The U.S.-China Chip Rivalry – A Battle for Semiconductor Manufacturing Supremacy

China and the U.S. are increasingly jostling over semiconductor intellectual property and manufacturing. The U.S. is seeking to jump-start its own chip production, while using sanctions to blunt China’s drive for self-reliance in this critical industry. A new Must C report from a team led by Chris Danely looks at the two powers’ battle for supremacy.

The semiconductor industry is the driving force behind technological innovations such as artificial intelligence, electric vehicles and factory automation. Consequently, the industry, is crucial to nations’ economic prosperity and national security. The U.S. accounts for 25% of total semiconductor demand, but its total semiconductor manufacturing capacity is just 12%, down from 37% in the 1990s. This decline has sparked concerns about a threat to national security given China’s efforts to gain a significant foothold in the industry.

A key focus of our analysis is the CHIPS and Science Act, which became U.S. law in 2022. Its aim is to boost domestic chip production by earmarking $52.7 billion for allocation over five years to develop domestic manufacturing, as well as R&D and workforce programs. The act provides 25% investment tax credits to semiconductor companies that invest in semis manufacturing or specialized tooling equipment, as noted in our report, conditions introduced by the Commerce Department have made it challenging to turn the act’s goals into realities.

Returning leading-edge semiconductor manufacturing to the U.S. could prove extremely difficult. By one estimate, it could cost up to 50% more to make leading-edge chips in the U.S. than in Taiwan. And most semiconductor companies are already raking in profits and don’t need extra funding, meaning only less-profitable firms may participate in the CHIPS Act.

The European Union is countering China with the European Chips Act (ECA), which aims to double Europe’s share of global chip manufacturing by 2030. The ECA lacks the CHIPS Act’s restrictions, and European chip makers seem to have few, if any, reservations on accessing its funding. Meanwhile, Japan’s 2022 Economic Security Promotion Act is key to its own effort to establish semiconductor production facilities.

The CHIPS Act isn’t the only tactic deployed in the U.S.-China chips rivalry: The U.S. and its allies are also using sanctions as a tool against China. Such restrictions have limited China’s ability to acquire and make advanced chips, with an emphasis on items or technologies used for supercomputing and AI training.