The ongoing “tech war” between the United States and China is reshaping global relationships and supply chains. In this analysis, we take a closer look at the high-stakes race for dominance in chip manufacturing and uncover the strategies and influences driving this geopolitical showdown.
Competition between the United States and China over chip trade and production has intensified to the point where it is considered a chip war between the two superpowers.
In this analysis, we will review all the facts and steps that Beijing and Washington have taken so far to better position themselves in the chip market. This will help us better understand the whole situation and make it easier for us to predict what will happen next.
China
In 2014, China launched its broader national security strategy, taking an important first step toward consolidating its position in the semiconductor technology market. The main thrust of this strategy, which remains in effect today, is to position China as the world’s leading technological superpower as part of its goal to become a global superpower. Chinese leaders realize that semiconductor microchips are essential for emerging civilian and military technologies, achieving their long-term geopolitical goals, and potentially surpassing the United States as the dominant superpower.
China has made significant strides in technological advancement, exceeding the predictions of Western intelligence and industry analysis. For example, the military-civil fusion program aims to combine civilian technology with military capabilities and blur the boundaries between civilian and military applications.
Part of a broader national security strategy is to reduce reliance on Western technology and reach a point where China can be self-reliant in key areas such as semiconductors. This is exactly why Chinese President Xi Jinping has called for greater technological autonomy to counter Western influence and strengthen China's global position. They have also invested heavily in their semiconductor industry while setting ambitious goals to increase self-reliance in chips. But some of the goals, such as achieving 70% self-reliance by 2025, have proven to be somewhat challenging.
However, these efforts have been further enhanced by the United States’ continued pressure in the form of increasing trade restrictions and policies to limit Chinese technology investment and exports. Semiconductor microchips are a key focus of Beijing’s economic security strategy. As expected, the microchip conflict with the United States has not been without countermeasures. For example, China has accelerated its efforts to phase out foreign-made chips, especially those made in the United States, and set a deadline for domestic telecommunications companies to phase out foreign-made chips by 2027. This move could particularly deal a major blow to American chip manufacturers such as Intel and AMD. Inflicting financial damage to the US economy.
China has also found ways around Washington's ban on Nvidia selling high-end AI processors to China. Instead of buying processors directly from Nvidia, Chinese universities and research institutes buy them through distributors. There has also been no shortage of public criticism, with officials in Beijing criticizing the US for tightening trade rules. They stressed that the move has increased barriers and created uncertainty in the global chip industry. China has shown clear signs that they will not give up the fight, but it all depends on how fast their technology advances.
As for the United States, concerns about China's accelerated technological progress were already very evident when President Biden took office in 2021. These concerns were mainly focused on the field of artificial intelligence. Many people were worried that China could surpass the United States in semiconductor technology, which would also threaten the West's technological dominance over the East.
This is why the EU and the US have begun to emphasize economic security in their push for globalization and trade liberalization, a shift from previous policies. This has also been triggered by reports that China has allegedly acquired Western technology through joint ventures and projects, leading to disruptions in the supply chain of key materials and equipment.
However, the most important turning point in American politics regarding semiconductor microchip manufacturing was the introduction of the CHIPS Act in August 2022. The main purpose of the CHIPS Act is to promote domestic semiconductor manufacturing processes and protect them from potential disruptions. It also includes a trend to reduce the United States' dependence on imports, especially Chinese imports.
In addition, Washington has imposed a series of sanctions and export controls to protect its intellectual property and national security interests. The sanctions include restrictions on exports to China of equipment needed to produce advanced chips, with a focus on chips below 16/14 nanometers.
The next step taken by the United States is to strengthen some of its alliances. They mainly cooperate with the Netherlands and Japan, which have strengthened export controls on high-performance semiconductor manufacturing equipment. In addition, in order to further isolate China, the White House proposed to establish the Chip 4 Alliance with Japan, South Korea and Taiwan, which aims to enhance the resilience of the semiconductor supply chain in East Asia.
Taiwan plays a vital role in this Sino-US conflict because it produces a large portion of the world's most advanced chips. Its technological leadership, supplier diversity and resilience make it a cornerstone in strengthening the semiconductor supply chain. Both Beijing and Washington want to increase their influence in Taiwan to better exploit the breadth of Taiwan's chip production.
What to expect?
The competition between China and the United States in this area began during the presidency of Donald Trump and has continued under President Joe Biden. This reflects a rare bipartisan consensus in the US Congress to challenge China's technological ambitions. On the other hand, for China, the status of global leader is a matter of national pride, which is ubiquitous under the leadership of President Xi Jinping.
The expanded tech war is manifesting itself in various fields, most notably in chip manufacturing, which is essential for information processing, and green technology, which is becoming increasingly important to the global economy. Both China and the United States are vying for dominance in these fields.
In an article titled "The Tech War is about to enter a fiery new phase", The Economist said that regardless of the outcome of future US elections, the next president is likely to continue to challenge China's technological progress, echoing Washington's concerted efforts to counter China's growing influence in the field of advanced technology.
The Economist added that there is also the possibility of increased tensions and a more aggressive approach by the United States under a future administration. This could involve expanding export controls and sanctions from companies such as Huawei to other Chinese technology companies. Such actions could trigger retaliatory measures from China, leading to a further escalation of the conflict.
TSMC, a Taiwanese chipmaker with significant investments in China, could come under pressure from the U.S. government to limit its operations in China. The same could happen to other foreign companies that do business in China and get caught in the crossfire of this conflict.
Despite winning over some allies, the United States may need help from other partners, especially in Europe and Asia. Washington’s approach to technology and China could affect its relations with some allies, as there are differences in priorities that could strain alliances and potentially complicate efforts to present a united front against China’s technological ambitions.
The conflict between the two great powers will undoubtedly leave a deep impression on the world economy. The International Monetary Fund (IMF) estimates that the elimination of high-tech trade between the two countries could cost up to $1 trillion per year, equivalent to 1.2% of global GDP. It is in the general interest to resolve this conflict as quickly as possible, although everything indicates that it will not happen soon.
