• Washington is desperate to prevent Beijing from become a leader in the making of semiconductor chips
  • Beijing has allocated about $120 billion in financing and other incentives for its domestic semiconductor industry
  • China is the world’s largest importer of chips

Semiconductors – a crucial component in the manufacture of electronic devices, including smartphones and countless other applications – are at the heart of a worsening trade war between the U.S. and China.

President Donald Trump and Washington are desperate to prevent Beijing from becoming a leader in the making of semiconductor chips – as the Chinese Communist Party embarks on a five-year plan to further develop China’s domestic technology industry, including its chip sector. Beijing has allocated about $120 billion in financing and other incentives for its semiconductor industry – with a goal of supplying 70% of China’s domestic demand for chips in five years (up from about 40% now).

In August, Wei Shaojun, vice-chairman of the China Semiconductor Industry Association, said “China is the world’s largest importer of chips” and is likely to import $300 billion worth in 2020.

Among other things, the U.S. Commerce Department has barred chip companies from supplying China’s mobile phone giant Huawei Technologies by imposing export restrictions. Trump has also slapped export restrictions on Semiconductor Manufacturing International Corp., China’s biggest chipmaker, as well as on Fujian Jinhua Integrated Circuit Co.

The U.S. is also worried that if China becomes a prominent chipmaker, it will use that technology to increase government surveillance and repression activities.

Chips also play a key role in the military – another area of concern for anti-China hawks in the U.S. “[Chips] are the fundamental basis of our qualitative military advantage, from missiles to radars to submarines,” a former U.S. official told Bloomberg.

The semiconductor industry generated sales of $412 billion last year, Bloomberg reported, making it one of the most important industries in the world. Now national governments are seeking to guard and upgrade their own chipmaking abilities.

In June, the U.S. Congress unveiled “The CHIPS for America Act,” a bill that establishes incentives to support U.S. semiconductor manufacturing, research and development.

Specifically, the bill offers an income tax credit for semiconductor equipment or manufacturing facility investments through 2026.

“We’re in a new world where governments are more concerned about the security of their digital infrastructure and the resiliency of their supply chains,” said Jimmy Goodrich, vice president of global policy at the Semiconductor Industry Association. “The techno-nationalist trends gaining traction in multiple capitals around the world are a challenge to the semiconductor industry.”

However, the key player in the global semiconductor industry is neither the U.S. nor China – but rather the Asian island nation of Taiwan, which manufactures about 70% of all chips. (China, of course, rejects Taiwanese sovereignty and claims it as its own territory).

In fact, Taiwan Semiconductor Manufacturing Co. (TSM) reigns as the world’s dominant chipmaker and is a key supplier to smartphone maker Apple (AAPL). TSM is now planning to make the most advanced chips ever.

TSMC’s founder Morris Chang even said his company has become the “turf that all geopolitical players want to secure.”

But Jan-Peter Kleinhans, director of the technology and geopolitics project at Stiftung Neue Verantwortung, a Berlin-based think tank, said that “there’s no region in the world that can proclaim strategic autonomy in semiconductors. Take out any of these players and the value chain falls down.”

A recent report from the Atlantic Council, a Washington-based think tank, said sanctions by the U.S. against China with respect to semiconductor technology was short-sighted and self-defeating.

“[These sanctions] will incur costs for U.S. companies while failing to ensure them supply chain independence,” the Council warned. “U.S. policy instead must coalesce around a more nuanced effort to protect U.S. technology and national security while leaving room for an essential industry to continue flourishing without sudden disruptions.”