Semiconductor chips, or microchips, are the tiny brains that run countless devices we use each day. These marvels power everything from refrigerators to smartphones, car navigation to wearable tech. The ever-growing demand for smart devices has created a desire for smaller, faster and more efficient chips. This pursuit of miniaturization has propelled the semiconductor industry to the forefront of contemporary technological advancement, sparking a fierce global competition for dominance known as the chip war.

A key battleground in this competition is the rivalry between the US and China. Both nations recognize the immense importance chip production holds for economics and national security. A secure and reliable supply is crucial for maintaining functioning weapon systems and communication networks, not to mention consumer electronics, automation and healthcare. 

The stakes of the global chip industry

East Asia dominates global chip production, with powerhouses like Taiwan (TSMC), South Korea (Samsung, SK hynix) and Japan (Atock, QD Laser) leading the way. Taiwan produces over half the world’s most advanced chips, while South Korea boasts a significant memory chip share and heavy research and development investment. Japan supplies critical equipment for over a third of global chip manufacturing. This concentration establishes East Asia as an indispensable tech hub.

China presents an anomaly. It is not a major producer but the world’s largest consumer, devouring nearly $380 billion in chips annually. The chips fuel China’s booming tech sector, which spans consumer electronics to the telecom and automotive industries. China, however, is now pursuing self-sufficiency in chip production, fueled by significant state-backed investments, positioning semiconductors as a key industry for its future.

The US and China battle for tech supremacy

Chinese President Xi Jinping envisions having a “world-class” People’s Liberation Army (PLA) by 2035. This vision of an intelligent military force implies unparalleled technological sophistication, superior combat capabilities and global influence. It relies heavily on autonomous weaponry and extensive artificial intelligence integration. For this, China has ramped up AI investment, with a particular focus on military application.

A United States Department of Defense report acknowledges China’s aggressive pursuit of next-generation capabilities through AI and advanced technologies. US companies have led the development of advanced microchips and semiconductor manufacturing equipment, and China has historically relied on US-developed semiconductors to help it progress in high-tech fields like AI. By utilizing these technologies, China has been able to accelerate its military modernization and close the gap with other leading powers. The US fears China’s chip advancements could give the nation an edge, built on the back of US engineering.

To counter China’s efforts, the US President Joe Biden’s administration implemented export controls in October 2022. It restricted the nation’s access to US-made chips and chip-making equipment. Now Chinese entities must obtain a special US license to make such purchases. Further tightening its grip, the US convinced the Netherlands and Japan to restrict similar exports to China in January 2023.

The US’s escalating restrictions on chip exports have sent ripples through both the US and global semiconductor industries. Nvidia, the US’s largest tech company by market capitalization, witnessed a significant revenue decline in key markets. Its year-on-year revenue from China and Hong Kong plummeted 20% in the 12 months leading up to February 2023. Tightened US export controls directly caused this downturn. In response, Nvidia introduced a less advanced A800 chip specifically for the Chinese market. However, subsequent US restrictions rendered this solution ineffective, further straining their regional performance.

The chip war has hit Chinese companies hard as well. Data from China’s General Administration of Customs shows a near-30% reduction in chip imports during the first five months of 2023 compared to the same period in 2022. This decline has disrupted production schedules and hindered technological advancements across numerous sectors. China’s official newspaper, People’s Daily, condemned the US for pursuing a strategy of “containment and suppression.”

In May 2023, Chinese Commerce Minister Wang Wentao urged Japan to reconsider its export controls.

Retaliating against US restrictions, Beijing banned the use of chips from major American semiconductor company Micron Technology in critical infrastructure projects. Chinese businesses have adapted by finding alternative methods to obtain high-quality chips. This includes chip rental, the use of intermediaries and even semiconductor smuggling. 

Beijing has restricted exports of rare earth elements, vital for chip manufacturing. These elements power modern technology: Lanthanum aids camera lenses and battery electrodes, neodymium strengthens magnets and dysprosium keeps data storage devices and advanced electronics functioning. This move has escalated tensions with the US.

The chip war endangers the world

This conflict extends beyond chips, encompassing AI and cybersecurity — in this field, technological dominance is a national security issue. While China supplies raw materials for chip production, products like AI algorithms, cybersecurity frameworks and data analytics systems hold greater strategic weight. These advanced technologies shape military and economic power, influencing the trade war’s dynamics. The Australian Strategic Policy Institute (ASPI) research suggests China leads the US in 37 out of 44 key technology sectors. Geopolitical tensions, technological rivalry and supply chain vulnerabilities combine to create a high-stakes global chip industry.

China’s dominance in specific AI applications like facial recognition contrasts with its domestic semiconductor industry’s limitations. Despite significant investments, China struggles to close the gap with leading manufacturers like TSMC and Intel. This is due to technological barriers, including the inability to produce high-end chips that match the precision and efficiency of those made by established industry leaders​. Recognizing this dependency, the government has launched initiatives to bolster domestic semiconductor production.

The chip war threatens to cripple the global economy. Telecommunications equipment shortages threaten to delay smartphone production and lead manufacturers to hike prices and hinder infrastructure advancements. Governments must address national security concerns by diversifying suppliers. The risk of broader economic disruption looms large; telecommunications troubles could cascade, leading to job losses and economic decline.

Furthermore, the semiconductor dispute could exacerbate trade tensions in other areas as countries retaliate against each other by raising tariffs and barriers. To prevent this, international collaboration is needed.

[Ali Omar Forozish and Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.