The US-China Rivalry: Emergence of the Chip War in the Semiconductor Industry

Over the past few months, a substantial exchange of discussions and negotiations has taken place between the United States and China about the issue of acquiring chip manufacturing and chip processing technology. Numerous instances of exchanges have resulted in the obstruction of access to rare earth materials essential for semiconductor production, a tactic predominantly employed by China. Conversely, the United States and its allies have resorted to impeding the importation of advanced technologies, such as artificial intelligence, that possess potential military or intelligence applications.

Nevertheless, the semiconductor sector is facing significant geopolitical concerns. Many nations are offering incentives to repatriate semiconductor manufacturing, which is a structural element that will harm exports to China. China had a 15% reduction in its imports of semiconductor-manufacturing equipment, amounting to $34.7 billion over the whole of 2022. This is the first decrease seen in this sector over the last three years. A 27% decrease in overall imports between January and February of 2023 compared to the previous year demonstrates that the downward trajectory has persisted. The efficacy of the continuing chip war has often been called into doubt, despite the many and extensive technological and export limitations imposed on China. Specifically, China’s imports of semiconductors and chipmaking equipment had a decline of 22% and 23%, respectively, when comparing the current year to the previous year. The implemented regulations seem to be exacerbating the challenges and increasing the expenses associated with China’s acquisition of certain inputs.

The role of the restrictions placed by the United States in the Chinese semiconductor industry on the exportation of equipment and software used in the production of sophisticated semiconductors should also be acknowledged. The Biden administration has called upon Japan to emulate its approach to enhancing protective measures around innovative semiconductor technology. Both nations are now engaged in the implementation of measures to control their respective situations. It is noteworthy to acknowledge that Taiwan, particularly TSMC, has played a big role in reducing China’s chip import figures by almost 40% since the beginning of the year. Subsequently, South Korea, the home of Samsung and Hynix, has also contributed to this decrease. It is noteworthy that Malaysia, Japan, and Vietnam have had substantial reductions. The imposition of limits on the export of semiconductor manufacturing tools by the Netherlands, which is the domicile of ASML, the globally renowned chip tool manufacturer, occurred shortly after the United States and Japan had already disclosed their limitations in this regard.

The United States’ placement in sixth place is noteworthy, even though it is probable that a majority of its items trade at an above-average Average Selling Price (ASP) owing to their presumed high-tech nature. However, there was a notable increase of 22% in the import of chips originating from the United States. However, the United States just represented around $6 billion in the semiconductor industry. The amount represents a very small portion of China’s overall spending, with Taiwan contributing around $70 billion over the same period. According to Intel, the most recent export laws that the United States has put into place are the most complicated so far. Beijing is facing significant challenges because of further restrictions imposed by the United States, including the prohibition of design software exports. Also, China lags by ten years in the realm of sophisticated chip development.

To comply with these regulations, the U.S. chip giant is exporting alternate models with lesser performance capabilities to circumvent any potential violation. But there is a strong demand for semiconductors such as those in electric cars, and prominent Japanese equipment manufacturers still see China as a significant consumer. The potential impact of the United States imposing stricter regulations on technology exports to China seems to be limited in its overall significance. On the contrary, China has undertaken substantial investments, amounting to billions of dollars, in the domains of education and advanced research. This strategic endeavor aims to enable China to mitigate the impact of import limitations by substituting foreign technology with domestically developed alternatives. Moreover, it is important to acknowledge that China is not passively succumbing to global challenges.

The Chinese government is actively promoting the establishment of semiconductor manufacturing facilities by offering tax benefits and financial support via investment funds. The financial ramifications of China’s recent regulatory measures targeting the technology sector have exceeded $1.1 trillion. Prominent Chinese chip manufacturers have been actively increasing their manufacturing capacity, with a specific emphasis on the use of mature-node technology that is not at the forefront of innovation. The purpose of this tactical move is to lessen the impact of American sanctions. The objective behind these measures is to limit China’s aspirations in the field of chip manufacturing. In response, the Chinese government has expressed strong disapproval.

The semiconductor market in China had a contraction of around 5% in the previous year, while the sales of locally produced chips witnessed a notable growth of 14%. Global chip makers have stated their intentions to continue investing in the Chinese market despite the ongoing pressure from the United States. China has the position of being the biggest market globally, with a market share of over 47%. High-ranking executives from Qualcomm, Intel, and ASML have visited China this year. In its supply chain assessment report released in June 2021, the White House listed two commodities that raised concerns due to their significant geographical concentration in China. The research highlighted the significance of gallium nitride in a wide range of applications, emphasizing its potential national security implications for the semiconductor industry. In response to US pressure, China has put restrictions on the export of chip materials like gallium and germanium.

According to the U.S. Geological Survey, China is responsible for the production of 98% of the global gallium supply, which is prime for the semiconductor industry. China has recently introduced a set of laws aimed at imposing restrictions on the export of several essential commodities that play a critical role in the domains of electric cars, renewable energy, semiconductors, and military technology. The implementation of these laws is a response to the actions taken by the United States, the Netherlands, and Japan to restrict the sale of advanced semiconductor tools to China. The export control legislation, which went into effect in the latter part of 2020, is limiting the supply of gallium from Beijing. The Chinese government has used legal measures to enforce limitations on the export of encryption technology and semiconductors, which serve as safeguards against data breaches. China has placed restrictions on the export of gallium to the United States and other countries. The US is now contemplating the implementation of more stringent trade regulations for semiconductors in China.

In concluding remarks, it can be noted that the chip war between the US and China is affecting the global supply chain and semi-conductor industry. It has created uncertainties, shortages, and price fluctuations for various industries that rely on chips, such as automobiles, smartphones, and consumer electronics. Nevertheless, the essential raw material required for the production of chips has become a tool to pursue geopolitical interests and prioritize competition over cooperation.

Aishwarya Sanjukta Roy Proma
Aishwarya Sanjukta Roy Proma
Aishwarya Sanjukta Roy Proma is a Research Associate at the BRAC Institute of Governance and Development (BIGD). She is a research analyst in security studies. She obtained her Master's and Bachelor's in International Relations from the University of Dhaka, Bangladesh. She can be reached at ash77662[at]