US looks to deprive China of cutting-edge computing services as Chinese consumers remain in sleep mode.

(Originally published July 5 in “What in the World“) The trade war between China and the U.S. now has a daily drumbeat.

After China on Monday announced restrictions on exports of key semiconductor metals, Tuesday’s The Wall Street Journal reports that the White House is looking to step up its restrictions on China’s access to U.S. chip technology by imposing restrictions on its ability to use cloud-computing services from companies like Amazon, Google, and Microsoft.

The argument relies on a sort of transitive property of tech equipment: such services rely on cutting-edge, AI chips, thus the customers using them to develop data applications are essentially using those chips. The White House would require cloud-computing services to get U.S. government approval before selling such services to customers in China.

While the proposed rule might be a great ad for cloud computing in general (Now with cutting-edge AI chips!), its biggest beneficiaries will be Chinese cloud computing companies like Alibaba, Baidu, Huawei and Tencent. U.S. computing companies already face hurdles selling in China thanks to China’s own cybersecurity law, which requires them to keep sensitive data on Chinese citizens in China and not store it on servers outside China. Arguably that law already segregates Chinese customers from whatever advances cloud services roll out in the U.S., and there is no loophole in Washington’s chip-export ban.

Having to maintain domestic servers without aggregating it with other data globally raises the cost of providing cloud services. It also defeats the true purpose of cloud computing, which is for cloud companies to mine those massive pools of data to uncover profitable business insights and sell them back to their clients or develop competing businesses of their own.

Forecasts for China’s economy are meanwhile growing dourer, with many analysts predicting quarter-on-quarter GDP growth will drop from roughly 4% in the first quarter to less than 1%. China is due to report second-quarter GDP data on July 17. Year-on-year growth is likely to appear strong, but only because last year’s GDP was still suffering from China’s zero-Covid lockdowns—what economists refer to as a “base effect.”

With consumers hunkering down and keeping their cash in the bank, it may be tempting for China’s economic mandarins to look to exports to take up some slack. U.S. Treasury Secretary Janet Yellen, who’s headed to Beijing tomorrow for what looks like an abortive attempt at mending fences, may be hoping to dissuade her counterparts there from further devaluing the yuan to gin up export earnings. But signs are that they’re already doing that. State-owned banks have slashed the interest rates they pay on U.S. dollar deposits to 2.8%, from 4.3%, as part of an effort to discourage savers from selling renminbi for dollars.