A Winner Is Emerging in the Chip Wars: How the Half-Decade Conflict Is Crippling China’s Lofty Technological Ambitions

Although it still feels like a highly novel, of-the-moment phenomenon, the conflict between the United States and China over the future of global semiconductor manufacturing has now been underway for nearly five years. What many consider to be the opening shot in the so-called chip wars took place in 2020. That May, the U.S. Commerce Department announced that it would be prohibiting all companies that use American technology from designing or producing semiconductors for Chinese telecommunications giant Huawei. 

Since those restrictions were imposed, the strategic economic conflict between the world’s two preeminent superpowers has gradually expanded in scope and severity. The U.S. and China have used sanctions, export controls, and other punitive instruments to destabilize their rival’s positioning in the global semiconductor manufacturing ecosystem, in the hopes that the cumulative impact of these measures will ultimately weaken their geopolitical standing. Despite the number of eyes trained on this conflict, however, determining the long-term consequences has proved challenging. This is due in no small part to the unique complexities of chipmaking and the long time horizons associated with the industry. 

But with these trade wars now encompassing nearly the entirety of the 2020s, it’s worth taking stock of the measures that have been levied since the initial salvo against Huawei. In addition, attempting to suss out where this industrial warfare is heading may help the thousands of organizations that utilize semiconductors develop strategies to protect themselves from the conflict’s wider blast radius.

A Brief History of the “Chip Wars”

While the U.S. had been engaging in subtle policy measures to curb China’s technological advancement within the semiconductor industry for years, the Bureau of Industry and Security’s rule on semiconductor export controls in October 2022 ushered in an entirely new chapter. What had heretofore been a largely cautious campaign, conducted with carefully targeted acts, suddenly evolved into something more aggressive and sweeping. 

The 2022 raft of export controls used licensing requirements, sanctions, and other trade barriers to effectively cut China off from the hardware and expertise it needed to advance its semiconductor technology. “We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead,” National Security Advisor Jake Sullivan explained when the export controls were announced. “That is not the strategic environment we are in today. Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.” 

These controls included:

• Expanding the Commerce Control List: The BIS added specific semiconductors and some of the hardware that runs on them to its Commerce Control List (CCL), a list of goods subject to the Export Administration Regulations (EAR). Following the 2022 rule, certain types of graphical processing units (GPUs), semiconductor manufacturing equipment, and computers and components containing advanced chips became subject to export licensing requirements. 

• Introducing New Foreign Direct Product Rules (FDPRs): The new FDPRs introduced by the BIS restricts companies from selling specific hardware and software to China if those goods were made with U.S. technology. These FDPRs cover not just U.S.-based manufacturers but firms all over the world that have incorporated American tech into their products. One of the main targets of the new EAR rules are any items destined to be used in the development and production of supercomputers in China. 

• Sanctioning Chinese Entities: The export control package also included the addition of 31 Chinese individuals and organizations to the Entity List. As a result of the sanctions, those entities are no longer able to purchase any items controlled by the EAR. 

October 2023 Updates to U.S. Export Controls 

Roughly a year after the initial round of export controls were announced, in October 2023 the Bureau of Industry and Security issued updated rules on exporting semiconductor technology. This new raft of barriers primarily served to refine and expand on the restrictions laid out in 2022, and can be distilled into three chief revisions:

• Broadening Scope of Controlled Equipment: This rule expands the types of semiconductor manufacturing equipment (SME) subject to U.S. export controls. New equipment added in 2023 included items used in the fabrication of logic chips under 16 nanometers, including equipment for dry etching, wet chemical processing, and the deposition process. 

• Modifying Inclusion Criteria: After reviewing the impact of its rules over the course of a full year, the BIS observed that Chinese companies were finding ways to circumvent the export controls and still obtain chips advanced enough to power AI models. To patch over this loophole, the agency adjusted its parameters for what semiconductors are subject to regulations, and began using total processing performance (TPP) and performance density as the key thresholds. The new criteria broadened BIS’s purview substantially, strengthening their control over what chips are restricted. 

• Expanding Entity List: Finally, the agency added an additional 13 Chinese-based organizations to its Entity List. Most of the sanctioned firms are involved in developing cutting edge artificial intelligence that the U.S. deems a threat to its national security. These included Beijing Biren Technology Development Co. Ltd. and Light Cloud (Hangzhou) Technology Co. Ltd., companies known to be involved in developing AI with military applications. 

The Chinese Response 

The Chinese Communist Party (CCP) has hardly stood idly by while the U.S. government implemented this succession of trade barriers aimed at hobbling China’s semiconductor capabilities. In 2023, the CCP took two major retaliatory actions against American businesses and U.S. industry writ large. 

• Micron Ban: In May 2023, the Chinese government announced that it would be banning all chips manufactured by U.S. chip firm Micron from key infrastructure projects. In a statement explaining the new restrictions, the Cyberspace Administration of China said that a review found that “Micron's products have serious network security risks, which pose significant security risks to China's critical information infrastructure supply chain, affecting China's national security."

• Critical Minerals Export Restrictions: Throughout 2023, China issued a number of restrictions on the export of various minerals instrumental to semiconductor and weapons manufacturing, including germanium, gallium, and graphite. Chinese companies that wanted to sell these materials outside the country would now have to obtain licenses from China’s Ministry of Commerce (MOFCOM) through applications that required firms to identify end-users. 

The Chip Wars Escalate in 2024 

While the first half of 2024 was relatively quiet in terms of additional actions within the broader trade war between the U.S. and China, Q4 carried several bombshells. First, on December 2, the Biden administration published several updates to the semiconductor export controls that were initially rolled out in 2022. The updates covered a wide breadth of territory: they expanded the hardware and software subject to the Commerce Control List (CCL), increased controls on the export of high-bandwidth memory (HBM), and extended the list of semiconductor manufacturing equipment (SME) restricted by the federal government. 

A severe and even draconian package of measures aimed squarely at China, the U.S.’s latest controls would register as a stunning development if they were not part of a larger wave of trade barriers implemented over the past two-plus years. As the Center of Strategic and International Studies concisely put it, “The goal of these controls is, unsurprisingly, to degrade China’s AI industry.”

This year, however, China has responded to U.S. industrial aggression with escalatory actions that are arguably equally, if not more, consequential. Just a day after the Biden administration’s new rules were published, China announced that it would be banning the shipment of myriad critical minerals to the U.S. The Chinese Commerce Ministry said that germanium, gallium, and antimony exports to the U.S. would be prohibited going forward, a move that represented the first time the CCP has explicitly targeted America with critical materials restrictions during this half-decade conflict. 

Then, as though the preceding flurry of economic attacks weren’t enough, China opened an investigation into American chipmaker Nvidia over allegedly violating Chinese antitrust laws. The probe’s underlying aim appears to be an effort to hamstring the U.S. company that’s emerged as the preeminent firm powering the worldwide pivot toward artificial intelligence. 

The Chips Are Down: the Trade War’s Impact on China 

Because China’s actions have been relatively measured up until the critical minerals export ban levied in December 2024, it’s probably too early to parse the cumulative consequences of the chip wars for the U.S. That is not, however, the case for China. America’s chief geopolitical rival has been weathering sanctions and export controls from the U.S. for over two years now, and there’s a fair amount of evidence that these trade barriers are having a significant impact on the country’s semiconductor industry. 

According to an analysis from Citi Global Insights, Citibank’s thought leadership arm, China’s integrated circuit (IC) imports in 2022 and 2023 were both down over 15% from the prior year. And as of August 2023, China’s 12-month rolling sum of total IC imports was down by 25% from its peak in 2021. While a number of different variables may have played a role in these declines, there’s little doubt that the Biden administration’s export controls were at least partially responsible. 

The U.S.’s export controls and China’s shrinking IC imports have two potential downstream effects. First, they could be hampering China’s ability to catch up to leading manufacturers like Taiwan and South Korea (the nation’s semiconductor technology is currently around five years behind Taiwan). Although Chinese firms like Semiconductor Manufacturing International Corporation (SMIC) and Huawei Technologies have made up a lot of ground over the past half-decade—as of 2023, they were utilizing American technology to produce 7-nanometer chips—the recent restrictions on advanced chips and crucial manufacturing equipment are likely to stymie this progress. 

The second impact is more ambiguous, but may hold even greater implications for the balance of power in global semiconductor manufacturing. Experts have speculated that being effectively choked off from the larger semiconductor ecosystem could actually stimulate China’s domestic manufacturing, leading to greater independence and self-sufficiency within the chip industry. Some of the data coming out of China in 2024 have borne out this theory. In the first quarter of the year, China’s IC production surged by 40 percent, jumping to over 98 billion units. The nation produced 36 billion ICs in March alone, an all-time record. 

A crucial caveat, however, is that much of this production is for older-generation chips. China’s share of the most advanced semiconductors remains minimal, and the U.S.’s trade barriers are likely to prevent them from making any substantive headway in manufacturing leading-edge ICs for the foreseeable future. 

Geopolitical Frustrations Bubble to the Surface 

In addition to the objective data on how the U.S.’s export controls are impacting China’s semiconductor manufacturing ambitions, there’s also a growing trove of anecdotal evidence coming from the Chinese Communist Party (CCP). In a phone conversation between President Biden and Chinese leader Xi Jinping in April 2024, China’s president attempted to warn Biden off of his campaign of trade restrictions by explaining how the barriers are “creating risks,” and that China will not simply “sit back and watch” while the U.S. pinions its technological development. 

However nondescript it appears on the surface, the conversation demonstrates just how desperate Xi and the CCP are to dissuade the U.S. from its aggressive export controls. Even if China whips its domestic production of legacy chips into a frenzy, it’s still being cut off from critical chipmaking equipment manufactured in the U.S., Japan, and the Netherlands. And without access to that global technology, the chances of China catching up to its rivals and manufacturing the 7, 4, and 1 nanometer chips crucial to powering AI will continue to fade.

The Chip Wars Are Only Going to Intensify 

The 2020s have been an unprecedented decade for aggressive protectionist policies between the U.S. and China, with the semiconductor industry serving as the nucleus of this ongoing conflict. With the transition to a second Trump administration in January, there’s a very good chance that this economic warfare is only going to continue, with tariffs and other restrictions further escalating this fierce struggle for technological hegemony. 

Though American businesses have some sense of what new trade policies may be installed with the incoming presidential administration, there’s still a profound degree of uncertainty about the future of trade between the U.S. and China. Manufacturers and other companies that source from the global electronic supply chain can use a supply chain risk management (SCRM) tool like Z2Data to help them navigate this increasingly unpredictable landscape. Z2Data’s suite of functionalities include visibility into country-level dependencies, event monitoring that helps customers follow the impacts of major global developments, and comprehensive sanctions coverage that includes a watchlist forecasting potential future sanctions targets. 

To learn more about Z2Data and the range of ways it can help businesses cultivate resilience in the era of chip wars, schedule a free demo with one of our product experts.