In January 2017, Chinese leader Xi Jinping promised “win-win results” via a “dynamic and innovation-driven growth model”. Yet only a few months earlier, Xi had struck a different tone in a speech to an audience that included Huawei founder Ren Zhengfei, Alibaba CEO Jack Ma, top People’s Liberation Army researchers and the most of the Chinese political elite. China must focus on “getting breakthroughs in core technology as quickly as possible,” Xi said, referring first and foremost to semiconductors, the tiny chips that provide computing power in everything from smartphones to dishwashers and autonomous drones.

How did Xi envision China advancing its semiconductor capabilities?

“We must promote strong alliances and attack strategic crossings in a coordinated manner. We must attack the fortifications of basic technological research and development,” he said. “We must not only launch the assault, we must also sound the call to assemble, which means that we must concentrate the most powerful forces to act together, compose shock brigades and special forces to take assault the passes.” Former President Donald Trump was known for his “trade war” with China. But the mixing of martial metaphors with economic policy began in Beijing. Now, amid an escalating chip war, America’s semiconductor industry faces an organized assault from the world’s second-largest economy and the one-party state that rules it.

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Chinese leaders rely on a mix of commercial and military methods to develop advanced chips at home. Today, China relies heavily on foreign technology to manufacture semiconductors. It spends more money importing chips every year than it spends buying oil. As Chinese tech companies push further into areas such as cloud computing, autonomous vehicles and artificial intelligence, their demand for semiconductors will only increase. Xi’s call to “compose shock brigades and special forces to storm the passes” seemed urgent. The Chinese government has implemented a plan called “Made in China 2025”, which plans to reduce China’s imported share of its chip production from 85% in 2015 to 30% by 2025.

Since 2014, Beijing has focused on semiconductor subsidies, launching what has become known as the “Big Fund” to support a new leap forward in chips. The main “investors” in the fund include China’s Ministry of Finance, China’s State Development Bank and various other state-owned companies, including China Tobacco and municipal government investment vehicles in Beijing, Shanghai and Wuhan. Some analysts hailed this as a new model of state-supported “venture capital”, but the move to force China’s state-owned cigarette company to fund ICs is about as far from the model as it gets. operation of Silicon Valley venture capital.

If China only wanted to play a bigger role in the global chip-making ecosystem, its ambitions could have been fulfilled. However, Beijing is not looking for a better position in a system dominated by America and its friends. Xi’s call to “attack the fortifications” was not a demand for a slightly higher market share. It was about remaking the global semiconductor industry, not integrating into it. Some economic policy makers and leaders of the semiconductor industry in China might have preferred a deeper integration strategy, but leaders in Beijing, who thought more about security than efficiency, considered the interdependence as a threat. The Made in China 2025 plan does not advocate economic integration, quite the contrary. He calls for reducing China’s reliance on imported chips. The main goal of the Made in China 2025 plan is to reduce the share of foreign chips used in China.

This revolutionary economic vision threatens to transform trade flows and the global economy. The chip trade helped build the globalized economy. The dollar values ​​at stake in China’s vision to rework semiconductor supply chains are staggering. China’s chip import, $260 billion in 2017, was far greater than Saudi Arabia’s oil exports or Germany’s car exports. China spends more money each year on buying chips than on the global trade in aircraft. No product is more central to international trade than semiconductors.

It’s not just Silicon Valley profits that are at risk. If China’s semiconductor self-sufficiency campaign succeeds, its neighbors, most of whom have export-dependent economies, will suffer even more. Integrated circuits account for 15% of exports from South Korea, 13% from Singapore, 27% from Malaysia, 23% from the Philippines and 43% from Taiwan. Made in China 2025 calls all of that into question. At stake is the world’s densest network of supply chains and trade flows, the electronics supply chains that have underpinned Asia’s economic growth and political stability over the past half-century.

Made in China 2025 is just a plan, of course. Governments often have plans that fail miserably. Yet the tools China has leveraged, including vast government subsidies, state-backed theft of trade secrets, and the ability to use access to the world’s second largest consumer market to coerce foreign companies to follow through on his tenure, give Beijing unprecedented power to shape the future of the chip industry. If any country can pull off such an ambitious transformation of trade flows, it is China. Unless the United States continues to take steps to support the chip industry in the face of Chinese subsidies, it’s easy to imagine that semiconductors could be the next victim of Chinese tactics in the “chip war”. “.

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Chris Miller is the author of
Chip War: The Fight for the World’s Most Critical Technology, Visiting Scholar Jeane Kirkpatrick at the American Enterprise Institute and Associate Professor at the Fletcher School.