Technological innovation is one of the main fields of US–China competition. Competition in the semiconductor industry is a significant point of tension where the continued interference of US bureaucracies in the industry is a source of contention between the superpowers.

For Beijing, closing the technological gap with the most advanced countries is seen as a pathway to recovering great power status or the ‘Chinese Dream’. As the geopolitical context surrounding it becomes increasingly hostile, technological upgrading could guarantee China’s greater strategic autonomy by decreasing its technological dependence on more advanced countries. Semiconductors have become a prime example of China’s search for technological independence.

Semiconductor production has increasingly shifted away from the Integrated Device Manufacturer model, which involves vertical integration at every phase of production, to the Fabless–Foundry model where companies specialise in different production phases. It has moved towards a geographical specialisation in which the major chip design companies are located in California and Taiwan. There are high barriers to entry, heavy R&D investment and efficientinnovation systems. These characteristics present unique challenges for upgrading the semiconductor capabilities of new competitive players. The dual-use applications of semiconductors and their significance in digital infrastructure have also increased their strategic relevance and amplified technological competition.

As a result, semiconductor manufacturing becomes a factor in strategic rivalry and any possible damage to the US domestic industry can be considered a threat to national security. The securitisation of technology has become an extremely flexible concept endowed with ‘accordion-like’ discretion to keep pace with technological innovation.

The turning point in Beijing’s interest in semiconductors came in 2014, when the State Council set a goal of becoming a global leader in semiconductors by 2030. In 2015, the Made in China 2025 project was launched, aiming for greater technological self-sufficiency. The first goal was to foster the creation of national champions in the industry that could compete on a global scale and supply China’s voracious appetite for semiconductors. The second objective was to acquire foreign technology through strategic acquisitions of technologically advanced foreign companies or private Chinese companies operating abroad.

But the grade of chip sophistication and design is currently beyond China’s technological capabilities. China is forced to depend on semiconductor imports. Assembly is the only phase of production, the one with the lowest added value,in which Chinese companies manage to carve out a slice of the market.

The largest US federal agencies have moved on national security grounds to block many strategic investments or acquisitions in the sector. This is thanks to the strengthened powers of the Committee on Foreign Investment in the United States (CFIUS) and the imposition of export controls on Chinese companies through the Entity List maintained by the Bureau of Industry and Security (BIS). The wide discretion enjoyed by these apparatuses is due to the flexible notion of ‘national security’.

These agencies have demonstrated that they can also intervene against foreign companies. This is shown when CFIUS blocked the acquisition of German Aixtron by China’s Fujian Grand Chip Investment Fund in 2016 and the pressure exercised by the BIS to block TSCM chip sales to Huawei.

All this activity has been codified by the Foreign Investment Risk Review Modernization Act (2018) and the Foreign Direct Product Rule of the Export Administration Regulation (2020). This has strengthened the legal power of these agencies by allowing them to take action against any firm using US technologies that are not easily replaceable.

It is US technological superiority that allows them to control the most strategic nodes in global semiconductor value chains to block Chinese technological upgrading. In addition, the other economies most involved in the industry — Taiwan, South Korea and Japan — are all strategic allies of the United States who are committed to the containmentof China’s geopolitical ambitions. They must balance their Chinese economic interests with their US geopolitical interests. South Korea has managed to maintain the most neutral approach.

The impact of the US strategy depends on the ability to engage foreign firms without giving them excessive incentivesto create foreign value chains to do business with China. The ability to intervene in these value chains must be applied in a surgical manner to avoid diminishing foreign trust when doing business with US companies. Given the current Chinese technological gap, excessive intervention would only have counterproductive effects.

https://www.eastasiaforum.org/2022/06/04/the-us-china-battle-for-the-semiconductor-industry/