Will Semiconductors Supercharge the US-China Trade War?

Why History May Predict Which Country Will Eventually Control the Coveted Semiconductor Sector

Article Written by Chenyu Huang

Trade wars are not new in human history. In fact, they often result in extreme protectionism, where nations impose tariffs and other trade barriers against each other in retaliation.

Although the current tensions between the United States and China are not the first of their kind, several notable precedents can be found in history including the Opium War, the Cold War, and the trade tension between Japan and the US in the 80s, that may give us as clue as to who will eventually control the coveted semiconductor sector in 2025 and beyond.

The US-Japan Trade War

In the aftermath of WW2, the United States became the world's leading economic power with a semiconductor industry dominating the global market. After the first steps of the integrated circuit (notably as part of the Apollo 11 program) the American semiconductor industry massively outsourced labor-intensive manufacturing and wafer fabrication operations to Asia.

The “Japanese Economic Miracle” soon threatened their hegemony. By the 1970s, Japan became the world's second largest economy, with a per capita GDP almost three times that of the US. Afterwards, Japan began to challenge the US in semiconductors and telecommunications.

Faced with this threat, the Reagan administration set up a Commission on Industrial Competitiveness to limit chip imports from Japan. Following the failure of this initiative — and under pressure the industry consortium — Reagan intensified the trade war in 1987 by imposing 100 percent tariffs on all semi-conductors imported from Japan.  

The Semiconductor Sector in 2025

The semiconductor sector reached approximately $627.6 billion in 2024, marking a 19.1 percent increase compared to the 2023 total of $526.8 billion. According to John Neuffer, president and CEO of the Semiconductor Industry Association, the global semiconductor market recorded its highest-ever annual sales in 2024, surpassing $600 billion for the first time with double-digit growth projected for 2025.

Today, China remains the second-largest consumer of semiconductors. In 2023, the country’s spending on semiconductor imports exceeded that of petroleum, accounting for around 60 percent of global semiconductor costs. However, due to US sanctions, many of these imports did not go directly to China but were routed through intermediary countries. This highlights the strategic importance of semiconductors in China's national development, as many high-tech products rely on them. Consequently, the United States has imposed sanctions and other measures to curb China's growth in this sector.

However, the United States continues to lead the global semiconductor market by maintaining a dominant position of 60 percent of the total market share.

President Xi Jinping (L) and President Donald Trump (R)

Trade War in the 21st Century: The Huawei Case

The origins of the China-United States trade war can be traced back to the U.S. government's concerns over unfair competition with China, particularly in terms of intellectual property rights. The significant differences between the two countries' policies and economic strategies have in some ways made the U.S. less competitive, threatening its technological dominance.

With President Trump's tariffs dominating the headlines, the China-U.S. trade war is not a new phenomenon. In 2018, the U.S. imposed 25 percent tariffs on $34 billion worth of Chinese imports, particularly in sectors involving raw materials such as steel and aluminum.

The 2019 Huawei Sanctions: A Matter of National Security or Economic Strategy?

The semiconductor industry has become a strategic tool for countries to impose sanctions on their competitors. A notable example is the United States' sanctions on China, particularly targeting Huawei. In 2019, the U.S. government justified these measures by claiming that Huawei posed a significant threat to national security. However, concerns about Huawei's activities can be traced back to 2011, when the U.S. began suspecting the company of supplying advanced devices to the Chinese military. Consequently, the U.S. restricted Huawei's access to its market, banning the import of Huawei products.

By 2019, Huawei's dominance in 5G technology had become apparent, further intensifying the sanctions. In 2017, Huawei held a 9.8 percent market share in the global 5G sector, which surged to 31.8 percent by 2018. Recognizing this rapid growth, the U.S. government sought to curb Huawei's advancements in 5G development through sanctions aimed at cutting off its access to critical semiconductor components.

In response, the Chinese government accelerated efforts to develop a self-sufficient semiconductor ecosystem. A cornerstone of this strategy is "The Big Fund," a government-guided investment initiative established to foster innovation and production within China's semiconductor industry. This fund aims to reduce reliance on foreign suppliers and establish a robust domestic supply chain capable of sustaining the nation's technological ambitions.

This situation underscores the critical importance of the international semiconductor supply chain. As seen in Russia's struggles during the technology race against the U.S., a weak or inaccessible supply chain can significantly hinder technological progress. In China's case, U.S. sanctions have targeted key suppliers such as ASML and TSMC, which advanced chips and equipment are vital for producing cutting-edge semiconductors. Without access to these resources, China faces substantial challenges in achieving technological independence.

Ultimately, the semiconductor industry is not just a battlefield of innovation but also a strategic lever in global geopolitics, shaping the competitive dynamics between nations. 

China’s Big Fund: The Search for Technology Independence

The Chinese government had already begun efforts to achieve technological independence from the U.S. before the trade war formally escalated. In 2014, the Chinese State Council authorized the Integrated Circuit Fund (ICF), spearheaded by major corporations such as Joint Communication, China Tobacco, China Mobile, SGAC, CETC, and SINO-IC. With an initial fund of approximately $17 billion USD, the goal of the ICF was to achieve self-sufficiency in semiconductor production and reduce reliance on foreign technology. 

Phase I (2014–2019)

The first phase of the ICF (2014–2019) involved an investment of $19.5 billion USD. The investment distribution included 67 percent in fabrication, 17 percent in design, 10 percent in packaging, and 6 percent in materials. By 2018, the fund had pledged $17 billion USD and delivered around $14.5 billion USD, surpassing expectations.

Phase II (2019–2023)

The second phase of China's Big Fund, with an allocation of approximately $28.8 billion USD, significantly influenced the semiconductor industry. By 2023, the fund had strategically invested in over 38 companies, focusing primarily on essential segments such as semiconductor equipment and materials. This investment strategy underscores the Chinese government's commitment to achieving self-sufficiency amidst global trade restrictions.

Phase III (2024–2039)

The third phase of China's Big Fund (2024–2039) focuses on advancing AI technology and new storage technologies, such as Phase Change Memory (PCM) and Magnetoresistive RAM (MRAM). The total projected investment for this phase is $47 billion USD.

Impact on Other Countries

Since the launch of China's Big Fund, one of its major geopolitical and economic effects has been its influence on the global semiconductor supply chain.

In October 2024, John Moolenaar, chair of the Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, issued a statement titled "TSMC Chips to Huawei: A Catastrophic Failure of Export Control Policy." The statement revealed that chips manufactured by TSMC for one of its customers had been found within Huawei’s ecosystem, raising concerns about potential loopholes in the current export control framework.

Taiwan collaborates closely with the U.S. government, and sanctions that prevent major industry players from doing business with China — especially Huawei — could further disrupt the already fragile international supply chain.

The Chip 4 Alliance

In March 2022, President Joe Biden proposed the creation of the Chip 4 Alliance, a coalition between the United States, Taiwan, South Korea, and Japan. This alliance aims to secure semiconductor supply chains and align the interests of key industry players. However, doubts remain about the project’s true objectives, as it appears to be an effort to isolate China on a global scale.

South Korea, in particular, faces challenges due to its reliance on semiconductor materials from Japan. During a trade dispute in 2019, Japan imposed stricter controls on the export of critical materials to South Korea, disrupting its semiconductor supply chain. Consequently, South Korea sought alternative suppliers, including China, highlighting the complexities of global supply chain dependencies.

Another complex issue is the ongoing competition between Taiwan and South Korea. These two countries compete in several areas, particularly in the fabrication and mass production of 2-nanometer chips, where Samsung and TSMC are engaged in a high-stakes technological race.

In the global foundry market, TSMC dominates with 60 percent of the total revenue, while Samsung, holding 11 percent, ranks as the second-largest player. However, Samsung has been striving to close the technological gap with TSMC. Despite this, in the latest competition for 2-nanometer production, TSMC remains ahead. Nevertheless, with the growing demand for 2-nanometer chips, major tech companies like Nvidia and Qualcomm are likely to source from both manufacturers, including Samsung.

Conclusion

In sum, the US-China trade war demonstrates the weaponization of technology into an effective tool to control a country's economic state and growth, sometimes even that of multiple nations. Semiconductors are the heart of modern technology and the "oil" of the 21st century.

Whoever dominates chip production holds the power to shape the future of all technology including AI, machine learning, the space race, and more.

With the ongoing debates about tariffs and AI applications, the semiconductor industry has become the most critical sector influencing technological advancements.

Yet despite U.S. sanctions and tariffs, Chinese companies will always find ways to circumvent restrictions, ensuring their continued development in the semiconductor field. How America responds will determine just which country will eventually dominate the space.

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