National Security: Who Prevails in the Battle for Chip Manufacturing Between China and America?

The technological semiconductor war between the United States and China began at the end of the tenure of former U.S. President Barack Obama, escalated during Donald Trump's presidency, and intensified further under the administration of Joe Biden.

As Trump focused on tariffs rather than the industry itself, America relatively retreated in confronting the Chinese giant. Therefore, the current President, Joe Biden, focuses on completely destroying the Chinese semiconductor and artificial intelligence industries, alongside preventing the transfer of this technology to China, expanding it in America, and doubling his country's production.

As a result, the past two years witnessed an escalation in the semiconductor war between the United States and its allies on one side and China on the other. Washington imposed strict restrictions against China to hinder its progress in the technology field.

Semiconductor manufacturing is a vital element in all electronic devices, from smartphones to weapons and military equipment.

The U.S. government pursued a series of parallel policies, some directly punitive toward China, and others aimed at encouraging semiconductor manufacturing in America itself to be more advanced and competitive.

The CHIPS and Science Act was part of President Joe Biden's experiment with industrial policy, where tax incentive funds were used to support certain companies that the administration deemed essential to national security.

Chinese chips pose a security problem for Washington, which uses sanctions to undermine Beijing's efforts to become self-reliant in this critically important industry while also seeking to stimulate its own chip production, according to City Group on January 2, 2024.

'Biden Policy'

As part of what is called the "Biden Policy" or CHIPS and Science Act, the U.S. president sought to pursue two paths to combat China in this field and prevent it from competing with Washington in a field where whoever wins gains control over all devices, whether smartphones or high-tech weapons.

The first is imposing restrictions on China to prevent it from obtaining this technology from the United States, including restrictions on the work of Americans in Chinese companies.

The second is providing massive financial support to American technology companies, opening more companies, and revitalizing this industry to ensure that the United States remains dominant in it, aiming to maximize the technological gap between Washington and Beijing.

As part of these policies, the Joe Biden administration announced on March 20, 2024, that it will provide grants and loans to Intel Corporation to assist in financing semiconductor chip factories in four states, totaling $20 billion.

Intel stated that the proposed funding, along with tax breaks on investment and eligibility for loans under the CHIPS and Science Act, would help strengthen American semiconductor manufacturing and technological leadership in the era of artificial intelligence.

The Wall Street Journal described this as the largest prize or grant to date from the CHIPS and Science Act, amounting to $53 billion, aimed at revitalizing the American chip industry overseen by the Joe Biden administration against China.

The newspaper confirmed that expanding semiconductor manufacturing is the cornerstone of a broader campaign to revitalize American industries and separate the country's most critical supply chains from Chinese influence.

The grant funds come under the CHIPS Act, which is "part of President Biden's experiment with industrial policy, where taxpayer funds are used to bolster some companies that the administration views as important for national security," according to the Wall Street Journal.

The U.S. Department of Commerce stated that the funds will be allocated for establishing new factories, as well as expansion projects in Arizona, New Mexico, Ohio, and Oregon.

Biden will announce the preliminary agreement of an $8.5 billion grant and loans of up to $11 billion from Arizona, where a portion of the amount will be directed to funding the construction of two factories and the renovation of another, according to Reuters on March 20, 2024.

The unprecedented spending underscores the Joe Biden administration's strong bet on Intel under the CHIPS and Science Act for 2022 to boost local semiconductor production with funding of $52.7 billion.

This investment includes $39 billion support for semiconductor production and $11 billion for research and development, according to Reuters on March 20, 2024.

In highlighting the importance of this agreement to America's security, U.S. Secretary of Commerce Secretary Gina Raimondo said regarding the deal with Intel that Americans can't just design chips; they have to make them in Washington. It's an economic security problem, a national security problem, and we're going to change that.

Raimondo pointed out that Intel's investments will put the United States on the right path to produce 20% of the world's leading chips by 2030.

The goal of the CHIPS and Science Act is to reduce reliance on China and Taiwan, where America's share of semiconductor manufacturing decreased from 37% in 1990 to 12% in 2020, according to the Semiconductor Industry Association (SIA).

Congress members previously warned that America's reliance on chips manufactured in Taiwan by TSMC, the world's largest chip manufacturing company, is fraught with risks because China claims the island as its territory and reserves the right to use force to reclaim it, according to Reuters.

Amid these concerns, TSMC America accelerated the establishment of factories outside Taiwan as a hedge against supply chain disruptions that could arise from geopolitical tensions in the region.

Restrictions on China

On the other hand, as part of the tightening on China, Washington announced on October 7, 2022, the broadest export restrictions to date to deprive Beijing of American chips.

Companies intending to export these chips to China are now required to obtain export licenses as part of a broader strategy to suffocate the Chinese semiconductor industry.

The restrictions covered chips produced using American equipment or computer software, regardless of where they are manufactured in the world.

The administration managing the grants expected that Intel's total investments in American projects over the next five years will exceed $100 billion, according to The Washington Post on March 20, 2024.

According to the newspaper, the grant funds aim to revitalize American manufacturing to avoid difficulties that occurred in supply operations during the COVID-19 period and address increasing geopolitical tensions with China.

It pointed out that a significant portion of chip production worldwide has shifted to Asia in recent decades, while the United States manufactured only about 12% of global production, according to 2020 statistics.

Semiconductor chips are tiny, intricate components produced from silicon (a type of sand) and are utilized in most advanced industries, such as smartphones, computers, automobiles, and others.

Manufacturing a chip takes over 3 months and requires giant factories, specialized facilities, and machines worth millions of dollars.

The semiconductor (chip) industry is the driving force behind technological innovations such as artificial intelligence, electric vehicles, and factory digitization and generally plays a crucial role in the economic prosperity and national security of countries.

Despite the total demand for chips in America being 25%, the American capacity to manufacture chips in the United States does not exceed 12%, down from 37% in the 1990s. This has raised concerns about the threat to American national security considering China's efforts to gain a significant foothold in this vital industry.

Companies that choose to manufacture chips internally are known as integrated device manufacturers (IDMs), and the factories that produce such chips are called fabs.

Estimates from the Semiconductor Industry Association indicate that the cost of building an advanced fab over a decade ranges from $10 to $40 billion, compared to less than a billion dollars in 1997.

There are only four integrated manufacturing companies: Samsung, Intel, Hynix, and Micron. Other companies like Nvidia, Marvell, Qualcomm, and AMD rely on external sources for some or all of their manufacturing.

Despite these American efforts and a series of steps to limit and dismantle the Chinese chip industry, particularly its advanced sector, as part of a broader effort to slow China's rise, researcher Miles Evers from the University of Connecticut believes that these measures may be doomed to fail. American companies resist them, and Chinese efforts to build their capabilities in the semiconductor industry are facing them head-on, according to the Lawfare website on January 14, 2024.

What Did China Do?

In response to American restrictions as part of the chip war, Beijing seeks a series of measures aimed at developing its chip production and avoiding reliance on American companies, while simultaneously expanding its industry and attracting experts from around the world for this purpose.

For example, reports on August 23, 2023, revealed that the Chinese technology giant Huawei is building a secret network of chip factories to avoid the consequences of the American restrictions imposed on October 7, 2022.

Other reports revealed that China is secretly attracting specialized personnel from around the world to enhance its semiconductor industry.

In August 2023, Huawei Technologies announced its success in replacing thousands of electronic components used in its phones, which were previously banned by the United States, with Chinese alternatives.

This raised questions about whether China had won the chip war against America. Ren Zhengfei, the founder of the Chinese technology company, stated that Huawei had found local Chinese alternatives for more than 13,000 components in its products affected by U.S. trade sanctions and redesigned four thousand circuit boards for its products.

China plans to invest around $143 billion in the local semiconductor industry, aiming to achieve self-sufficiency in semiconductors and to counter American moves aimed at slowing Chinese technological progress.

Beijing's plans include tax exemptions and incentive packages for 5 years, as well as grants and loans to support research and chip production. Huawei invested $23.8 billion in research and development in 2022.

Former President Donald Trump initiated a "trade tariff war" against China in 2018. However, experts believe that the most important battle between the United States and China is not the trade tariffs but the chip war, which began during the Obama era.

What bothers Beijing is that the U.S. CHIPS and Science Act is not the only tactic used in competition between China and the United States in this field. Washington and its allies have been using other sanctions against China dating back to 2017.

In 2020, the U.S. administration included companies operating in the technology industry in China on a blacklist, prohibiting American and allied companies from dealing with them.

The Joe Biden administration significantly escalated its economic war in October 2022 by imposing sanctions to restrict the export of advanced semiconductors and chip manufacturing equipment to China.

The U.S. Department of Commerce's Industry and Security Bureau tightened export controls on advanced semiconductor production equipment and high-performance computer chips.

These restrictions have reduced China's ability to obtain and manufacture advanced chips, with a focus on elements or technologies used in high-performance computing and artificial intelligence training.

Export restrictions also apply to non-U.S. sellers and exporters, prompting Japan and the Netherlands to limit semiconductor manufacturing technologies.

China filed a complaint with the World Trade Organization, but its consideration takes several years and may not lead to anything.

Therefore, China has focused on domestic scientific and technological research and made securing supply chains a top priority.

With support from the Made in China 2015 initiative, Beijing has caught up with Taiwan in the semiconductor industry over the past two years.

The latter continues to advance by 9%, with sales expected to reach $114 billion by 2024.

Because winning the chip war is difficult due to U.S. dominance and its alliance with many countries and its focus on AI chip technology and military industries, China is more interested in the field of microelectronics and electronic devices.

Due to this conflict, the European Union has established its own chip law.

Only about 10% of global chip manufacturing is located in Europe, and the European Union aims to double that to 20% by 2030.