If anyone thought that China would stand still… Not at all. The final regulation of the CHIPS for America Act of the Biden Administration has its first consequences. The first is the stimulus plan for R&D, the second is the implementation of licenses for the export of germanium and gallium. In short, China will play the same game as the US as it rebuilds itself, and as with every piece that Biden moves, Xi Jinping responds strongly. Does China really feel threatened by the CHIPS Act?
There are two steps, which could be three, because the one with investment in R&D with tax reductions has a branch that involves increasing the localization of manufacturing tools for chips. Licenses for germanium and gallium are difficult, because they are basic raw materials for a large part of American industry, not to mention semiconductors…
China is against the CHIPS Law: it will not allow itself to be afraid of the US and fight
First of all, the national policies to encourage the chip with the so-called “massive incentives.” We must forget, for a long time, Made in China 2025, that was the past and a failure that left 10,000 companies bankrupt. We have already discussed the issue, but it is worth knowing that the scheme implemented by the Asian giant has many holes due to its complexity, and the money slipped through the fingers of the Chinese president based on waste, corruption and bad business practices.
After recovering from the pandemic, opening later than anyone else and, in addition, the US released the sanctions that hit the economy and isolated the country, Xi Jinping is back in the fray and the first thing it will do is encourage companies to invest in R&D and counter the impact of the CHIPS Act in China.
The goal is for this R&D to be rewarded tax deductions In addition, advance, which is a new dimension. It talks about 120% deductions between 2023 and 2027, four years to try to get back to where the country was. What happens if the company is able to make that R&D investment tangible and profitable? Well, something revolutionary too: Allowed amortization of assets created before paying tax on them at a rate of 220% of the said cost of the asset in 4 years.
In short, the government rewards companies before and after R&D effort at the cost of less revenue for the country.
Do you want germanium or gallium, or even any of its derivatives? You must apply for a license
In other words, if you are the US, you do not have a supply of many metals and compounds derived from these two. This is a direct response to AI chip restrictions for China. Xi Jinping has threatened it and now we know that in August there will not be a single gram left for the United States, or for the rest of the world, a warning to sailors without hesitation . All requests are rejected.
It is estimated that China produces approx 94% gallium and 83% germanium with the ridiculous cost of production, finding it is certainly not an impossible task for the US, the problem is what the price is.
For this reason, and although in China already in September the hand opens slightly to non-American companies, the price of both minerals fell by up to 20% due to excess stock. Therefore, as happened in the US with AI chips, both are willing to suffer to show their strength and damage the other as much as possible.
The question now is whether Europe also falls under this quota of the US, in what we call the West. The EU has always agreed, but for some time now wants to expel Huawei and its communication technology within the 27, as the US has done for a long time, which is not good for China.
Is the tension at its peak? At the moment it seems that it is, because the investment from the USA to China is completely closed for the semiconductor sector, which will do a lot of damage to the economy of the Asian country in the short term.