Guards on the Zhuhai border between Macau and mainland China recently intercepted a woman wearing a fake baby bump.
In many parts of the world authorities would expect to find drugs in such an appendage. But this one contained 202 processors and nine smartphones.
Chip smuggling into China is booming, creating a lucrative black market that could threaten the effectiveness of US export curbs introduced this year.
The main objective of the US measures is to prevent China from accessing high-end chips for military purposes. The latest controls are comprehensive enough to significantly slow the progress of China’s military and technological development.
Yet just 1 per cent of global chip demand is from governments, including for military use. The overwhelming majority are destined for consumer products. Even accounting for the chips designed for communication or machinery purposes that may be diverted for military use, a tiny proportion of imported chips are critical for military purposes.
Most chips needed for military use are based on older technology. Radars, for example, only need so-called 65nm process technology, which was developed two decades ago. Older automotive chips can be repurposed for most of those that go into aircraft, drones, and missiles, and they can be made at home by China’s local chipmakers. A fraction of the chips needed for military devices are the high-end variety that China needs to bring in from overseas.
The country imported $350bn worth of chips a year before the US export controls were implemented, amounting to 50bn units each month.
The sheer amount of chips traded and the comprehensive scope of the US ban mean there are not many options for China to find a workaround.
But historically, countries under sanctions have always adapted, for example by importing goods through foreign affiliates of local companies or setting up shell companies to acquire products, then smuggling them into the country.
Russia and North Korea have for decades evaded sanctions on devices much bigger than chips, such as thermal imaging devices. Smugglers hide them among shipments of non-controlled products, using fake companies, addresses and shipping labels to cover their tracks.
China has a vast black market, initially established to help people evade high import taxes on foreign goods, that can facilitate this. Its scale and efficiency has been proved in industries as varied as Swiss luxury watches, Korean cosmetics and refined oil.
The global chip shortage since 2020 had already fuelled a black market for chips, along with significant mark-ups. After the US move, with chips fetching prices up to 500 times their original level, there is even more incentive to smuggle them.
China has no hope of entirely circumventing the ban through clandestine trade. But nor should the US fool itself that it can completely cut off Chinese access to its technology.
Relatively few chips are needed to keep China’s military advancement on track. The illicit trade raises the possibility that US sanctions will cost more than they achieve.
An analogy can be drawn between chips and drugs that extends beyond small size, high value and the scope for transporting them in a fake baby bump.
In both cases, prohibition reduces supply, increases prices and fosters criminality. Contraband US technology will still dribble into China in the same way that South American cocaine trickles into the US.
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