China's Semiconductor Strides Amid US Curbs: A Deep Dive into the Tech Tug-of-War
Summary
- Amidst U.S. export controls, China ramps up its semiconductor game, pushing for greater self-reliance in the tech arena.
- Taiwan finds itself central in the techno-economic crossfire, aligning with the U.S. but raising concerns of potential escalation.
- Beijing's pursuit of tech independence confronts U.S. export constraints, spotlighting a global chess game of technological moves.
In a tit-for-tat move, Beijing has responded to the U.S. Commerce Department clamping down on companies benefiting from the 2022 CHIPS and Science Act.
The recent move by China to further enhance its semiconductor subsidies highlights the ongoing technological tug-of-war with the United States.
In August, CNC highlighted the global ramifications of the Biden administration's CHIP Act on the semiconductor industry. This development has stirred uncertainty among Chinese, Taiwanese, and U.S. policymakers, leading to heightened protectionist sentiments. The resulting techno-economic tensions have spurred increased investments in China and across the Taiwan Strait. The intensifying competition in advanced technology not only shapes the future of the chip industry but also amplifies trade sanctions and export restrictions.
In the face of tightening U.S. export controls from 2022 and anticipated stricter measures by late 2023, China announced a whopping $150 billion for chip subsidies the previous year. On September 19, the Chinese Ministry of Finance augmented the nation’s semiconductor R&D tax credit by a notable 20%.
The stringent measures from the U.S., including the decade-long prohibition of expansion for U.S. subsidised chipmakers in China, have pushed the Chinese leadership to craft a self-sufficient tech blueprint. As Commerce Secretary Gina Raimondo aptly said on September 19,
"We have to ensure not a cent aids China's technological advance." She stressed the urgency of the situation but added, "Getting it right supersedes speed."
Regulations from the U.S. further delineate a ceiling of 5% expansion for semiconductor manufacturing in specific foreign nations for the next ten years. Further restrictions include constraints on new clean rooms or lines that boost a facility's capacity past 10%. Notably, the regulations also explicitly target the expansion of high-tech facilities and wafer production.
Nicholas Mulder, in his 2022 expose, "The Economic Weapon: The Rise of Sanctions as a Tool of Modern War," encapsulates the resilience of nations under sanctions. They either pivot towards new trade alliances or recalibrate their indigenous supply chains. While certain industry stalwarts in China doubt the feasibility of an entirely domestic chip ecosystem, there’s a burgeoning advocacy, particularly among policymakers.
They're aligning with President Xi Jinping’s vision of “dual circulation”, a strategy focusing on domestic consumption and innovation, supplemented by foreign technology where essential.
The unveiling of the Huawei Mate 60 Pro in late August, during U.S. Secretary of Commerce Gina Raimondo’s China visit, drew raised eyebrows. The gadget boasted a 5G-capable chip, allegedly China's brainchild, intensifying U.S. concerns regarding China's technological prowess.
Despite China's fervent strides, it remains a net semiconductor importer, accounting for a substantial 24% of global demand but only contributing a mere 9% in value addition. Their predominant role is relegated to chip assembly and packaging, the least profitable segment.
However, inconsistencies loom. While Beijing champions semiconductor R&D and production, 66% of the financial thrust originates from local governments, more engrossed in regional progress rather than a cohesive national blueprint. Calls are growing louder for a harmonised semiconductor strategy, resonating with sentiments at the annual gathering of the Chinese People’s Political Consultative Conference.
Across the Taiwan Strait, the tech tension simmers. With Taiwan prepping a protective list of pivotal technologies against Chinese overreach, Wellington Koo, secretary-general of Taiwan's National Security Council, shared insights.
"Semiconductors, agriculture, aerospace, and ICT will be the central focus," Koo disclosed. Aligning with global concerns over China's tech appetite, Taiwan, like the U.S. and Japan, is gearing up defences against potential tech espionage.
In a larger context, under President Xi Jinping’s stewardship, China emphasises diluting tech chokepoints, areas of overwhelming dependency on foreign tech. His announcement of the New Whole Nation System (新型举国体制), in September 2022 underlines China's commitment to technological self-sufficiency, especially in pivotal national security realms.
Communist Party of China (CPC) Central Committee and chairman of the Central Military Commission, made the remarks while presiding over the 27th meeting of the Central Committee for Comprehensively Deepening Reforms on Sept. 6 approved the "Opinions on Enhancing the New National System for Core Technology Research in a Socialist Market Economy." The resolution emphasises the importance of merging government, market, and societal roles for optimising this system. There's a call to focus on strategic planning, target crucial sectors impacting the nation's industry, economy, and security, and pinpoint core technological breakthroughs. Research should prioritise first-mover technologies and foundational advancements shaping the future. Centralised leadership under the Party Central Committee and a decisive decision-making system are vital.
The recent spike in R&D tax credits is one among many strategic moves, a testament to Beijing's growing influence in incentivizing tech companies. Historical markers like the 1996 tax incentive, which allowed a 50% R&D expenditure deduction, and the recent March 2023 surge to a 200% credit for patent-resulting R&D activities highlight China's unwavering focus.
Taiwan: A Pivotal Player in the US-China Techno-Economic Standoff
Taiwan's role in the global technology space is drawing it into the swirling vortex of the techno-economic confrontation between the U.S. and China. Although efforts by Taiwan to impose restrictions on its technology might delay China's inevitable advancement in the tech realm, it is not a definitive solution. Political actions such as trade tensions and the Western alliance's approach to curtailing advanced tech exports emerge as potentially exacerbating factors, with fears of escalating into a more significant conflict.
In their attempts to stymie the outflow of potentially military-use technology to China, the Taiwanese government is closely aligned with U.S. mandates. Following strict regulations to prevent their companies from exporting such technology, Taiwan's government has been proactive. Yet, this raises an alarming question: at what cost does this alignment come, particularly if it ends up spurring military confrontations or economic sanctions?
In a significant move to deter technological leaks, Taiwan's legislature, in the previous year, introduced an "economic espionage crime" to its National Security Act. This revision also heightened regulatory requirements, compelling Taiwanese firms to obtain an official nod before offloading their Chinese assets or plants to native corporations.
Echoing these sentiments, Mohammed Soliman, who heads the strategic technologies and cybersecurity program at the U.S.-based Middle East Institute, notes the burgeoning trend across Europe, the U.S., and Asia to shield pivotal technologies.
"Driven by concerns of national security, economic resilience, and the burgeoning competition with China, this trend is unmistakable. However, as nations fervently aim to protect their significant technological assets, the world might witness an uptick in protectionism, a disjointed global supply chain, and impending clashes over tech accessibility and intellectual property rights."
- Mohammed Soliman
Deciphering Beijing's Technological Aspirations
China remains a significant distance from realising its ambitious "Made in China 2025" vision, which seeks to cater to 70% of its semiconductor requirements domestically. The nation grapples with a considerable chip trade deficit, and its foremost chip equipment producers lag a good four years behind their international peers.
However, Beijing's commitment is evident in its substantial investment in fostering domestic alternatives to overseas semiconductors and manufacturing apparatuses. For U.S. decision-makers, the real question might not be if China's semiconductor sector will bridge the gap with the West, but whether Beijing believes it's capable of doing so. With every semiconductor technology that the U.S. brings under export control, Beijing responds with a renewed zeal to innovate in-house. This sets the stage for a showdown between U.S. export restrictions and China's vast pool of subsidies and tax breaks.
