China’s Massive Barrage in the Chip Battle

Flag of USA and China on a processor, CPU or GPU microchip on a motherboard. US limits, restricts … [+] AI chips sales to China.

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In the ongoing Sino-American trade war; China has made a massive move, in which semiconductor chip tech is a key battleground. Beijing’s latest investment into its chips is its largest yet, with $47.5 billion pumped into semiconductor R&D and manufacturing as part of the third phase of the China Integrated Circuit Industry Investment Fund, also known as the “Big Fund.” Previous phases have gone toward financing chipmakers like Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor. The third will focus on chip manufacturing equipment. These investments represent Chinese hopes not just to become self-sufficient in producing and advancing semiconductor technology, but to assume a dominant role that can marginalize Taiwan.

Advanced chips play a crucial role in numerous industries, but their use in AI processing raises the most concern for the United States and China. Both countries are investing heavily in AI-enabled systems that rely on microchips to function. This focus on semiconductors has significantly shaped U.S.-China relations in recent years. In response, the United States tightened export controls on semiconductor technology in October 2022, aiming to limit Beijing’s access to advanced chips with potential military applications.

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The Biden administration enacted further measures with the same intent in 2023, restricting outbound investment into the chipmaking and AI sectors in “countries of concern” like China in August and even further tightening export controls in October. Such actions have prompted China to focus on its domestic chipmaking capacity, determined to develop its own capabilities.

The importance Beijing attaches to chip production can be seen in various aspects of Chinese foreign policy. U.S. policy forced Beijing to adjust the calculus in its ever-contentious relationship with Taiwan, as Taiwanese dominance in semiconductor manufacturing has made protection of the island nation a priority of the United States and other Western countries. In an attempt to attract expertise in the sector, China has ongoing programs aimed at engineers, industry executives, and trade secrets to gain the advantage.

Semiconductors have also proven vital to China’s projection of influence in Asia and beyond. Recently, this has been an important factor in its assistance to Russia as it wages war against Ukraine. Russian imports of semiconductors increased from $200 million in 2021 to $500 in 2022. As of 2023, China provided 90% of Russia’s microelectronics vital for advanced armaments, according to a Biden administration official. The sale of these components to Russia allows for the production of weapons systems, capable of shifting the Sino-Russian axis’ strategic balance against Ukraine, Europe, and the West.

Considering the high priority that Beijing places on the supply of advanced semiconductors, it is unsurprising that this has altered its relationship with nations that have their own manufacturing capacity. For example, countries that have largely aligned with the United States export controls, like the Netherlands, have been the target of attempts by Beijing to gain access to industry knowledge. ASML, a Dutch firm supplying machinery crucial to many of the largest manufacturers of semiconductors, has experienced repeated attempts at industrial espionage perpetrated by China. South Korea, which has not yet fully aligned with U.S. export controls, is receiving attention from China as well. As home to advanced chipmakers like Samsung and SK Hynix with chip manufacturing capacity on Chinese soil, South Korea has been subject to American and Chinese diplomatic efforts to sway it to one side or the other of the chip war. Planned manufacturing capacity to be built in South Korea signals a shift away from manufacturing in China, another cause for concern in Beijing.

The SK Hynix Inc. M14 plant stands in this aerial photograph taken above Icheon, South Korea, on … [+] Monday, July 22, 2019. Photographer: SeongJoon Cho/Bloomberg

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China’s actions in the face of U.S. export controls, from industrial espionage to investing in its domestic manufacturing capacity, indicate that these controls limit its access to critical technologies like AI-capable chips, as intended. While these measures have stymied Beijing’s ambitions, there are other avenues through which China can gain access to advanced processing for AI such as developing relations with chip suppliers outside of the United States and renting processing capacity.

China’s latest gigantic microchip fund presents the US with a difficult dilemma. On the one hand, the US remains concerned about the lax licensing processes in place enabling the transfer of critical technologies to China from key American allies and wishes to curtail Beijing’s access. Simultaneously, there is a danger that if the US contains China, it runs the risk of incentivizing Chinese domestic production and technological autarky even further, which poses its own set of challenges as far as maintaining peace in East Asia. Chief amongst these challenges is that Taiwan’s utility as a strategic asset may actually decline, resulting in possible political gains for Beijing. Regardless of which choice Washington makes in its future semiconductor chip restriction policy, it will reverberate in every high-tech board room and war room worldwide.

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Quin Buckley contributed to the production of this article.

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