Home Slider Chip Wars: Why Semiconductors Are Front and Centre of Simmering US-China Tensions

Chip Wars: Why Semiconductors Are Front and Centre of Simmering US-China Tensions

by internationalbanker

By Nicholas Larsen, International Banker


China’s emergence as a leading economic power has decidedly put the cat among the pigeons as far as Western economic hegemony is concerned. And today, this perceived threat is no more clearly demonstrated than through the dramatically expanding measures being implemented by the United States and its allies to try to contain the rise of China’s semiconductor industry.

Semiconductors refer to those materials that allow current to pass through under certain conditions and prevent its passage under other conditions, a dual function that makes them crucial foundational components of computers and other electronics. As such, they are extensively used in manufacturing transistors, diodes and, most importantly, processors for computers, smartphones, cars, medical equipment and other common electronic devices (also known as chips, microchips or integrated circuits).

These chips represent a critical ingredient in China’s economic evolution from being the “world’s factory” due to its low labour costs and enormous manufacturing base to becoming a technologically autonomous powerhouse. As set out in its 2020 Dual Circulation Strategy (DCS), China intends to boost tech innovation, pushing Chinese companies further up the global value chain and achieving greater economic and technological independence, with the domestic manufacture of semiconductors deemed a pivotal part of this process.

But China’s semiconductor industry remains dependent on imports from more advanced chipmaking regions (Taiwan, the US, Japan, South Korea and the Netherlands) and increasingly so. Indeed, official customs data shows that China spent more than $433 billion in 2021 on imports of integrated circuits, 24 percent more than in 2020, accounting for almost 40 percent of global chip sales. Semiconductors thus represent China’s single biggest import, despite Beijing’s “Made in China 2025” strategic plan formally aiming to boost the domestic content of core materials to 40 percent by 2020 and 70 percent by 2025. It is largely due to these lofty ambitions that the US has been ramping up efforts to restrict China’s ability to grow its semiconductor industry and is increasingly making no secret of the “chip war” it is now waging against its Asian economic rival.

This escalation was crystalised in August 2022 when the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) was signed into law. The Act provides funding to carry out activities related to creating incentives to produce semiconductors domestically. It also seeks to reignite US capacity—mainly via research and development (R&D) and commercialisation—of key technologies, including nanoscience, artificial intelligence (AI), aerospace, materials, chemistry, biology and quantum information science (QIS).

“We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today,” US National Security Advisor Jake Sullivan acknowledged in September. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large a lead as possible.”

The CHIPS Act was then followed in October by hugely consequential measures adopted by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) that updated its export controls to restrict China’s ability to both purchase and manufacture certain high-end chips, including those used in military applications, thus considerably reducing China’s semiconductor import options. “The export controls announced in the two rules today restrict the PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors,” the BIS stated. According to Sullivan, moreover, such tech-export controls serve as a “new strategic asset” that can “impose costs on adversaries” and even “degrade their battlefield capabilities”.

Trade sanctions have proven at least partly effective in achieving their aim of eroding China’s chip-manufacturing capacity. Data from the National Bureau of Statistics (NBS) shows that China’s chip output dropped by 17 percent in January and February compared to the same two months in 2022. And while the extended Lunar New Year celebrations and weaker consumer demand certainly contributed to this decline, the percentage drop was comfortably more than the 11.6-percent fall recorded for the entirety of 2022.

More punitive measures have materialised this year, with a US-led joint agreement with Japan and the Netherlands being struck in January to coordinate additional export controls to prevent China from acquiring advanced chips and chipmaking equipment, a move Washington no doubt views as a “win” for its intense international pressure campaign. On March 9, the Netherlands implemented export restrictions on advanced semiconductor-manufacturing equipment, with the country’s ASML (Advanced Semiconductor Materials Lithography) among the leading manufacturers of lithography machines that make chips. “These new export controls focus on advanced chip manufacturing technology, including the most advanced deposition and immersion lithography tools,” ASML stated. “Due to these upcoming regulations, ASML will need to apply for export licenses for shipment of the most advanced immersion…systems.”

Japan soon followed suit, announcing at the end of March that it would expand restrictions on exports of 23 types of leading-edge chipmaking technology. “These export controls apply to all regions and are not meant to target any one country,” Japan’s minister of economy, trade and industry, Yasutoshi Nishimura, insisted. “We will be looking at whether there is any danger of military appropriation.” But while Japan’s more friendly trading partners, such as South Korea, Singapore and Taiwan, can continue importing without licenses, shipments of restricted equipment to China will require additional approval by export-control officials.

But it is Taiwan that holds the key to this economic war being waged by the US. Located on the island, the world’s biggest chipmaking company, Taiwan Semiconductor Manufacturing Company (TSMC), holds around 90 percent of the market share for advanced processors used not only in most of the world’s electronic devices (indeed, TSMC counts Apple as its biggest customer) but also in more advanced technologies such as guided missiles and machine learning (ML) applications. As such, the US is increasingly desperate to keep TSMC’s advanced semiconductor capacity away from mainland interests.

And while the overwhelming majority of the world currently recognises Taiwan as being part of China (only 12 United Nations [UN] member states with a combined population of 39 million people maintain formal diplomatic ties with Taipei)—albeit as one country operating under two different political systems—the formal process of Taiwan’s reunification with the mainland has yet to be finalised. Should US-backed separatist forces on the island seek to scupper this process, Beijing has confirmed it will not rule out using military force to achieve its reunification goals. “We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort, but we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary,” China’s President Xi Jinping said in October. “This is directed solely at interference by outside forces and the few separatists seeking ‘Taiwan independence’ and their separatist activities; it is by no means targeted at our Taiwan compatriots.”

The potential for China to acquire Taiwan’s advanced chipmaking assets is perhaps what the US fears the most. Indeed, Robert O’Brien, a national security advisor under former President Donald Trump, recently confirmed that the US would go so far as to destroy Taiwan’s semiconductor factories should China invade the island. The US “and its allies are never going to let those factories fall into Chinese hands,” O’Brien asserted, adding that such a scenario would see China become “the new OPEC of silicon chips” that would be able to “control the world economy”.

China is not taking this aggressive US posturing lying down, however, with officials exploring the most effective ways to support the domestic chip sector in the face of this belligerence. In December, for instance, a $143-billion domestic semiconductor-industry support package was announced, which includes tax incentives for the coming five years alongside R&D and production subsidies. Beijing is also making additional subsidies and state-backed research more accessible to a select few Chinese chip companies, such as chipmakers Semiconductor Manufacturing International Corp (SMIC), Hua Hong Semiconductor and Huawei Technologies Co, as well as equipment suppliers Naura Technology Group Co and Advanced Micro-Fabrication Equipment Inc China (AMEC).

China will also be reassured by the support it is receiving from its economic partners. Brazil, for example, aims to seek Chinese technology and investment to develop its own semiconductor industry, with President Luiz Inácio Lula da Silva’s foreign policy adviser, Celso Amorim, recently confirming that Latin America’s top economy cannot afford to take sides in the intensifying China-US standoff. “I don’t pay attention to messages. If the US wants, they can propose bigger and better conditions, and that’s it, and we will choose theirs,” Amorim told Reuters. “We have no preference for a Chinese semiconductor factory. But if they offer good conditions, I don’t see why we refuse. We are not afraid of the big bad wolf,” he added when asked about US efforts to discourage technology deals with China.


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