Semiconductors are the cornerstone of modern technology and play a vital role in modern technology. Therefore, semiconductors are not only the core of global scientific and technological innovation, but also the key in the current US-China trade war. In order to maintain the leading position of the United States in the semiconductor industry, Biden introduced the CHIPS Act, which provides $52.7 billion in federal subsidies for the semiconductor manufacturing industry in the United States, aiming to improve the competitiveness of semiconductor manufacturing in the United States. In addition, the U.S. government has also restricted semiconductor transactions with China, requiring many U.S. semiconductor companies to report transactions with China or obtain special permission when doing business with China. The aim of this strategy is to curb China's breakthroughs in high-end semiconductor technology.
However, there is still debate about whether this U.S. export control policy can effectively curb China's technological progress. Huawei, for example, has successfully developed an advanced 7-nanometer chip despite U.S. export restrictions. In addition, China has long relied on low-cost semiconductors produced in the United States, and this dependence has also limited the progress of China's domestic semiconductor research and development to a certain extent. However, with the tightening of export controls, China is accelerating its investment in the domestic semiconductor industry, which may not only reduce its dependence on U.S. technology, but also push China to become a self-sufficient country in the semiconductor sector in the future. U.S. restrictions are likely to be counterproductive, failing to halt China's technological progress and potentially weakening the global competitiveness of U.S. semiconductor companies.
So, while U.S. export restrictions may achieve certain national security goals in the short term, in the long run, these measures may instead weaken the technological dominance of U.S. semiconductor companies in the global market.
China's road to semiconductor self-sufficiency
Long before the United States imposed export restrictions, China had already increased its presence in the semiconductor sector. As early as 2014, the Chinese government launched the National Integrated Circuit Industry Investment Fund, or "Big Fund", a government-backed initiative to enhance China's self-sufficiency in semiconductor production. With a total size of 138.7 billion yuan, the fund is mainly used for investment in semiconductor manufacturing, equipment and related materials, with a focus on supporting large domestic enterprises such as SMIC and Yangtze River Storage (YMTC). Since then, in 2015, the Chinese government launched the "Manufacturing 2025" plan, which aims to build China into a global leader in high-tech fields such as aviation and electric vehicles, and promote the development of the domestic semiconductor industry by setting industry standards, providing preferential policies and financing support, reducing dependence on international technology.
In the face of U.S. export restrictions, China has not flinched, but has accelerated its self-sufficiency. In 2023, the Chinese government announced the establishment of a new capital pool with an investment of 300 billion yuan for the development of the semiconductor industry, of which the Ministry of Finance provided 60 billion yuan of special funds. This investment plan is much larger than the previous capital investment and is focused on the key bottleneck area of semiconductor manufacturing equipment. This series of large-scale investments has paid off. Including the successful development of 7-nanometer chips by Huawei and SMIC, this achievement shows that U.S. export restrictions have not been effective in stopping China's progress in the semiconductor field to some extent.
Figure: Can U.S. export control policies really curb China's chip technology progress?
The counter-effects of U.S. export controls
While U.S. export restrictions have failed to curb China's technological innovation, they have hurt the economic performance of U.S. companies themselves. In October 2023, Nvidia bypassed the Biden administration's ban by modifying chips for the Chinese market to perform below certain standards. But this "curve to save the country" method was quickly recognized by the U.S. government, which further strengthened restrictions and prevented Nvidia's A800 and H800 models from being exported to China. Similarly, Intel's Gaudi 2 chips have also been banned from sale under the new restrictions. Both Nvidia and Intel have publicly stated that their export control policies have negatively impacted their businesses. For example, Nvidia CEO Jensen Huang said the company's performance was severely hampered by the inability to sell more advanced semiconductor chips to China, a market that accounts for 22.2 percent of the company's revenue.
Limitations and challenges of U.S. policy
The U.S. technology blockade of China stems in part from concerns about China's political system and the belief that China may accelerate advances in semiconductor technology by concentrating its efforts. However, it is precisely China's institutional strength that allows it to quickly implement policies that could accelerate breakthroughs in semiconductor technology. In contrast, the CHIPS Act in the United States faces a series of challenges, including cumbersome approval processes, the impact of immigration policies on skilled worker shortages, and an uncertain political environment that could hinder the achievement of the bill's goals. As a result, the U.S. should focus more on promoting domestic innovation and technological progress rather than relying too heavily on export restrictions.
The U.S.-China tech war has sparked a deep rethinking of U.S. free-market principles. Export controls and government subsidies, while aimed at enhancing domestic semiconductor production capacity, are inherently contrary to the principle of free market competition. While these measures may temporarily curb China's semiconductor progress, it remains to be seen whether such policies will actually curb China's technological progress in the long run. U.S. policy may simply have accelerated China's efforts to become self-sufficient in semiconductors.
