Editor's Note

As part of its long-term research on US-China competition and the role of middle powers like Korea, EAI is publishing a special report series. In the second installment, focusing on advanced technologies, Professor Bae Young-ja argues that we must acknowledge the decades-long interdependence between the US and China in developing the global value chain, which has been the source of prosperity for both economies. She further urges both nations to work towards strengthening technological innovation in the global semiconductor industry and fostering global economic recovery based on a shared sense of responsibility.

1. Introduction

Semiconductors lie at the heart of the current US-China conflict over advanced technologies. President Biden has maintained the semiconductor export controls imposed by the Trump administration and, in late February of this year, signed an executive order investigating semiconductor supply chains. In April, seven Chinese supercomputer operating entities and the companies supplying them with semiconductor chips were added to the entity list, signaling the continuation of the US-China semiconductor conflict. Semiconductors are core components for the practical implementation of the so-called Fourth Industrial Revolution, including 5G, cloud computing, the Internet of Things, autonomous vehicles, biopharmaceuticals, and artificial intelligence. The stable procurement of advanced semiconductors is a critical factor in determining the success or failure of the Fourth Industrial Revolution. Semiconductors are also key components that determine the performance of various advanced weapons systems, representing a typical dual-use technology. While semiconductor technology has been developed primarily by private companies driven by commercial needs, governments have also played a crucial role in the industry's development as purchasers, through investment support and various policy initiatives (Weiss 2014).

The United States has led the development of the semiconductor industry since the mid-1950s (Morris 1990, Brown and Linden 2016). China, around the announcement of 'Made in China 2025,' has rapidly strengthened its semiconductor technological innovation through massive investments, posing a challenge to the US (Lewis 2019). In response to China's challenge, the US has sought to curb China's semiconductor technological innovation through various means, including tariffs, trade restrictions, and foreign investment regulations. The US's efforts to contain China's semiconductor industry not only aim to impede its rise but also to reshape the existing global semiconductor value chain, drawing attention to how the industry will transform in the future. Amidst these changes, the Chinese government's efforts toward indigenous innovation (自主创新) in semiconductors are accelerating, and US companies are also exploring various strategies to maintain their dominance in the semiconductor industry. This study aims to review the US-China semiconductor conflict to date and forecast its future trajectory, considering the potential future developments of the conflict.

2. Development of the US-China Semiconductor Conflict

1) US efforts to curb China's semiconductor technological innovation

Around 2015, as China's semiconductor rise began in earnest, a sentiment of containment started to form within the US. In 2015, China's semiconductor company Tsinghua Unigroup attempted to acquire Micron, the world's third-largest memory chip manufacturer, to expand its memory semiconductor business. However, the acquisition was blocked by the Committee on Foreign Investment in the United States (CFIUS) on the grounds that Tsinghua Unigroup was involved in the localization of advanced Chinese military weapon chips. In 2017, the US President's Council of Advisors on Science and Technology (PCAST) issued a report warning of the threats posed by China's semiconductor rise and proposed strategies for the US to secure long-term competitive advantage (PCAST, 2017).

Following the inauguration of the Trump administration, the containment of China's semiconductor rise intensified through a wider range of measures. After President Trump took office, the Office of the United States Trade Representative (USTR) initiated Section 301 investigations, raising concerns about China's unfair trade practices and its support for advanced technologies. Through various reports, the Trump administration indicated its perception that China's technological innovation was achieved through aggressive mergers and acquisitions of US companies or illicit technology transfers, posing a threat to US advanced industries, constituting economic aggression, and that China's advanced technological development was closely linked to advanced weapons development, thus posing a military threat (USTR 2018, White House 2018). Under the premise that US technology, illicitly and unfairly obtained by China, was being used to undermine US national security and interests, the National Defense Authorization Act for Fiscal Year 2019 (NDAA) enacted laws such as the Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA). These measures aimed to thwart such activities through various means, including tariffs, export restrictions, regulation of Chinese acquisitions of US companies, and intellectual property lawsuits.

The first measure the US employed to curb China's semiconductor rise was to prohibit the acquisition of US semiconductor companies by Chinese firms and capital. Following the failure of Tsinghua Unigroup's acquisition of Micron in 2015, this trend continued with the thwarted acquisition of US-based Fairchild Semiconductor by China's China Resources Group in 2016, the rejection of the acquisition of US semiconductor design firm Lattice Semiconductor by Chinese private equity firm Canyon Bridge in 2017, the failed acquisition of semiconductor test equipment company Xcerra, and the thwarted acquisition attempt of US chipmaker Qualcomm by Chinese-Singaporean company Broadcom in 2018 (Yoon Dae-gyun 2018). The Committee on Foreign Investment in the United States (CFIUS) played a role in the repeated failures of Chinese companies to acquire US firms. Based on the Section 301 investigation, the FIRRMA was included in the NDAA and signed into law by the President in August 2018, aiming to restrict Chinese investment in key US industries or technologies. This law expanded CFIUS's review scope and strengthened its authority, allowing it to suspend transactions under review or investigation. Consequently, attempts and successful acquisitions of US advanced technology companies by Chinese capital significantly decreased (Bae Young-ja 2020). The continuous failure of acquisitions of US companies possessing technologies needed by Chinese firms in the semiconductor sector has created significant obstacles for Chinese companies that have actively pursued technological innovation through mergers and acquisitions.

The most significant tool for the US to curb China's semiconductor rise was export controls. In December 2017, US-based Micron filed a lawsuit in a US court against China's state-owned semiconductor company Fujian Jinhua Integrated Circuit Co., Ltd. (JHICC) and Taiwan's UMC, which was building a joint venture factory with JHICC, for patent and trade secret infringement. In response, UMC filed a counterclaim in a Chinese court requesting a halt to Micron's product sales (Lee Soo-hwan 2018). The Fuzhou Intermediate People's Court in China ordered a ban on the sale of 26 Micron products, including DRAM and NAND flash memory, within China. In August 2018, the Trump administration confirmed the imposition of high tariffs of 25% on Chinese imports, with many items related to 'Made in China 2025,' including semiconductors and related equipment, as well as electronics, railway vehicles, and chemicals, being included. In October 2018, the US Department of Commerce determined that the memory chip manufacturing by China's state-owned semiconductor company JHICC posed a 'significant threat' to the survival of US military system chip suppliers and added JHICC to the Entity List, restricting the export of semiconductor design software and equipment. Consequently, US companies required special approval from US authorities to export to JHICC. The prohibition of exports from US semiconductor equipment manufacturers like Applied Materials to China caused significant disruptions to the technological innovation of memory semiconductor companies such as JHICC and Hefei Changxin, ultimately leading JHICC to temporarily halt DRAM chip production.

In 2019, the US Department of Commerce announced trade restrictions on a total of 114 companies related to Huawei on two separate occasions. This put Huawei in a critical situation where it could no longer use Intel and Qualcomm semiconductor chips or Google's Android on its mobile phones. Huawei's semiconductor design subsidiary, HiSilicon, faced limitations in its technological development as it could not upgrade the semiconductor automated design tools provided by US companies. In May 2020, the US announced an expansion of the scope of products subject to export control regulations to include products manufactured using US technology and software, thereby restricting supplies to Huawei and related Chinese companies (DOC 2020). In other words, a more stringent trade restriction measure was announced, requiring foreign companies using less than 25% of US software or technology to obtain US permission to trade with Chinese companies. By controlling the design software and equipment segments of the semiconductor value chain, the US not only halted supplies to Chinese semiconductor companies but also required foreign companies utilizing US technology, such as TSMC, to obtain permission for transactions with Chinese semiconductor companies. This was an attempt to slow down the technological innovation of Chinese semiconductor companies and exert greater pressure through chokepoints.

2) China's Response

In response to the US's containment of its semiconductor technological innovation, China has, in principle, emphasized the importance of continuous dialogue and negotiation, while simultaneously working to improve its domestic intellectual property system and considering countermeasures against the US. For instance, in June 2019, China reiterated in its 'Position Paper on China-US Economic and Trade Consultations' that negotiation is the sole solution to issues between the two countries (关于中美经贸磋商的中方立场). In response to the US's renewed strengthening of export controls in May 2020, a spokesperson for the Chinese Ministry of Commerce urged the US to "immediately cease its wrong actions" and stated that "China will take all necessary measures to resolutely protect the legitimate rights and interests of Chinese enterprises" (Yonhap News, May 19, 2020). The Global Times warned of strong retaliation if the US implemented such measures, threatening retaliatory actions against US companies such as Qualcomm, Cisco, Apple, and Boeing (Global Times, May 16, 2020). Companies frequently mentioned in China's retaliatory measures against the US include Apple, Qualcomm, Boeing, and Cisco, which are highly dependent on the Chinese market. The Chinese government pressured these companies by suggesting they could be included in the 'Unreliable Entity List' or subjected to sanctions or investigations under the Cybersecurity Law.

Although China had predicted 2019 to be the inaugural year for its memory semiconductor production with the advancements of three companies—Fujian Jinhua, Changxin Memory, and Hefei Changxin—the initial export controls disrupted its memory semiconductor rise plan. The second round of sanctions, which led foreign companies like TSMC to halt exports of high-performance semiconductor chips, has caused difficulties for Chinese companies such as Huawei. To date, China has not directly retaliated against the US's various measures but has instead focused on improving its intellectual property and cybersecurity systems, which are frequently cited by the US, and strengthening its own scientific and technological innovation capabilities. China has made progress in intellectual property protection, arguing that royalty payments increased from $3.4 billion in 2011 to $7.2 billion in 2018, thereby defending its intellectual property system.

Despite recognizing the various difficulties caused by US actions, China continues to invest in and innovate in the semiconductor sector, focusing on memory, foundry, fabless, and downstream semiconductor equipment industries. The growth of Chinese memory semiconductors and foundries has faced significant challenges due to US sanctions. Ironically, the US's actions have further strengthened the resolve of the Chinese government and companies to pursue semiconductor dominance, leading to increased investment. In April 2018, shortly after the US imposed sanctions on telecommunications equipment provider ZTE, President Xi Jinping visited Wuhan Xinxin Semiconductor Manufacturing Co., Ltd. (XMC), a subsidiary of China's Tsinghua Unigroup, emphasizing that semiconductors are the 'heart for realizing the Chinese Dream' and encouraging continuous technological innovation efforts. Currently, there are few ways for China to acquire necessary semiconductor technologies outside the US sanctions within the global semiconductor value chain, forcing China to focus on its own technological development efforts. Instead of immediate responses or actions, China has adopted a 'New Long March' strategy, setting long-term goals, improving systems, adjusting industrial policies, and strengthening indigenous technological development.

Through the first phase of the National Integrated Circuit Industry Investment Fund in 2014, China invested approximately $243 billion in the semiconductor industry. Subsequently, it has been investing aggressively through the second phase of the investment fund since 2019. At the Two Sessions held in May 2020, an investment plan of approximately $530 billion was announced for new infrastructure (新型基础设施建设), which serves as the foundation for future new industries such as 5G, AI, IoT, big data centers, and electric vehicle charging stations. As semiconductors are the foundation for new infrastructure construction, investment in the semiconductor sector will continue to increase. Indeed, the Chinese government has shown interest in aggressive investment and external talent recruitment to accelerate semiconductor technological innovation, with active investments raising concerns about over-investment in the semiconductor sector by both the Chinese government and private entities. While US sanctions on Chinese companies are expected to significantly delay China's semiconductor rise, considering China's domestic market demand, which accounts for nearly half of global semiconductor demand, and the Chinese government and companies' determination for localization and their investment capacity, there is no reason for China to abandon continuous innovation in the semiconductor sector, and China's semiconductor rise will continue.

3. Outlook for the US-China Semiconductor Conflict

1) Biden Administration's Semiconductor-Related Measures

Following the inauguration of the Biden administration early this year, there has been considerable interest in its stance on containing China's advanced technologies. On February 24, President Biden signed an executive order directing a 100-day supply chain review for four critical items, including semiconductors, batteries, rare earth elements, and pharmaceuticals. This executive order also requires the submission of reports within a year on supply chains in the defense, health, information technology, energy, transportation, and agriculture sectors. The supply chain review specifically aims to identify sources of critical materials, manufacturing capabilities, and supply chain threats and resilience. Examining recent US government actions and reports from government-related agencies provides insight into the direction of the Biden administration's technology policy, including its approach to containing China's semiconductor industry. Let's look at some of the significant recent measures and reports related to semiconductors.

First, the 'Chips for America Act,' enacted as part of the National Defense Authorization Act (NDAA) earlier this year, is noteworthy. This act, introduced in the US Congress last year, aims to rebuild the US semiconductor manufacturing base and secure future competitive advantages through large-scale federal funding investments. It legalizes various provisions, including substantial investments of $30-50 billion to support the expansion of the US domestic semiconductor manufacturing base, offering various tax credits to investing companies, establishing a National Semiconductor Technology Center, imposing domestic production requirements, and organizing consortia involving private companies led by the Department of Defense.

Second, the recent report by the US National Security Commission on Artificial Intelligence (NSCAI) contains important information. NSCAI is a bipartisan organization established under the National Defense Authorization Act of 2018, chaired by former Google CEO Eric Schmidt and vice-chaired by former Under Secretary of Defense Robert Work, advising the President and Congress on national AI strategy. Viewing artificial intelligence as a game-changer for future national security, the commission emphasizes that the US must secure a leading position and released its final report in mid-March, containing its findings and recommendations, exceeding 750 pages. The report highlights the importance of semiconductor technology in determining AI superiority and strongly advocates for strengthening intellectual property rights, export controls, and regulations on foreign investment within the US. It also proposes annual R&D support of $32 billion for AI research until 2026, the establishment of a National Technology Foundation, an increase in the size and number of National AI Research Institutes, the establishment of a Multilateral AI Research Institute (MAIRI) to jointly counter China in AI technology, and the development of a technology alliance (Emerging Technology Coalition) involving Australia, Canada, France, Germany, Italy, Japan, New Zealand, South Korea, and the United Kingdom.

Third, the semiconductor export controls implemented by the Trump administration on several occasions have been maintained by the Biden administration. In early April, the US Department of Commerce added a total of seven Chinese supercomputer operating entities and related companies to the entity list, citing their use in activities contrary to US national security. This marks the first sanctions imposed by the Biden administration against China and includes four Chinese national supercomputing centers and the China Aerodynamics Research and Development Center (CARDC), which is under the People's Liberation Army and responsible for developing hypersonic weapons. Phytium, a design company known for supplying semiconductor chips to these supercomputers, is among those added. TSMC, which manufactures and supplies chips designed by Phytium, announced its immediate compliance with the export controls.

Fourth, on April 12, a virtual meeting was held at the White House with semiconductor CEOs, chaired by National Economic Council (NEC) Director Brian Deese and National Security Advisor Jake Sullivan. President Biden participated in this meeting, which included executives from Intel, Alphabet, GM, Ford, Micron, TSMC, and Samsung, holding up a wafer, a material for semiconductors, and stated that the US has no reason to delay semiconductor investment any longer and will continue to lead through the end of the 21st century. The meeting reportedly addressed the current shortage of automotive semiconductors and discussed building a stable semiconductor supply chain and increasing investment in the US semiconductor manufacturing sector.

2) US Semiconductor Sector Goals, Strategies, and Tools

Synthesizing the recent series of reports and US government actions, the Biden administration's goals in the semiconductor sector appear to be to maximally delay China's semiconductor rise, enhance the stability of the US semiconductor supply chain, and maintain a technological gap with China. In particular, the US is employing various strategies focused on maximizing delays in China's entry into advanced foundry and memory sectors while securing domestic semiconductor manufacturing capabilities. The US semiconductor strategy can be broadly summarized into three pillars: direct engagement and pressure on China, building alliances, and strengthening domestic manufacturing capabilities.

First, the primary tool the US is using to directly engage and pressure China is export controls. To date, the US Department of Commerce has restricted the export of advanced semiconductor equipment and software to China, and the Biden administration recently added companies designing semiconductor chips for supercomputers to the entity list. Furthermore, the NSCAI report proposes adding immersion argon fluoride (ArF) lithography equipment and deep ultraviolet (DUV) equipment, in addition to extreme ultraviolet (EUV) lithography equipment already under regulation, to the list of export-controlled items to widen the gap with China, drawing significant attention. ArF equipment, while less advanced than EUV equipment used for producing 5-nanometer class system semiconductors, is a key advanced equipment for producing 16-nanometer class semiconductors. Currently, China's SMIC's main products are 55nm and 65nm, but it has recently begun producing 14nm products, classified as advanced fine processes, and plans to mass-produce 12nm by the end of this year (Yonhap News, January 28, 2021). While the world's top two foundries, TSMC of Taiwan and Samsung of South Korea, are already mass-producing sub-5nm fine process semiconductors, ArF equipment is used in the mass production of memory products such as 3D NAND flash and 10-nanometer class DRAM at Samsung Electronics and SK Hynix's production facilities in China. The expansion of US export controls targets companies like SMIC and could further slow down China's semiconductor rise.

US export controls have impacted major semiconductor companies such as Fujian Jinhua, HiSilicon, and SMIC, delaying China's semiconductor rise. Fujian Jinhua, established with the goal of mass-producing DRAM, has temporarily suspended its operations due to its inability to procure equipment under US sanctions. HiSilicon, facing US EDA export controls, is unable to design high-performance chips or outsource their manufacturing to TSMC. SMIC has also experienced disruptions in the supply of equipment necessary for high-performance semiconductor manufacturing. Major Chinese semiconductor companies, including Tsinghua Unigroup, a representative company for China's semiconductor self-sufficiency, have declared defaults, facing significant difficulties.

On the other hand, US semiconductor design, equipment, and software companies, such as Intel and Qualcomm, have suffered significant revenue losses due to the blockage of exports to China, the most dynamic market in the global economy. Companies like Apple, which produce their goods in China, have also faced pressure. US equipment manufacturers such as Applied Materials, KLA, and Lam Research, whose exports to China reportedly account for 20%, 17%, and 15% of their respective revenues, are experiencing decreased sales due to reduced exports to China. In 2021, Qualcomm's smartphone semiconductor shipments to China decreased by 48.1% year-on-year, and its market share in China plummeted from 37.9% in 2019 to 25.4% last year. This boomerang effect has also sparked discussions within the US about a 'small yard high fence' strategy, advocating for limiting export controls to areas directly related to national security while implementing strict regulations. Furthermore, questions are being raised about how long and to what extent export controls can be sustained, as prolonged implementation can lead to corporate fatigue, accumulated losses, and increased costs, even if they are temporarily effective.

Second, unlike the previous Trump administration, the Biden administration is utilizing bilateral and multilateral cooperation to counter China, as highlighted by the NSCAI report's emphasis on the need for technology alliances in advanced technology sectors such as AI and semiconductors. The invitation of Korean companies like Samsung, Taiwanese company TSMC, and Dutch company NXP, in addition to US companies, to the White House semiconductor CEO meeting underscores the reality that the US must build its semiconductor supply chain in collaboration with these companies.

The US is currently strengthening bilateral and multilateral cooperation in the semiconductor sector. For example, within the multilateral cooperation framework of the Quad, critical and emerging technologies have been included as key areas of cooperation alongside climate change and vaccines, and the 'Quad Critical and Emerging Technology Working Group' has been formed, with discussions on the stability of advanced technology supply chains being a major agenda item. Various bilateral cooperation initiatives are also underway. Following their summit, US President Biden and Japanese Prime Minister Suga announced the 'New Competitiveness and Resilience Partnership (CoRe),' a comprehensive cooperation framework encompassing new technologies, economy, pandemic response, and climate. Specifically, the economic cooperation plan includes exchanges in information and communication technology (ICT), including semiconductor supply chain cooperation, and collaboration on 6G mobile communications. Following the US-South Korea summit, both countries recognized their complementary roles as optimal partners for building stable supply chains, particularly crucial in the wake of the COVID-19 pandemic. They announced strengthened investment and supply chain cooperation in sectors with the greatest expected synergy, namely semiconductors, batteries, and the bio-industry. Taiwan's semiconductor company TSMC has also ceased transactions with HiSilicon, which supplied chips to Huawei, and under the Biden administration's sanctions, TSMC has actively complied with US sanctions, including suspending cooperation with China's CPU design company Phytium, demonstrating close cooperation with the US. As requested by President Biden, TSMC has agreed to build new semiconductor fabrication lines in Arizona, far exceeding its initial planned investment of $12 billion.

As the formation of US semiconductor alliances materializes, uncertainties are increasing in the relationships between the US and major semiconductor manufacturers in South Korea and Taiwan. Chinese semiconductor companies are facing difficulties in procuring materials, equipment, and high-performance semiconductor chips, and the possibility of China being excluded from the advanced semiconductor supply chain is growing. However, to date, the strengthening of cooperation between Korean and Taiwanese companies with the US has not led to a complete severance of cooperation with China. Samsung and TSMC are continuing their investments in China while also investing in the US. However, as US-China relations further deteriorate, the space for simultaneous investment in both countries is expected to shrink. On the other hand, although China's production capacity and technology in the semiconductor supply chain are weak, it possesses the largest and most dynamic market. It is difficult for the US and its allies to abandon the Chinese market, posing challenges to the robust maintenance of technology alliances that exclude China.

Given the significant role of the Chinese market in the current semiconductor supply chain, it is crucial to understand the extent to which the US's technology alliances envision US-China decoupling. Reports from NSCAI and the Semiconductor Industry Association (SIA) argue that pursuing complete self-sufficiency in the global value chain, including the semiconductor sector, is neither desirable nor feasible for the US. In fact, a report by Boston Consulting Group predicted that US-China decoupling in the semiconductor sector would lead to a roughly 30% reduction in the size of the US semiconductor industry. The SIA report emphasizes that complete self-sufficiency is not a solution, estimating that if all semiconductor manufacturing currently sourced externally were produced domestically, the total production costs would increase by approximately 35-65%. The deep interdependence that has formed between the US and China over decades within the global value chain, forming the foundation of both economies, means that artificial separation at an excessive level would impose immense costs and cause damage to both countries and the global economy as a whole.

Third, unlike the Trump administration, the Biden administration is showing greater interest in and actively seeking to invest in strengthening domestic technological innovation and manufacturing capabilities. In addition to the 'Chips for America Act' passed earlier this year, the 'American Foundries Act,' which aims to support semiconductor manufacturing facilities, is under discussion. Furthermore, the 'Endless Frontier Act,' which proposes a significant increase in US basic research funding and support for cultivating talent in science and technology, has been introduced and is undergoing hearings. While containing China is important, there is a consensus between the White House and Congress that strong measures are necessary to maintain US technological superiority.

While increased investment in the US domestic semiconductor manufacturing sector may not directly harm China's semiconductor sector, it could serve as a crucial opportunity for the US to widen the technological gap with China and continue to lead the Fourth Industrial Revolution by enhancing and stably supplying its top-tier semiconductor manufacturing capabilities. If sustained investment in basic research and manufacturing capabilities begins under the Biden administration, it could yield significant positive effects. However, considerable challenges are anticipated in the effective and appropriate allocation of increased federal funding and in achieving tangible results. For example, major US technology organizations, including the CTIA (Cellular Telecommunications Industry Association), have expressed concerns that focusing government investment in semiconductor manufacturing on specific processes, such as those for automotive semiconductors, could lead to supply constraints for other industrial semiconductors and cause overall market distortions. They have conveyed these concerns in a letter to the White House and Congress, suggesting that flexible supply chain management would be a more desirable solution. Furthermore, strengthening basic research and manufacturing capabilities requires sustained efforts over a period extending beyond the Biden administration's four-year term to yield visible results, making future US domestic politics a significant variable.

3) China's Semiconductor Sector Goals, Strategies, and Tools

Amidst the US strategies of export controls, alliance building, and strengthening domestic manufacturing capabilities, and the various tools employed, China has limited options for response. China's goals in the semiconductor sector are to ensure a stable supply of advanced semiconductor chips, continuously upgrade its position in the value-added manufacturing and equipment segments of the semiconductor value chain, catch up with South Korean and Taiwanese companies, and achieve domestic production of advanced semiconductors. Semiconductors have surpassed crude oil as China's top import, and securing advanced semiconductor manufacturing capabilities is crucial for China's ascent as a leading manufacturing nation. Indeed, 'Made in China 2025' set a goal for China to achieve 70% domestic production of semiconductors.

To achieve these goals, China has historically employed strategies of acquiring foreign advanced technology through official and unofficial channels, as well as large-scale domestic investment. Particularly, given the weak domestic technological foundation, China has rapidly enhanced its semiconductor technological innovation capabilities by acquiring foreign companies with advanced semiconductor technology, transferring technology from companies investing within China, and recruiting top talent. However, due to US export controls and alliance strategies, Chinese semiconductor companies have been denied access to foreign advanced equipment and software, and outsourcing the manufacturing of advanced semiconductors to foreign companies has become difficult. Consequently, Chinese semiconductor companies have been forced to close down or have experienced a rapid decline in their pace of technological innovation. The inability to produce advanced electronic products moves them further away from their goal of becoming a leading advanced manufacturing nation.

Meanwhile, China has also considered retaliatory measures against the US. As US export controls have intensified, the Chinese Ministry of Commerce and the Ministry of Science and Technology revised and announced the 'Catalog of Technologies Prohibited or Restricted from Export by China' (《中国禁止出口限制出口技术目录》) in August 2020. This catalog designates 53 new technologies as subject to export controls, particularly strengthening restrictions on technologies where China has achieved a significant degree of self-reliance through its own R&D efforts, including artificial intelligence, quantum technology, drones, 3D printing, biotechnology, and construction machinery. Furthermore, in September 2020, China announced plans and related regulations for establishing an 'Unreliable Entity List' of blacklisted companies, based on its Foreign Trade Law, Anti-Monopoly Law, and National Security Law. However, if this measure is implemented, it could also harm Chinese companies trading with these entities, not just US companies, making its strict enforcement unlikely.

Given that the US currently dominates the semiconductor design, equipment, and software sectors, there are few ways for China to acquire advanced semiconductor technology outside the scope of US sanctions. In response to US sanctions, China has not taken immediate actions but has instead adopted a 'New Long March' strategy, setting long-term goals, improving systems, adjusting industrial policies, and strengthening indigenous technological development. While China has not ceased its efforts to acquire foreign advanced technology and talent, with official access restricted, China will inevitably focus more on semiconductor technological innovation through domestic investment. At the opening of the National People's Congress in March 2021, China finalized its '14th Five-Year Plan and Long-Term Goals for 2035 (Key Points).' The document, comprising 19 chapters, includes goals and directions for various fields such as economy, society, environment, education, and national defense for the construction of a 'socialist modern country,' with a strong emphasis on scientific and technological self-reliance (自立) and self-strengthening (自强). The draft of the 14th Five-Year Plan includes plans to strategically foster eight key industries: new materials such as rare earths, robotics, aircraft engines, new energy vehicles and smart cars, agricultural machinery, major technical equipment such as high-speed rail, large LNG carriers, and the C919 large passenger aircraft, advanced medical equipment and new drugs, and the Beidou satellite navigation system. The mid-to-long-term goals for 2035 include achieving breakthroughs in seven major fields: artificial intelligence, quantum computing, semiconductors, brain science, genetic and biotechnology, space and deep-sea exploration, and clinical medicine and healthcare.

While China has strived to expand its external influence through the Belt and Road Initiative, it is difficult to utilize this as a supply chain for its own advanced industries in response to US containment. Instead, China is focusing its efforts on building a 'red' supply chain within China, completing the value chain for semiconductors and related components and equipment by domesticating advanced components and equipment and expanding the domestic market.

4. Mid-to-Long-Term Outlook for the US-China Semiconductor Conflict

With US technological superiority continuing through 2030, the US-China conflict in the semiconductor sector is expected to persist intensely, with China's semiconductor technology steadily improving despite US containment efforts. The ongoing investments by South Korean and Taiwanese companies in advanced foundries within the US will enable domestic manufacturing of advanced semiconductors. Synergies between the stable supply of advanced semiconductors and the US's superior design and manufacturing technologies will lay the foundation for the US to lead the Fourth Industrial Revolution. Currently, the US supplies 80% of semiconductor equipment, materials, and software and possesses major design companies such as Intel, AMD, Qualcomm, and Nvidia. The US's strong position in the semiconductor industry is expected to continue for the foreseeable future. The US will complement its relative weakness in advanced manufacturing through cooperation with Korean and Taiwanese companies and increased domestic investment, building a foundation for more stable growth. However, for this optimistic scenario to materialize from the US perspective, cooperation and investment must be sustained over a long period. For instance, it takes two to three years for facilities capable of manufacturing 5nm chips to be built and operational in the US by TSMC or Samsung, and by that time, 5nm may no longer be the most advanced chip. Furthermore, continuous investment and attention are required for the substantial funding planned by the US government for advanced semiconductor manufacturing facilities to materialize and yield results.

Despite the US's solid dominance in the semiconductor sector, China is also expected to see its semiconductor technological innovation capabilities gradually strengthen, narrowing the semiconductor technology gap with the US over time. This is due to large-scale, continuous investments in the semiconductor sector, fueled by its rapid economic recovery post-COVID-19; the establishment of the dual circulation policy, expanding the domestic market; the continued recruitment of overseas talent through official and unofficial channels despite US sanctions; and the ongoing technological accumulation in mid-to-low-end semiconductor chips being continuously upgraded.

The export controls initiated by the Trump administration have inflicted significant damage on major Chinese semiconductor companies, delaying China's semiconductor rise. The goal of achieving 70% semiconductor self-sufficiency by 2025 is unattainable; instead, it is predicted that China will achieve approximately 20% self-sufficiency by 2025. However, the Chinese government and companies are responding to the current situation by actively fostering and supporting domestic companies that can replace US-supplied equipment, materials, and software. For example, YMTC, which focuses on the NAND sector, continued production even during the lockdown of Wuhan, where the company is located, receiving an exemption from the lockdown. The company has hired over 800 personnel to meticulously disassemble all material, equipment, and process steps required for chip production and to find companies, either within China or overseas, that can replace the US-dependent components. Reports indicate that this process is leading to the discovery and nurturing of numerous Chinese companies that were previously overlooked due to their low technological capabilities. Many Chinese semiconductor equipment companies, such as Kingstone, Naura Technology, and AMEC, are experiencing rapid revenue growth and attracting attention. Although the technological capabilities of China's domestic equipment and material suppliers are still at a low level, continuous efforts toward technological innovation are underway, driven by surging domestic demand.

The US-China semiconductor conflict is expected to evolve into a fierce technological confrontation between the two countries, with China's continuous technological innovation, around 2040. Amidst the US's ongoing containment strategy and alliance building, and China's independent technological development efforts, a certain degree of decoupling in the advanced semiconductor supply chain is inevitably expected, despite the deep interdependence between the US and China in the global semiconductor value chain. Currently, the US is actively attempting to separate the supply chain through export controls and alliance strategies, aiming for China's exclusion. China, under US sanctions, is compelled to build its semiconductor supply chain centered on cooperation with its domestic companies and some foreign firms. As this process continues, and China's technology accumulates over the long term, the US and China will move towards solidifying their respective domains in advanced technology sectors, including semiconductors. As conflicts and competition between the two countries intensify on the global political and military stage, the US and China will continue to compete to reshape advanced technologies and industries in ways that benefit them and to proactively establish the paradigm of their respective industries. With the acceleration of technological development leading to the continuous creation of new industries, the war over advanced technologies between the US and China will persist, and the technological gap between the two countries is expected to narrow further. In the case of the US, its economic growth dynamism may be relatively lower compared to China, or its standing in advanced technology sectors may decline from its current position. China, empowered by its vast data, applied technologies, and large-scale market, will likely lead in areas such as artificial intelligence, space exploration, and energy technology, gradually enhancing its standing in advanced technology sectors.

Some argue that while the US-China semiconductor conflict is causing significant damage to China in the short term, it will lead to an 'Innovation Winter' in the long term, reducing productivity and increasing costs in the semiconductor industry, thereby dampening the drive for innovation in both China and the US (Houser 2020). While strategic competition between the US and China in the semiconductor sector is unavoidable for the time being, there are clear reasons for both China and the US to refrain from extreme confrontation and engage in negotiation and dialogue.

The US must acknowledge that no measure can completely halt the technological innovation of Chinese companies. Instead, it should narrow the focus of its pressure tactics against China to preventing illicit technology theft or addressing actions that clearly violate core national interests. Such measures will gain international credibility when they are based on multinational norms, such as WTO trade rules and export control regimes, and respect market principles. Furthermore, recognizing the importance of China as a market for its own semiconductor industry, the US should consider partially easing export controls, particularly in areas where its own semiconductor companies have suffered damage. In the long term, the US must accept the inevitability of some degree of technology leakage and actively support the strengthening of competitiveness in vulnerable areas of its domestic semiconductor industry and the expansion of its talent pool.

China must acknowledge that US technology and markets are crucial for its economic recovery and growth. It should refrain from aggressive challenges and illicit technology theft that could excessively provoke the US, and persuade the US that just as China is important to the US, the US is also an important partner to China. Furthermore, China needs to improve its domestic intellectual property system and government subsidies for state-owned enterprises, which have long been criticized, to align with international standards, thereby enhancing its image as a country that adheres to international norms. China must also continue to invest in its own semiconductor technological innovation and strive to strengthen its innovation capabilities from a long-term perspective.

In essence, the US and China must seek compromise centered on keywords such as interdependence, respect for market principles, adherence to multilateral norms, and institutional management of conflict. While competition between the two countries in advanced technology sectors like semiconductors is unavoidable, they have also formed deep interdependence within the global value chain developed over decades, which has been the source of their economic prosperity. Recognizing this, both nations must approach the issue with a shared sense of responsibility, understanding that breaking this interdependence would impose immense costs and cause damage not only to both countries but also to the global economy as a whole, based on 'Principled Interdependence' (Kennedy 2020). Economic pressure or measures against the other party must be conducted transparently in accordance with applicable international norms, only when there are clear reasons that severely undermine market principles or pose a direct threat to national security. Furthermore, both countries should refrain from creating an environment of excessive competitive overheating, maintain channels for managing conflict, and above all, focus on strengthening their respective domestic innovation capabilities and compete fairly. By doing so, they can contribute to strengthening technological innovation in the global semiconductor industry and to the recovery of the world economy. ■

< References >

Kim Soo-jin. 2019. “Status and Impact Assessment of China's Semiconductor Industry Promotion Policies.” Woori Financial Research Institute.

Bae Young-ja. 2011. “US-China Cooperation and Conflict: Cases of Semiconductor Industry and Internet Regulation.” Journal of Cybercommunication Studies.

Bae Young-ja. 2019. “US-China Technological Hegemony Competition: Focusing on Semiconductors, 5G, and Artificial Intelligence.” East Asia Institute.

Bae Young-ja. 2020. “Foreign Direct Investment Regulation and National Security: A Focus on the US Case.” Journal of International Area Studies.

Yeon Won-ho et al. 2020. *Analysis of the Hegemonic Competition Between the US and China Over Advanced Technologies*. Korea Development Institute.

Yoon Dae-gyun. 2018. “The Failure of Broadcom's Acquisition of Qualcomm: Background and Implications.” TechM.

Lee Eun-young. 2018. “China's Semiconductor Rise and Future Prospects.” KDB Future Research Institute.

Jeong Hee-cheol et al. 2020. *Paradigm Shift in Global Value Chains (GVC) and the Future of Korean Trade*. Korea Institute for International Economic Policy.

Boston Consulting Group. 2020. “How Restricting Trade with China Could End US Semiconductor Leadership.”

Brown, Clair and Greg Linden. 2016. How Crisis Reshapes the Semiconductor Industry. MIT Press.

Cheng Ting-Fang and Lauly Li. 05/05/2021. US-China tech war: Beijing's secret chipmaking champions: How Washington's sanctions boosted China's semiconductor sector. Nikkei Asia.

Ernst, Dieter. 2016. “China's new role in the semiconductor industry.” East-West Center, University of Hawaii.

Houser, Kimberly. 2020. “The Innovation Winter Is Coming: How the U.S.-China Trade War Endangers the World.” San Diego Law Review 57(3).

Kennedy, Scott. 2020. “Washington’s China Policy Has Lost Its Wei.” CSIS.

Lewis, James. 2019. “China’s Pursuit of Semiconductor Independence.” Washington DC: CSIS.

Morris P. R. 1990. A History of the World Semiconductor Industry. IEE History of Technology Series.

Saif M. Khan and Carrick Flynn. 2020. “Maintaining China's dependence on democracies for the advanced computer chips.” Brookings

SIA(Semiconductor Industry Association). 2020. 2020 State of the U.S. Semiconductor Industry.

USTR(Office of the U.S. Trade Representative). 2018. “Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974.” https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.

Weiss, Linda. 2014. America Inc.? Innovation and Enterprise in the National Security State. Cornell University Press.

VerWey, John. 2019. “Chinese Semiconductor Industrial Policy: Past and Present.” Journal of International Commerce and Economics

https://www.usitc.gov/journals/jice_home.htm.

White House. 2018. “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World.”Office of Trade & Manufacturing Policy Report. https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf.

■ Author: Bae Young-ja Professor, Department of Political Science and International Relations, Konkuk University. She graduated from the Department of Diplomacy, Seoul National University, and received her Ph.D. in Political Science from the University of North Carolina. Her main research areas include international political economy, political economy of foreign investment, science and technology and international politics, internet and international politics, and science and technology diplomacy. Her major papers include “International Political Hegemony and Technological Innovation: A Case Study of US Semiconductor Technology” (2020), “The Rise of Chinese Internet Companies and Internet Sovereignty” (2018), “US-China Hegemonic Competition and Science and Technology Innovation” (2016), and “Science and Technology and Public Diplomacy” (2013).

• Managed and Edited by : Pyo Kwang-min Senior Research Fellow, EAI
  
  Contact: 02 2277 1683 (ext. 203) I ppiokm@eai.or.kr