On October 17, 2022, at the 20th National Congress of the Communist Party of China, President Xi Jinping called for a nationwide effort to “win the battle” in core technologies. The urgency was reflected in the 20th Party Congress report, in which the word “technology” was mentioned fifty-five times compared to thirty-four times in the 19th Party Congress report. This focus underscores the Chinese Communist Party’s determination to bolster its technology sector, with semiconductors being a focal point.

Semiconductors, or chips, are the backbone of the modern global economy as they are vital to telecommunications, defense, and industrial applications. In recent years, semiconductors have emerged as a critical battleground in the broader geopolitical contest between the People’s Republic of China (PRC) and the United States. In 2015, the PRC launched the “Made in China 2025” initiative as the roadmap for technological self-reliance. The initiative aimed to transform China’s manufacturing sector into a high-tech leader. A key aspect of this industrial policy was to boost domestic chip production by 40 percent in 2020 and 70 percent in 2025, thereby reducing dependence on foreign technology. 

China’s emergence as a major chip producer could disrupt the global chip supply chain, affecting export-dependent economies like the Republic of China (Taiwan), home to Taiwan Semiconductor Manufacturing Company (TSMC), one of the world’s largest and leading chip manufacturers alongside South Korea’s Samsung. TSMC produces 90 percent of the world’s most advanced chips, with the PRC relying on the Republic of China for 60 percent of chip imports. Achieving self-sufficiency in chip production would undermine Taiwan’s “silicon shield,” a status quo that deters China from forcefully taking over the island. According to a research report from RAND, given the heavy concentration of global fabrication in Taiwan and the critical role of semiconductors across various sectors of the economy, economic vulnerability could grant the PRC an uneven advantage. Furthermore, semiconductors also play an important role in China’s military-civil fusion strategy, a policy to transform the People’s Liberation Army into a world-class military with technological superiority. This strategic initiative has raised concerns in Washington, leading to a series of sanctions and export controls designed to restrain China’s technological and military advancements. 

Export Controls on Critical Technologies 

Before Xi Jinping’s speech in Beijing, the Biden administration unveiled a series of new export controls on October 7, 2022, targeting artificial intelligence and chip technologies to China under a “small yard, high fence” approach. The aim was to restrict critical technologies that have significant military applications while maintaining normal economic exchanges. These controls included restrictions on chip design tools and semiconductor manufacturing equipment, as well as transactions involving companies on the entity list. This was not Washington’s first attempt to restrict China’s access to semiconductor technologies under national security interests. Between 2018 and 2020, the United States cut access off to Chinese state-owned entities like Fujian Jinhua IC, and ZTE, as well as the PRC’s national champion, Huawei, from American chip suppliers.

The policy was updated in 2023 to include American-produced chips from Nvidia and extreme ultraviolet lithography machines (EUVs). EUVs are an indispensable chip-making tool to fabricate smaller and more sophisticated chips, which are increasingly in demand for modern technologies like artificial intelligence, autonomous driving, and 5G networks. The computing power of a chip is determined by its size in nanometers, with smaller sizes indicating higher computing power. ASML, a Dutch-based semiconductor company and the sole provider of EUV technology, has faced US government pressure to halt exports to China. Lithography machines, including EUV systems, are also subject to the Wassenaar Arrangement, a multilateral export control agreement restricting the sale of items with dual military purposes. Since 2019, during the Trump administration, ASML has refrained from selling these machines to China, and without access to this technology, China’s semiconductor industry faces significant barriers to producing its own advanced chips. 

Roadmap to Self-Sufficiency 

Building on top of the “Made in China 2025” agenda, the PRC launched the National Circuit Industry Investment Fund, also called “the big fund” (大基金), in 2014. The fund was financed by China’s Ministry of Finance and China Development Bank, raising $21 billion in its first phase. The fund was distributed to at least 3,000 entities operating in the industry, including key players like Semiconductor Manufacturing International Corporation (SMIC), Hua Hong Semiconductor, and Huawei. In response to the October 2022 export controls, the PRC doubled down on its chip investment with an additional $40 billion in 2023. In addition to the big fund, the PRC employed various fiscal policies such as subsidies, grants, tax breaks, and low-interest loans to support the chip industry. Notably, Huawei has received direct government subsidies and tax incentives since the United States added the company to its trade blacklist in 2019. Leveraging these resources, Huawei, SMIC, and other fund beneficiaries imported billions of dollars worth of chips and stockpiled chip-making equipment to safeguard its chip supplies against future restrictions. 

Despite massive investment and state support, the Chinese chip industry fell short of meeting the 40 percent target set for 2020. The target was only met in 2022 due to COVID-19 and the stringent zero COVID policy that strained the chip supply chain. Regardless, the “Made in China 2025” initiative has faced significant criticism from many researchers and industry experts, who argued that the target is unrealistic. Yet, there is evidence suggesting that it remains an important industrial policy for China’s broader strategy to achieve self-reliance in critical technologies. 

China’s Chip Breakthrough 

The success of the investment fund became evident with the release of Huawei’s Mate 60 smartphone series, featuring a seven-nanometer chipset manufactured by SMIC. The achievement was considered a major leap forward; SMIC achieved seven nanometers in two years from the conventional fourteen nanometers without access to foreign technology. In contrast, it took TSMC and Samsung three to five years to reach the same level with access to the global chip supply chain.

The production of the seven-nanometer chip drew scrutiny from many US policymakers, including National Security Advisor Jake Sullivan, who questioned the existence of the sanctions-evading chip. Bloomberg investigations revealed that a Shenzhen city government fund in 2019 assisted Huawei in acquiring lithography machines through a “self-sufficient chip network.” The investigation also found that Huawei hired former ASML employees from the network to aid in the chip manufacturing process. The production was faced with budget challenges due to the EUV ban. SMIC had to resort to less efficient deep ultraviolet lithography systems from ASML acquired before the US export controls took effect, resulting in higher production costs and lower yields. Furthermore, SMIC bypassed US sanctions to acquire semiconductor equipment from California-based chip suppliers Applied Materials and Lam Research. 

The Future of the Industry

China’s relentless drive toward technological self-reliance in the semiconductor industry has intensified its geopolitical rivalry with the United States. Despite facing rigorous export controls from the United States, the PRC has demonstrated resilience and progress, exemplified by Huawei’s advanced seven-nanometer chipset. However, the path to full self-sufficiency remains fraught. Not only is self-sufficiency costly, but Huawei and SMIC also still face limited access to critical tools like EUVs needed to produce advanced chips, and replicating the technology is considered impossible without ASML’s industrial expertise. Moreover, the ambitious goals set for “Made in China 2025” continue to draw skepticism. The unfolding dynamics between the People’s Republic of China and the United States in this high-stakes technological arena highlight the broader implications for the global chip supply chain and international relations. The PRC’s pursuit of semiconductor self-sufficiency could destabilize the global economy, shift the balance of power in favor of the PRC, and heighten national security concerns by escalating geopolitical tensions in the Taiwan Strait.

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