tanks and urged leaders across Washington to reconsider additional chip controls, according to interviews with two dozen officials across the government, industry and policy organizations.

The companies have warned that a U.S. pullback could accelerate China’s development of an independent chip industry, paving the way to a world dominated by Chinese-created chips rather than American-designed chips.

“What you risk is spurring the development of an ecosystem that’s led by competitors,” said Tim Teter, Nvidia’s general counsel, who has helped lead the lobbying campaign. “And that can have a very negative effect on the U.S. leadership in semiconductors, advanced technology and A.I.”

All of that sounds good and some of it may even be true but it’s not what the chip makers care about.

China accounts for about a third of the global semiconductor market and more than $50 billion in combined annual revenue for Nvidia, Intel and Qualcomm. The companies have cautioned that losing that revenue could force cuts in technology development, jobs and spending on semiconductor factories in Arizona, Ohio and New York.

Fifty billion is a lot of money. That’s what the chipmakers are squawking about.

The problem is there’s really no good way out of this situation. Not stopping sales to China gives them a chance to build their military. Stopping sales to China hurts US companies and also inevitably results in acts of retribution by China. In fact, China has already been making moves in that direction involving the chipmaker Micron Technologies:

Beijing on Sunday told Chinese companies that deal with critical information to stop purchasing products from Micron Technology, the U.S.-based manufacturer of memory chips used in phones, computers and other electronics. Many analysts viewed the move as retaliation for Washington’s efforts to cut off China’s access to high-end chips.

In a statement on its official social media site, the Cyberspace Administration of China said that in a cybersecurity review it had found that the chip maker’s products posed “relatively serious cybersecurity problems.” The problems could “seriously endanger the supply chain of China’s critical information infrastructure” and threaten national security, it said.

Does China really believe any of that? Who knows.

What we do know is that this is another instance in which they are mirroring moves made by the US, in this case against Huawei. China uses this mirroring approach a lot and they will certainly continue to do it as we clamp down on their ability to buy tech high tech chips.

There’s also some truth to the idea that China will be forced to build up its internal chip making ability if they are cut off from the US though it’s worth noting that there are real limits to how far they can go without access to the latest EUV lithography machines produced by ASML. Those machines have been described as the most complicated machines humans have built and they require precise optics from Germany, not to mention ASML technicians to service them. China has access to older models of ASML’s machines but not the most recent ones.

Could they bootstrap their EUV machines? Maybe eventually but it would be extremely expensive and it would take years. In fact, it’s possible that one reason China is so eager to reunify with Taiwan is that Taiwan has these machines and China does not.

So the predictions by US chipmakers that China could become the leader in the industry is probably overstated. They can’t produce the most advanced chips themselves (which is why they buy them from us) and they can’t produce the machines to produce those chips themselves anytime soon. But again, Intel and Nvidia have 50 billion reasons to claim there are downsides to cutting of their sales to China.