Competition between the USA and China in chip trade and production is growing on a daily basis to the extent that it is considered a chip war between these two superpowers.
In this analysis, we will review all the facts and steps that Beijing and Washington have taken so far to position themselves better in the chip market. This will help us see the whole picture better and allow us to predict what will come next more easily.
China
China’s first significant step in strengthening its position in the semiconductor technology market happened in 2014 when a broader national security strategy was introduced. The main task of the strategy, active to this day, is to position China as the world’s leading science and technology superpower, which is part of its goal to establish itself as a global superpower. Chinese leaders realised that semiconductor microchips are crucial to emerging civilian and military technologies and for achieving their long-term geopolitical goals and potentially surpassing the USA as the dominant superpower.
China has made significant progress in technological advancements that have outpaced the forecasts from Western intelligence and industry analyses. For example, the military-civil fusion programme aims to integrate civilian technologies with military capabilities and to blur the lines between civilian and military applications.
Part of the broader national security strategy is a tendency to reduce dependence on Western technologies and to reach the point where they can rely on themselves in critical sectors like semiconductors. That’s precisely why Xi Jinping, the Chinese president, called for increased technological autonomy to counter Western influence and strengthen China’s global position. They have also invested heavily in its semiconductor industry while setting ambitious targets to increase chip self-reliance. But, some targets are proving to be somewhat challenging, such as reaching 70% self-reliance by 2025.
However, those efforts have been bolstered even more by the constant pressure of the USA in the form of increasing trade restrictions and policies that limit Chinese technological investments and exports. Semiconductor microchips are a focal point in Beijing’s economic security strategies. As expected, the conflict over microchips with the USA did not go without countermeasures. For example, China accelerated its efforts to remove foreign-manufactured chips, especially those made in the USA, and set a deadline for domestic telecommunications companies to do so by 2027. That move could particularly hit American chipmakers such as Intel and AMD and inflict significant financial damage to the US economy.
China also found a way to bypass Washington’s prohibition of Nvidia’s high-end AI processor sales to China. Instead of buying directly from Nvidia, Chinese universities and research institutions acquired the processors through resellers. There was no lack of open criticism either, as officials in Beijing criticised the USA for tightening trade rules. They emphasised that this move raises barriers and introduces uncertainty to the global chip sector. China is showing clear signs that they will not give up the fight, but it all depends on the speed of their technological progress.
US
As for the USA, when President Biden took office in 2021, concerns about China’s accelerating technological progress were already very much present. Those concerns were mainly focused on the field of AI. Many feared that China could overtake the US in semiconductor technology, which would also threaten the dominance of the West over the East in technology.
This is precisely why the EU and the USA began emphasising economic security in the foreground, thus making a turn from past policies when they promoted globalisation and trade liberalisation. This was also triggered by alleged reports that claimed China acquired Western technologies through joint ventures and projects and caused disruptions in supply chains for crucial materials and equipment.
However, the most significant turning point in American politics regarding semiconductor microchip manufacturing was the introduction of the CHIPS Act in August 2022. The primary purpose of the CHIPS Act was to boost the domestic semiconductor manufacturing process and protect it from potential sabotage. It also included the tendency to reduce US dependency on imports, especially from China.
Furthermore, Washington implemented a series of sanctions and export controls to protect its intellectual property and national security interests. The sanctions included restrictions on exporting the equipment required to produce advanced chips to China, emphasising chips lower than 16/14 nm.
The next step the USA took was to strengthen some of its alliances. They did this primarily with the Netherlands and Japan, which enhanced export controls on high-performance semiconductor manufacturing equipment. Also, to further isolate China, the White House proposed the Chip 4 Alliance with Japan, South Korea, and Taiwan, aiming to bolster the resilience of East Asia’s semiconductor supply chain.
Taiwan plays a vital role in this US-China conflict because it produces a significant share of the world’s most advanced chips. Its technological leadership, supplier diversity, and resilience made it a cornerstone in efforts to strengthen the semiconductor supply chain. Both Beijing and Washington want to increase their influence in Taiwan to better take advantage of the breadth of Taiwan’s chip production.
What can we expect?
The rivalry between China and the USA in this field started during Donald Trump’s presidency and has continued under President Joe Biden. It reflects a rare bipartisan consensus in the US Congress to challenge China’s technological ambition. On the other hand, for China, the position of a global leader is a matter of national pride, which is omnipresent in President Xi Jinping’s leadership.
The expanded tech war manifests in various arenas, with the most notable ones being chipmaking and green technology. Chipmaking is crucial for information processing, while green technology is becoming increasingly important for the global economy. Both China and the USA are vying for dominance in these sectors.
The Economist stated in its article titled ‘The tech wars are about to enter a fiery new phase’ that regardless of the outcome of future elections in the USA, the next president is likely to continue challenging China’s technological advancements. This echoes the joint effort in Washington to confront China’s growing influence in advanced technologies.
The Economist added that heightened tensions and a more aggressive US approach under a future administration are also possible. This could involve expanding export controls and sanctions beyond companies like Huawei to other Chinese tech firms. Such actions might provoke retaliatory measures from China, further escalating the conflict.
The Taiwanese chipmaker TSMC, which has significant investments in China, could be pressured by the US government to limit its operations there. That could also happen with other foreign companies that do business in China and get caught in the crossfire of this conflict.
Despite winning over some allies, the USA might need help with other partners, particularly in Europe and Asia. Washington’s approach to technology and China could affect its relationship with some allies since there is a difference in priorities, which could strain alliances and potentially complicate efforts to form a united front against China’s technological ambition.
This clash between the two great powers will undoubtedly leave its mark on the world economy. The International Monetary Fund (IMF) estimates that the elimination of high-tech trade between the two countries could cost as much as $1 trillion annually, equivalent to 1.2% of the global GDP. It is in the general interest to resolve this conflict as soon as possible, although everything indicates that it will not happen very soon.
