Over the past four years, the Trump administration—driven by growing concerns over China’s rise as a technological competitor and the coupling of its military and civilian industries—has ratcheted up controls on semiconductors and semiconductor manu­facturing equipment destined for Chinese end users. China hawks in the administration viewed American companies’ dominance of key semiconductor subsectors, particularly in areas such as electronic design automation and other tools needed to produce advanced semiconductors, as a key policy lever. They sought to use this lever to punish Chinese companies for specific types of activities deemed problematic by U.S. officials, and to push back on Beijing’s heavy subsidies to the semiconductor industry that some fear will distort market-driven global supply chains.

In response, Beijing, building on a series of policies in development for more than a decade, has over the past two years stepped up government support for the semiconductor industry across the board, via more traditional methods such as subsidies and through novel mechanisms designed to introduce market forces into the industry and attract domestic and foreign investment into this critical sector. This paper examines the challenges Beijing will face in trying to re­duce the dependence of Chinese technology companies on foreign sources of semiconductors and critical semiconductor manufacturing equipment, particularly from U.S. companies. For Beijing, this is a multiyear project, given China’s late entry into the industry, the huge and growing capital costs associated with manufacturing, shortages of trained personnel, and the fast-moving pace of innovation that keeps the cutting edge moving forward. Until recently, these factors have kept Chinese companies years and even decades behind leading global companies. To date, China’s progress has been highly uneven and inconsistent across the many subsectors that make up complex semi­conductor production value chains. This dynamic will continue to roil global supply chains in the semiconductor and broader technology sector over the coming decade, with significant collateral effects, both intended and unforeseen.

As this process unfolds, China will remain the largest global producer and export platform for electronic devices and systems, and thus also the world’s largest consumer of key inputs to advanced manufacturing in the semiconductor sector. China currently accounts for nearly one-third of global semiconductor demand, but domestic Chinese suppliers can provide for only around 10 percent of this demand. Chinese leaders have long been intent on reducing this gap, and much ink has been spilled designing plans and targets for domes­tic industry to begin winning market share across the many sectors that make up the semiconductor industry. Over the next decade, China will have to determine what level of domestic production of semiconductors and manufacturing equipment is appropriate and realistic, and at what cost that level can be reached.

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