The chip war heats up after China strikes again in the US, what’s next.

On Sunday at a summit of the Group of Seven major industrialized nations, President Biden predicted that the relationship between the world’s two economic superpowers would “dissolve very soon.” But China has a different mind. On the same day, the Cyberspace Administration of China (CAC) announced a ban on products from US memory chip maker Micron Technology after a two-month investigation, alleging potential network security issues that could endanger China’s national security. The agency told Micron that it had told operators of critical information infrastructure in China to stop using the company’s products.

The move marks the first major retaliation from China over a wave of US moves last year, including banning China from importing the most advanced artificial intelligence chips from the US, along with the latest chip-making equipment.

The rationale behind Micron’s Chinese ban is misleading at best. Unlike logical chips like CPUs and Graphics Processing Units (GPUs), which act as computing brains and can process data, memory chips made by Micron are “dumb” in comparison and are simply used for storage. The technological makeup means that China’s claims are unlikely to be accurate.

Whether it’s fair or not, the ban would hurt Micron’s business. At an investor conference Monday, Micron’s chief financial officer, Mark Murphy, said the chipmaker’s sales to China-based companies — whether directly or through distributors — account for about a quarter of the company’s revenue. Depending on China’s definition of critical information infrastructure, Micron estimates that a ban imposed by China could negatively impact a high single-digit percentage of its sales. Micron did not respond to a request for comment on the CAC’s decision.

US officials see China’s latest strike in the chip battle as more than a proportionate response. On Tuesday, Senate Majority Leader Chuck Schumer said China’s restrictions on Micron are a “disturbing use of economic coercion.” He said he was working closely with the Biden administration to make it clear to China that it was “unacceptable”.

A spokesperson for the US Commerce Department said it is working with allies and partners “to address distortions in the memory chip market caused by China’s actions.”

This ally referred to is most likely South Korea. According to TrendForce, two Korea-based manufacturers, SK Hynix and Samsung
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It accounts for nearly three-quarters of the global memory market, compared to 23% in Micron.

If the United States retaliates, China could expand the economic fight to other markets altogether. As I wrote in April, it will be difficult for China to crack down on the major US chip manufacturers who make the most critical logic chips needed to run their companies. China does not have many supply alternatives for products from Intel (INTC), Advanced Micro Devices (AMD), or Nvidia (NVDA).

But China could decide to squeeze US companies with large business operations within its borders, including Tesla
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apple
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Starbucks
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And Nike
.

This is likely to lead to another round of retaliation with no clear end.

US corporate leaders are pleading with countries to ease tensions. Nvidia CEO Jensen Huang told the Financial Times that the Biden administration risks “massive damage” to the US technology industry if Washington moves to restrict exports to China. Nvidia has already been banned from selling its most advanced AI chips to China.

After the media frenzy over the Chinese spy balloon earlier this year, it became clear that politicians feared appearing weak and motivated to respond rather than defuse the situation.

We hope that this struggle for chips will not escalate to the point of no return, because all-out economic war is a losing game for all parties.

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Write to Tae Kim at [email protected] or follow him on Twitter at @tweet