May 23, 2023 - 7:00am

The trade war continues to heat up, and now the boundaries are starting to be defined. On Sunday, the Chinese government announced that semiconductors from the American company Micron would be banned among operators of “critical infrastructure” in China. The ban could arguably have been worse — Beijing could have banned imports of the chips altogether — but the American company will still feel the pinch, given that it derives around 16% of its revenue from China and Hong Kong.

Shortly after the announcement, South Korea signalled that it would not do anything to prevent the Chinese buying chips from their companies as a substitute. Last month, the White House asked Seoul to prevent the American chips from being substituted, but South Korea shrugged it off, insisting that it was a matter for their companies to decide. Even if they wanted to, imposing such a ban would be difficult, with one industry leader pointing out to the Financial Times that “even if we increase our supply to Chinese customers, how can they examine all these deals individually and judge that the increased volume comes from us, replacing Micron’s?”

South Korea’s refusal to damage its companies to fulfil the desires of the D.C. foreign policy establishment shows that there are hard limits to Washington’s trade war. American strategists seem to assume that the products over which they are picking fights are not easily replaceable; that, in economics-speak, they are “non-fungible”. But, as with Russian crude oil, we are seeing the global market work its magic and arbitrage away any attempts at preventing trade.

The only way America can make its trade war work is to convince a substantial slice of the world economy to put in place similar restrictions to those being imposed by Washington. But as the Micron example shows, these restrictions bring with them counter-restrictions — and this grim cycle can quickly escalate, destroying the companies caught in its wake. Countries like South Korea are simply not interested in getting involved.

Meanwhile, the United States is still trying to revive diplomatic relations with the Chinese following Secretary of State Antony Blinken’s announcement that he was cancelling his trip to Beijing after the Americans shot down a Chinese balloon earlier this year. At the G7 meeting over the weekend, President Joe Biden referred to the incident as a row over a “silly balloon” and said that he expected diplomatic relations to thaw very soon. Washington has clearly realised that the Chinese are not willing to play ball with any attempt at a “hardline” diplomatic strategy.

This last year has produced a series of lessons for the US and its allies that, in a rapidly changing world, there are limits to their power, both hard and soft. China is not Iran, or even Russia. Trying to isolate the country economically and diplomatically is near-impossible, and may well end up isolating the country attempting to impose the measure. In the coming months, it seems increasingly likely that America will have to revise its China policy.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics