But beneath China’s strength lies a crucial vulnerability: Nearly all of the chips powering the country’s most advanced projects and institutions are inexorably tied to US technology. “The entire industry can only function with American input,” says Miller. “In any facility that is remotely close to the very latest, there are American tools, American design software and American intellectual property all the way through.” Despite decades of efforts by the Chinese government and tens of billions of dollars spent on “indigenous innovation,” the problem remains acute. In 2020, China’s domestic chip makers supplied only 15.9 percent of the country’s total demand. As recently as April, China spent more on semiconductor imports than on oil.
America has fully understood its dominance over the global semiconductor market in 2019, when the Trump administration added Huawei, a major Chinese telecommunications maker, to the entity list. While the listing was ostensibly a punishment for a criminal offense — Huawei was caught selling sanctioned material to Iran — the strategic benefits immediately became apparent. Without access to US semiconductors, software and other essential supplies, Huawei, the world’s largest producer of telecommunications equipment, struggled to survive. “Huawei’s sanctions immediately pulled back the curtain,” said Matt Sheehan, a fellow at the Carnegie Endowment for International Peace who studies China’s tech ecosystem. “Chinese tech giants run on chips that are made in America or have deep American components.”
Export control laws have long been seen as a dusty, secretive backwater, a far cry from the actual exercise of US power. But after Huawei, the United States found that its primacy in the semiconductor supply chain was a rich source of untapped leverage. Three firms, all based in the US, dominate the chip design software market, which is used to order the billions of transistors that fit on a new chip. The market for advanced chip-making tools is similarly concentrated, with a handful of companies able to claim effective monopolies on essential machines or processes – and almost all of these companies are American or rely on American components. At every step, the supply chain is through the US, US allies or Taiwan, all of which operate in a US-dominated ecosystem. “We ran into it,” says Sheehan. “We started using these weapons before we really knew it How to use them.”
In May 2020, the Trump administration tightened the screws further, this time by subjecting Huawei to a previously obscure provision of the export control law, the Foreign Direct Products rule. Under the FDPR, foreign-made items are subject to US controls if they are produced using US technology or software. It’s a sweeping assertion of extraterritorial power: Even if an item is made and shipped outside of the United States, never crosses country borders, and contains no U.S.-origin components or technology in the final product, it can still be considered a U.S. product. Good.
For Huawei, the application of the FDPR meant that the company was virtually cut off from semiconductors. “That rule subjected all semiconductors on the planet to U.S. law, because every foundry on the planet used at least some U.S. tooling,” said Kevin Wolf, a former deputy secretary of commerce for export administration at the BIS. “Having one US tool and 100 non-US tools in your fab taints every wafer that moves across the line.”
According to the market analysis firm Canalys, Huawei was the largest smartphone seller in the world in 2020, with a market share of 18 percent, beating even Apple and Samsung. Huawei’s revenues fell by almost a third in 2021 and the company sold one of its smartphone brands to stay afloat. By 2022, the share had fallen to 2 percent.
The October 7 rules represented the sum total of everything US policymakers had learned about semiconductors, supply chains and US power. The measures were announced as an “interim final rule”, meaning they took effect immediately – a direct response to a perceived weakness in Huawei’s controls. “There was a lot of attention before the Huawei rule went into effect, and they spent the time before that stockpiling,” said Peter Harrell, a former senior director for international economics at the National Security Council who was involved in drafting of the rules of 7 October. . “That was a tactical lesson – that you need the element of surprise.” More importantly, the United States had learned that hobbling one company, no matter how big, simply created space for new competitors to enter. A more comprehensive approach would be needed. “The Trump administration went after companies,” says Allen, the CSIS expert. “The Biden administration is going after industries.”
