Semiconductors at Stake: Balancing Innovation, Security, and Global Stability

By IndraStra Global Editorial Team

Cover Image Attribute: Image by TyliJura from Pixabay

The global semiconductor industry, a linchpin of modern technology, has become a central battleground in the escalating technological and geopolitical rivalry between the United States and China. At stake is not just the production of advanced chips that power everything from smartphones to artificial intelligence systems, but also the broader balance of economic power, national security, and global stability. The story of this rivalry, exemplified by China’s Semiconductor Manufacturing International Corporation (SMIC) and the U.S.’s stringent export controls, reveals a complex interplay of ambition, innovation, and unintended consequences. While China strives for semiconductor self-sufficiency, the U.S. seeks to maintain its technological edge, yet both nations’ strategies carry profound risks and trade-offs that could reshape the global technological landscape for decades.
China’s pursuit of semiconductor independence is driven by both necessity and ambition. The nation’s largest chipmaker, SMIC, founded in 2000 by Richard Chang, a Taiwanese-American with experience at Texas Instruments, has become a symbol of Beijing’s determination to reduce reliance on foreign technology. SMIC’s progress, notably its production of seven-nanometer chips for Huawei’s Mate 60 smartphone in 2023, demonstrates significant technological strides. “SMIC was already producing and selling 7nm chips no later than July 2022 and potentially as early as July 2021, despite having no EUV machines,” notes Gregory Allen, highlighting SMIC’s ability to adapt older deep ultraviolet lithography techniques to achieve advanced nodes. This achievement, accomplished under the weight of U.S. sanctions, clearly reflects China’s resilience. Beijing’s $48 billion investment fund, aimed at fostering talent, startups, and domestic manufacturing equipment, further signals a comprehensive strategy to build a self-reliant semiconductor ecosystem. “China’s strategy aims not only at chip design but also at building a comprehensive semiconductor ecosystem,” an industry insider explains, emphasizing the long-term vision of circumventing external dependencies.
However, SMIC’s progress must be contextualized against the global leaders, Taiwan’s TSMC and South Korea’s Samsung, who are advancing to three- and five-nanometer technologies. “While SMIC has managed seven nanometer chips, its rivals TSMC and Samsung are advancing to five and three nanometer technologies,” industry experts observe, underscoring the technological gap China must bridge. SMIC’s production capacity is also constrained, limited to “low tens of thousands” of wafers monthly compared to the “hundreds of thousands” planned, a direct consequence of U.S. export controls that restrict access to critical equipment like extreme-ultraviolet lithography machines from ASML. These limitations highlight the dual-edged nature of China’s progress: remarkable given the constraints, yet insufficient to challenge the global leaders in scale or sophistication.
The U.S. export controls, initiated in 2020 and expanded under the Biden administration in 2022, 2023, and 2024, are designed to curb China’s technological ascent. By targeting SMIC and Huawei, these measures restrict access to advanced chips, manufacturing equipment, and even U.S. technical expertise. The designation of SMIC as a military end-user in September 2020 and its addition to the Department of Commerce’s Entity List in December 2020 reflect Washington’s view of China’s semiconductor ambitions as a national security threat. The Foreign Direct Product Rule, which extends U.S. jurisdiction over foreign-made products incorporating American technology, has further tightened the noose, with updates in December 2024 expanding unilateral authority to potentially cover “all of the SME made by any company on Earth,” according to Gregory Allen. These controls aim to limit China’s ability to deploy advanced AI systems and other critical technologies, with proponents like Anthropic CEO Dario Amodei arguing that transformative AI capabilities could emerge within two to three years, necessitating a short-term advantage. “A large part of export controls, if they work, is just that the amount of AI that can be run in China is going to be much lower,” Nathan Lambert asserts, emphasizing the strategic intent to constrain China’s computational capacity.
Yet, these controls have sparked a paradox. Far from crippling China’s semiconductor industry, they have accelerated its drive for self-sufficiency. “Washington is increasingly realizing the unintended consequences of these export controls,” an industry analyst notes, pointing to China’s galvanized efforts to develop indigenous capabilities. The 2023 release of Huawei’s Mate 60 Pro, powered by SMIC’s seven-nanometer Kirin 9000s chip, prompted U.S. Congressman Mike Gallagher to claim that “this chip likely could not be produced without US technology and thus SMIC may have violated the Department of Commerce’s Foreign Direct Product Rule.” However, as Ben Thompson observes, “The existence of this chip wasn’t a surprise for those paying close attention: SMIC had made a 7nm chip a year earlier.” The revelation triggered an “overwrought reaction in Washington D.C.,” leading to further restrictions, but it also highlighted China’s ability to innovate under pressure. Holger Mueller of Constellation Research Inc. remarked that the sanctions “might have had the effect of sending China’s chip-making industry into overdrive,” a sentiment echoed by the efficiency innovations seen in Chinese AI firms like DeepSeek.
DeepSeek’s release of the R1 reasoning model in January 2025, competitive with OpenAI’s o1, exemplifies China’s ability to optimize within constraints. Trained for approximately $5-6 million—far less than the billions typically required by U.S. firms—DeepSeek’s model leveraged advanced techniques to overcome bandwidth limitations in Nvidia’s H800 chips, with “20 of the 132 processing units on each H800 specifically to manage cross-chip communications,” as noted in the analysis. “Money has never been the problem for us; bans on shipments of advanced chips are the problem,” DeepSeek CEO Liang Wenfeng admitted, underscoring the real barrier posed by export controls. Yet, as Nat Friedman questions, “Is it in fact the case that, if you impose sanctions on China so that they can’t get as much compute, then all you do is give them this constraint to optimize against, which says, ‘How can we squeeze every little bit of IQ out of every flop that we’ve got?’” This optimization, while impressive, comes at a cost, diverting top engineers from other tasks, but it demonstrates China’s capacity to adapt and innovate, potentially narrowing the gap with Western competitors.
The U.S. strategy, while rooted in security concerns, faces significant challenges. Skeptics like Ben Thompson argue that if transformative AI advancements take a decade or more, “China will win because of these restrictions long-term, unless AI does something in the short-term,” as Dylan Patel warns. By denying revenue to U.S. firms like Nvidia, which faces reduced demand for its chips in China, the controls may inadvertently weaken American companies while spurring Chinese competitors. “Nvidia would likely prefer not to be bound by export controls,” Gregory Allen notes, though “there are some elements of the new export control package that actually help Nvidia by hurting its Chinese competitors.” The economic impact extends beyond chipmakers, with wafer-fabrication-equipment suppliers claiming a potential “death spiral,” though SemiAnalysis counters that “the 24 months under export controls have been among the best in history for American WFE suppliers,” as demand shifts to non-Chinese customers.
The geopolitical ramifications of this standoff are equally profound, particularly for Taiwan, home to TSMC, the world’s leading chipmaker. “TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles,” Ben Thompson observes, highlighting Taiwan’s vulnerability. U.S. export controls, by reducing China’s dependence on TSMC, may diminish Taiwan’s economic deterrence against Chinese aggression. “One of the risks of cutting China off from TSMC is that the deterrent value of TSMC’s operations is diminished,” Thompson warns, noting that a disruption due to war would have less impact on China if its domestic capacity grows. For the U.S., however, a conflict disrupting TSMC’s production would be catastrophic, as Taiwan manufactures not only cutting-edge chips but also commodity chips critical to “everything from cars to stereos to refrigerators.” This asymmetry heightens the stakes, as “a hot war, which would almost certainly result in some amount of destruction to these capabilities, would be devastating,” Thompson cautions.
Allied cooperation further complicates the U.S. strategy. Effective controls require coordination with Japan and the Netherlands, home to key equipment manufacturers like ASML, which derived 29% of its 2023 sales from China. “White House officials have been discussing restrictions on capital equipment with counterparts in the Hague and Tokyo since Biden’s inauguration,” Gregory Allen reports, but “the Netherlands apparently does not yet see eye-to-eye with U.S. assessments on the need to set the threshold at 16/14 nm or smaller for logic chips.” This divergence reflects differing economic priorities and threat perceptions, undermining the multilateral approach needed for effective enforcement.
The debate over export controls hinges on timelines and predictions about AI and semiconductor development. Proponents of a short-term AI advancement scenario, like Dario Amodei, argue that “super powerful AI” could emerge by 2026-27, justifying controls to secure a U.S. lead. “To some extent, training a model does effectively nothing… The thing that Dario [Amodei is] speaking to is the implementation of that model, once trained to then create huge economic growth, huge increases in military capabilities… But that requires a significant amount of compute,” Dylan Patel explains. Conversely, those anticipating a longer timeline, like Nathan Lambert, suggest a more cautious approach, estimating transformative AI around 2030 or later. “If you’re making me give a year, I’m going to be like, ‘Okay, I have AI CEOs saying this. They’ve been saying two years for a while. (…) I need to take their word seriously, but also understand that they have different incentives,’” Lambert reflects, advocating for a balanced perspective.
Ultimately, the U.S.-China semiconductor rivalry is a high-stakes gamble with no clear winners. China’s ambitions, driven by necessity and substantial investment, signal a potential shift in global dynamics, yet its technological lag and production constraints highlight the enduring challenges. The U.S., while holding a dominant position, risks undermining its own industry and allies like Taiwan through overly restrictive policies. “China’s progress in critical technologies demands a strategic response from the US,” a technology policy expert asserts, but the optimal response remains elusive. Policymakers must understand the uncertainties, balancing the need to protect national security with the risk of accelerating China’s self-sufficiency and destabilizing global supply chains. Flexibility, multilateral cooperation, and regular reassessment are essential to adapt to evolving technological realities. As the semiconductor standoff unfolds, its outcome will not only shape technological innovation but also the geopolitical order, with consequences that will reverberate far beyond the cleanrooms of chip foundries.
With reporting by The International Center for Law & Economics and The Wall Street Journal

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