The United States of America is a significant obstacle that Xi Jinping must overcome to realize his lofty goal of bringing China’s global dominance to fruition. A significant portion of his policies are driven by his fervent desire to liberate himself from the influence of the United States. Despite this, China has not been able to escape the American grip. In order to maintain its own rise, China is still dependent on the dollar, American funds, and the US global institutions. One of the major resources from the US that China needs is the microchip. For Xi Jinping to fully transform China into a technological powerhouse, he requires both the tiniest and the fastest chips. Despite being the manufacturing powerhouse, they are not manufactured in China. In addition, China does not manufacture the machinery required to manufacture them, which is exceedingly complicated. Xi must rely on the US and its allies, who are unwilling to share the technology.
President Joe Biden believes that China is using it for entirely inappropriate purposes. Consequently, Biden has exploited the American industry’s advantage in semiconductor manufacturing to prevent China from acquiring the technology.
The Chip Ban: A Weapon in the US Arsenal
The chip ban is a significant indicator of the power struggle between China and America and the challenges Xi faces in his quest to tilt the balance in his favor. To advance China’s economic goals, Xi has aligned with Russia and Iran, challenging the US-led global order and building a military force to counter American power—all while relying on American technology. Perhaps he underestimated the influence of corporate interests on national security or the potential inaction of a divided Congress. The intricacies of the semiconductor industry and the time required for chip production, crucial for China’s needs, may have also been overlooked. Regardless of Xi Jinping’s assumptions, he decided to engage in a microchip war with superior forces before he had the equipment to fight it.
In 2023, the US-based Semiconductor Industry Association reported that American businesses owned fifty percent of the worldwide chip market, while China controlled just seven percent.
The US Advantage in Chip Technology
At the bleeding edge of technology, where powerful processors that drive future sectors such as artificial intelligence are being developed, the US stands out as having a significant advantage. An artificial intelligence processor developed by US-based Nvidia is sixteen times faster than the one that is now being marketed by Huawei Technologies. This Chinese company deals in telecommunications.
The US of America and its partners have an even greater advantage over China in terms of the equipment that is required to manufacture new chips. Chinese managed to produce 28-nanometer chips with the most advanced machinery yet developed by a Chinese company. However, the most cutting-edge pieces of machinery in the industry are capable of producing 2-nanometer chips.
An Uphill Battle for China
Attempting to close this gap will continue to be an uphill battle for China. The production of semiconductors is a complex process, and only a handful of companies worldwide have expertise in this area. Biden’s policies have made the task considerably more challenging. In 2022, his administration prohibited American companies from supplying China with the most advanced semiconductors and the equipment necessary to manufacture them without a special license. He also convinced Japan and the Netherlands, two key sources of semiconductor equipment, to implement their own bans. These measures effectively isolate the Chinese technology sector, making it even more difficult for China to catch up.
Other foreign chip manufacturers that use American technology, such as Taiwan Semiconductor Manufacturing Company, the leader in the sector, are prevented from producing advanced chips for Chinese companies because of Biden’s controls.
The implementation of export regulations concurrently affects every component of the semiconductor value chain. Because of this, Xi will find the policies that Biden has proposed very tough to overcome.
Attempting to close this gap will continue to be an uphill battle for China. Because the production of semiconductors is so difficult, just a handful of companies in the world have special expertise in this area. Because of Biden, the task has become considerably more challenging. To effectively isolate the Chinese technology sector, his administration in 2022 prohibited American companies from supplying China with the most advanced semiconductors and the equipment necessary to manufacture them without obtaining a special license. Additionally, Biden successfully convinced his friends Japan and the Netherlands, two additional key sources of semiconductor equipment, to have their own bans implemented.
Other foreign chip manufacturers that use American technology, such as Taiwan Semiconductor Manufacturing Company, which is the leader in the sector, are prevented from producing advanced chips for Chinese companies as a result of Biden’s controls.
The implementation of export regulations concurrently affects each and every component of the semiconductor value chain. Because of this, Xi will find the policies that Biden has proposed to be very tough to overcome.
The Chinese government declared the controls unreasonable and attempted to make their removal a prerequisite for better ties. The day after the embargo was issued, China’s Ministry of Foreign Affairs accused the US of abusing export control procedures to senselessly impede and hamper Chinese firms. Furthermore, a Chinese spokesperson stated that by politicizing technology and trade issues and employing them as tools and weapons, the US will only injure and isolate itself when these measures backfire.
In response, Biden imposed further, more stringent limits on the export of AI chips to China in October 2023. And they do work. Restrictions on chip production equipment will most likely prevent Chinese enterprises from developing ultra-small semiconductors in the foreseeable future.
The loss of American AI chips is likely to delay the development of huge language models and other AI developments in China.
The longer these control measures are in place, the more painful they will be. As American chips and equipment in China become obsolete and cannot be replaced, Chinese enterprises will find it increasingly difficult to compete with American rivals for the fastest and most advanced technologies.
China’s Domestic Efforts: Progress and Challenges
The only way to break free from Washington’s stranglehold is for China to build its own technology. Ten years ago, it launched a drive to replace chips imported by American firms with the establishment of a domestic semiconductor industry, and its government has invested hundreds of billions of dollars to accomplish so.
In 2015, Xi set a target for China to achieve 70% chip self-sufficiency by 2025. The Global Times, a Communist Party-run news organization, forecasted that by 2023, the level of self-sufficiency will reach 30%.
The manufacturing targets are practically useless. The more crucial question is whether China can manufacture sophisticated semiconductors. In this regard, Beijing has made progress. For the first time in 2024, Huawei drew the watchful eye of Nvidia, which referred to the Shenzhen-based business as a competitor. In September 2023, Huawei made headlines by introducing the new Mate 60 Pro smartphone, which features an innovative 7- 7-nanometer chip, a first for China.
The Painful Impact of US Restrictions
Huawei’s chip highlighted the effectiveness of Washington’s sanctions. The 7-nanometer chip remains behind the global industry. Taiwan’s TSMC has already started mass production of 3-nanometer processors. Huawei’s much-touted success was actually a step backward. Before being sanctioned by the US in 2019, the company received 5-nanometer chips through its collaboration with TSMC.
Huawei, which can no longer use TSMC’s services, has been obliged to make lower-quality chips in Chinese plants that are incapable of producing more modern processors. In response to Schuman’s inquiry, the business declined to comment on the specifics of its chip production activities but did concede that severe problems lie ahead, stressing that technology constraints and trade obstacles continue to harm the world.
In the face of technological disadvantage, Xi Jinping’s strict state-led policies fail to produce results. One of the biggest investment initiatives, the ‘Big Fund’ (Big Fund 3.0), has been embroiled in corruption allegations, with some of its administrators facing corruption charges. Furthermore, subsidies have prompted Chinese companies to build factories producing outdated chips using old technologies, raising concerns that China will flood the global market. This prompted Biden to announce in May 2024 that the US will increase tariffs on Chinese chip imports from 25% to 50% by next year.
A recent estimate by the Semiconductor Industry Association and the Boston Consulting Group forecasts that by 2032, China will supply only 2% of the world’s sophisticated chips domestically.
Can China Achieve Self-Sufficiency? – Silicon Valley vs. Zhongguancun
Semiconductor technology comprises three components. The first part is the equipment used to manufacture semiconductors. The next component pertains to the chip’s design. The third component is the capacity to use the equipment to fabricate the chips.
China’s primary deficiency pertains to its semiconductor manufacturing equipment. At present, China has access to semiconductor designs that are comparable to those of the US. It is possible that China is lagging behind in the development of one generation of GPUs and possibly x86 CPUs.
SMIC is employing Deep Ultraviolet (DUV) equipment to manufacture 7nm circuits. This technique is more intricate than extreme ultraviolet (EUV) and results in decreased yields (the number of usable chips per wafer), which may increase the cost of production. In the same vein, Intel has yet to achieve a high yield in the bulk production of 7nm chips.
A Double-Edged Sword: US Sanctions
Speaking at the international annual computer technology exhibition Computex on 2024 in Taipei, Intel CEO Patrick Gelsinger expressed grave concern that the ongoing US sanctions against China could soon have a negative impact on Intel itself, writes The Register (6 June). He believes that additional US export restrictions will drive China to create its own advanced chips. As a result, according to Intel’s CEO, Chinese companies could become serious competitors to American chip manufacturers.
Global Repercussions of the Chip War
On a global level, China’s aggressive investments in the semiconductor industry are likely to upset market dynamics. Increased production capacity for mature node chips may result in overstock and price pressure in nations such as Taiwan, South Korea, Malaysia, and Vietnam.
The US has increased its attempts to coordinate export regulations with other countries to limit China’s access to advanced technologies. This continuous technological conflict will continue to affect global semiconductor industry policies and alliances.
The Chinese Big Fund 3.0’s outcomes will have far-reaching repercussions for the semiconductor industry and global technological dynamics and a defining role in Xi Jinping’s economic and political legacy.
