US-China chipping away at each other

Bipartisan support in the US for restrictions on transfer of advanced semiconductor chip technology to China is expected to result in incremental curbs. Markets have, of course, reacted to the latest iteration of US concerns in characteristic fashion – punishing chipmakers across Europe and Asia. But the fundamental factors shaping the global semiconductor industry are already in play. Nvidia, the largest maker of chips used in AI, has seen its China business slump from a year ago as Joe Biden restricted their exports last October. Intel is the biggest beneficiary of the 2022 US CHIPS Act, as it invests heavily at home to restore its edge over Taiwan’s TSMC, the world’s largest contract chipmaker. The US restrictions were unveiled by Donald Trump, and irrespective of the presidential election outcome, fragmentation of the global semiconductor industry has an element of inevitability to it.

The US has a long haul ahead in regaining its comparative advantage in semiconductors. It needs to make substantial investment in research to enhance its technological superiority. It must rebuild domestic conductor manufacturing that has been outsourced to Asia. And it needs to build a global supply chain to feed its chip-making capacity. These concentric objectives involve a large realignment of policy, from education funding in the US to investments in South America and deeper trade relations with Asia. China will, meanwhile, keep chipping away at the US intellectual property moat, offer appealing alternatives to near-shoring, and pull Asia into a tighter manufacturing embrace. Semiconductor superiority is nowhere near a done deal for the US.

The AI race is likely to intensify Sino-US competition over chips. American companies need access to data that China collects to train their AI models. Tesla is betting on Baidu for self-driving cars. Google and Microsoft data centres in China could provide access to restricted Nvidia chips. A full-blown trade war over semiconductors is still rhetoric on the US side.