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Writer's pictureChennai Centre for China Studies
Sep 20, 20226 min read

The Chip War: US Restrictions, China’s Ambitions and the Semiconductor Industry

By Sapna Elsa Abraham

Image Courtesy: Nikkei Asia

Article Courtesy: The Rise


Article 36/2022

Semiconductor chips form a very crucial part of the technological and strategic competition between the US and China. The disruptions in the supply and value chain due to the pandemic and trade tensions with China have brought out the significance of semiconductor chips. These are crucial for technological progress and responsible for the country’s growth as an economic power. The present article looks at the present US-China tensions and the implications of such spillover on the semiconductor ecosystem.


Semiconductors have become the most essential tool for a country’s growth as an economic power in the present world. They have become a critical technology enabler across the world as these cutting-edge chips are the foundation of paradigm-shifting technologies like Artificial intelligence. Semiconductors form a very crucial part of the technological and strategic competition between the USA and China. From the year 2018, the USA has been imposing export restrictions on the transfer of advanced semiconductors and the inputs required to produce them. The restrictions on transferring semiconductor technologies from the USA to Chinese companies like Semiconductor Manufacturing International Corporation (SMIC) and Hangzhou Hikvision Digital Technology Co. began in 2020.


The disruptions in the supply and value chain due to the pandemic and trade tensions have led China and the US to start the process of decoupling their technology dependence. This process won’t be easy. Thanks to globalization, the chip-making process is interconnected and relies on the global supply chain concentrated in different parts of the world. The USA is the market leader in design and technology, and the European nations, especially the Netherlands, concentrate on the manufacturing of the machinery required for production. The manufacturing and assembly are carried out in Asian countries mainly, Taiwan, South Korea, and China. The USA used to dominate 40 percent of the world supply in chip making over the years but these numbers have dropped to a rate of 12 percent. This alarming situation has led the US to focus more on domestically produced chips.


China mainly manufactures semiconductors with the help of foreign tools and software. They lack a domestic ecosystem, which is seen as a vulnerable side. China has been increasing its domestic production of semiconductors as part of the self-sufficiency dream, “Made in China 2025”. The country has come a long way in the production of these chips. Researchers at TechInsights reported that China’s national champion Semiconductor Manufacturing International Corporation (SMIC) had acquired the ability to produce a 7-nanometre (nm) chip. This is considered a breakthrough in Chinese chip production.

The US is tightening exports of technology and equipment to restrict the growth of the Chinese chip-making industry.

The US is tightening exports of technology and equipment to restrict the growth of the Chinese chip-making industry. The restrictions also extend to acquiring chips produced in China that form a part of the military equipment and to Chinese firms acquiring stakes in US firms. This is part of the US plan to ensure China does not receive the critical technology that is required to produce advanced semiconductor chips. They are also doing so by restraining other chip-making allies like South Korea, and the Netherlands from sharing and transferring the equipment needed. US sanctions on China are “list-based controls” and “end-use and end-user controls”. Such sanctions will play a role in promoting its home-grown industries and making use of its advantage in technology design. On the same coin, they can keep a check on China’s ambitions.


Reports suggest that the USA is planning to increase curbs on US shipments to China. The Commerce Department intends to publish new regulations based on restrictions communicated in letters earlier this year to three U.S. companies KLA Corp, Lam Research Corp, and Applied Materials Inc, the people said, speaking on the condition of anonymity.

Over the years, the USA has brought sanctions on advanced graphic processor units (GPUs), extreme ultraviolet (EUV) lithography machines, and field-programmable gate arrays (FPGAs), partly covering central processing units (CPUs). As part of the US resolve to form domestic self-reliance for chip manufacturing, a proposal to form a forum of all the major chip-making Asian partners has been proposed. The forum consisting of South Korea, Japan, and Taiwan could be a useful measure to restrict China’s ambition of becoming a leading chip manufacturer.


In the early stages, these restrictions were concentrated on the advanced chips being transferred. Now the restrictions are on technology and tool transfer which are essential for chip making. China is heavily dependent on electronic design automation (EDA) tools and semiconductor manufacturing equipment (SME) which are imported from foreign firms. As part of the ‘chip war’, a new area has emerged with restrictions on the transfer of Electronic Design Automation (EDA) to China. This was started with the announcement of restrictions on certain EDA tools to be transferred to China and other non-US allied 150 countries..


The implications of increasing restrictions on the export of chips to China will have implications in different fields. China is heavily dependent on technology from the West, especially the US, to produce advanced chips. The US placing restrictions would mean China’s dream of self-reliance will take years to fulfil. This would increasingly cripple the Chinese plan of “Made in China 2025”. This is the major aim of the USA, to ensure that China’s semiconductor industry does not get the push. If they succeed in creating advanced chips with the raw materials and the assembly units, China will take over the USA. The USA and China heavily rely upon each other for semiconductor devices.


Private companies will not be happy about the restrictions being placed as this would reduce their profit margins. These sanctions invariably affect the production and competitiveness of the semiconductor industry. This might result in the innovation and supply of these semiconductors. Unilateral restrictions imposed raise concerns among private and public actors about the impact of the action. With these restrictions, companies will end up evaluating production models and investments, and suppliers to circumvent the economic policies of the US.

China can leverage its economic influence through trade restrictions and even launch non-conventional attacks to obtain intellectual property from the companies.

Taiwan is a major contesting point between the USA and China. Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s leading manufacturer of semiconductors. China can leverage its economic influence through trade restrictions and even launch non-conventional attacks to obtain intellectual property from the companies. China can opt for such measures if the need arises with the increased restrictions from the US.


Semiconductors have become an important part of China’s and the US national security strategy. China is a net importer of semiconductors and is heavily dependent on imports from foreign sources, especially the US, as they lack access to semiconductor manufacturing equipment and software. Even though China has come a long way in chip manufacturing, they still lag behind its competitors who are the global leaders in manufacturing, having the ability to carry out high production in the 5-nanometre processing node. With such curbs being applied on the firms from exporting these to China, they will face increased shortages in their manufacturing of semiconductors. The world will be looking at the ways in which China will overcome these restrictions placed by the US. The US also needs to find a way to impose restrictions on China without impacting the global supply and value chain in a major way.


(Ms. Sapna Elsa Abraham is a research officer at C3S. The views expressed in this article are those of the author and does not reflect the views of C3S.)


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