- + The chip industry is the main battlefield of the Sino-American rivalry.
- + Trump’s latest blow on chipmakers hits China hard.
- + Innovation is key and global supply chains are at the crossfire.
Why is Trump at war with Xi?
Answer: Technological prowess.
Ever since the start of the Trump administration, he has been at war with Xi Jinping. Considering the massive trade deficit the US has with China, Trump has always believed “China is winning” when it comes to trade. As a response, a quite overwhelming trade war has been raging between the two superpowers since the President took office. This trade war is broad and all-encompassing with tariffs as the main weaponry. However, the trade conflict that matters the most is the 21st century fight over technology with semi-conductors being the main battlefield.
In order to understand the so-called “Chip Wars” between the United States and China, it is important to understand the chip industry itself. Chips are an American invention developed in the 1960s in Silicon Valley, giving it its name. Semiconductors are essential for the functioning of circuits that act as the “brain” of all computers. From smartphones to cars, chips are, and more importantly, will become, even more essential for our day to day life, especially as the world becomes more and more digital.
As data becomes the new oil, chips are the engines that turn data into profit. The industry is now worth $433 billion USD. So broad is the need for semiconductors, that China now spends more in chips than in oil, leading to the forefront of the battle. The US, and its allies, mainly Taiwan and South Korea, still dominate the industry of advanced chips, while China is still dependent on international trade for their supply. Out of the 15 top firms that produce this tech, none are Chinese. This fact makes Xi restless. Dependency is costly for China.
What does Trump want?
Answer: To stay ahead.
The US has battled to retain its status in the industry even before Trump. The Obama administration in 2015 blocked Intel, a large chip producer, from selling some of its most sophisticated chips to Chinese firms in fear they would steal the tech. Fear of intellectual property mischief is far-reaching in American leadership. When the Obamas left the White House, they left a report warning the next administration about the Chinese ambitions and forced technology transfers. This fear was shared by the US’s main allies mentioned before.
When Trump landed his position, one of his first moves was an export ban on chips and software to ZTE, a Chinese telecom firm. The measure was so extreme, it led to the complete collapse of the company, and after a pledge from Xi, Trump lifted the ban. However, the battle was far from over and the next target was set. In May 2019, Trump announced yet another export ban in the main tech companies, including Google, Intel and Qualcomm, of software, hardware and licenses to Huawei, a Chinese tech giant.
Considering Huawei sources ⅙ of all its components from the US, it was forced to completely reshape its supply chain and seek independence from the US. However, as with most restrictions, a loophole was found that allowed tech giants to continue to supply to Huawei. The revenue of the Chinese firm actually increased by 19% thanks to its efforts to sock up from US suppliers.
However, Trump’s fight with Huawei was not over. In May 2020, a new strategic attack was launched. Instead of blocking exports, the new rule targets Huawei’s in-house microchip production by prohibiting the use of US tools in their designing and manufacturing process. Since every chipmaker uses US tech, this might be the decisive blow to the firm. The firm denounced its survival is at stake and the whole industry will be affected by the new measure. However, as with the previous ban, when a door closes, two windows open up.
What does Xi want?
Answer: To catch up and stop depending.
China’s interests are as clear as they are urgent. It needs internal development to stop its dependency from the US when it comes to chips. While there are other tech races Chinese firms are running (including famous 5G), the main aim is set at developing a chip industry within the country. As Xi himself said in 2016: “the fact that core technology is controlled by others is our greatest hidden danger.” The pressure for a developed internal market is both commercial, as they spend billions on importing chips, and military, as the fear of espionage through chips exists on both sides.
While the US does dominate the industry, there are certain processes in which they are further ahead. The main steps in creating semiconductors, high tech ones especially, are designing, manufacturing, packaging and assembly. The US has the upper hand in both designing and manufacturing the most complex and advanced chips. China’s supply chain has been focused only on packaging and assembly. Hence, the Chinese intend to flow upwards the supply chain by developing the capacity to design and manufacture their own chips and moving away from dependency on US manufacturers.
What is Xi doing?
Answer: Investing, heavily.
Characteristically of China, when it comes to catching up to the US they have both a plan and a full wallet. In 2014, Beijing announced a 1 trillion yuan (150 billion USD) investment fund, the National Integrated Circuit Industry Investment Fund, to get its internal chip making industry running. Additionally, semiconductors play a crucial part in the 2025 “Made in China” national development plan to boost manufacturing in the country.
Huawei once more appears involved. One of its companies, HiSilicon, which is also partly owned by the state, is stepping up its designing capabilities. Only is it now ranked among the top ten chip-designing firms, but it can create smartphone chips as good as they can across the pacific. HiSilicon has moved into developing semiconductors for 5G networks proving their capability to match high tech design only the US seemed to possess.
Who is winning and what about you?
Answer: Insert – “?”
While Trump’s latest blow is a hard hit, attempts to curb Chinese growth might slow down its process, but they are destined to increase Chinese incentives to develop the industry within. Blocking Intel chips only spurred the development of local Chinese chips. And so, the chip war is bound to continue with interests unchanged. However, the battlefield is complex, stakes are high and innovation is paramount.
The chip industry, as most tech, has a massively complicated and international supply chain. It is the epitome of globalization. Raw materials used for each step come from all over the world, and the steps to create a chip occur in many continents, let alone countries. Thus, this war involves more than US-China export bans and bilateral fighting, and it is deemed to make the chip industry all around the world less efficient. Global supply chains might suffer greatly from Trump-like bans.
However, global supply chain needs are not aligned with national security interests. As most tech, the early development of chips was due to the need of guidance systems for nuclear missiles. And as military tech advances, so does the need for high tech military chips. Armies are smart now too, and they fight with silicon as well as steel. It is, therefore, paramount for both Trump and Xi’s national securities to continue this war.
Who wins may affect you considering how much we depend on semiconductors, especially after the forced digitalization of work due to COVID-19. The health of the industry may determine availability of certain tech or even prices for consumers. While the two superpowers fire away, the decisive factor, as with traditional warfare, will be innovation. China is betting big on quantum computers and specialized AI chips, but the Americans are too. With chips getting smaller and smaller, and their production getting more and more expensive, investment in R&D might determine the winner of the chip wars.