China has identified semiconductors as one of a handful of critical technologies it seeks to master for both economic growth and regime security, driven by a mixture of ambition and insecurity stemming from its diplomatic isolation and perception of a closing global order resulting from Xi Jinping's policies.

No country in the world has self-sufficiency in semiconductors; semiconductors are the poster child for a globalized, hyper-specialized economy. Even TSMC, the world leader in semiconductor manufacturing, relies on lithography machines from the Netherlands, chemicals from Japan, and design software from the United States, making China's pursuit of semiconductor self-sufficiency a dead end despite its massive financial investment.

China absolutely has the right to develop its economy, but not at the expense of U.S. jobs, industry, and security

The US and allied countries should work with nations seeking to rise up the value chain—including India, Malaysia, Mexico, and Brazil—to prevent China from dominating mature node semiconductor technology, with a convergence of interests between the US and those nations in ensuring that China does not obtain coercive economic leverage.

China's model of economic development was derived originally from the Soviet Union's planned economy, and China decided very early on to develop positions in key industries important for national security and economic development by using state planning mechanisms to invest huge resources to create whole industries from the ground up, an approach used since the 1950s.

Massive corruption consumed hundreds of billions of dollars in Chinese semiconductor subsidies, with concessional loans, free land, and subsidized electricity provided to facilities and fabrication plants that were never actually built, with money disappearing into opaque channels, as documented in scandals reported even in the Chinese press.

Within the past 20 years, there was a vigorous discussion in China about whether state involvement in the economy was helpful or harmful to economic development, with evidence suggesting that the most productive private firms in China outperformed state-led enterprises, but this debate has become less active in recent years.

The lion's share of the semiconductor market is in mature nodes, not advanced nodes, producing semiconductors that appear in all commodity products from kitchen appliances to cars to wearables and other items, and are the ones that caused Detroit to shut down during COVID due to shortages of very cheap parts.

China has pursued semiconductor self-sufficiency for 25-30 years, and export controls would not represent anything new but merely an intensification of ongoing efforts that China has doubled down on several times already with diminishing returns, so the medium-term likely outcome is that if allies and partners (Taiwan, Japan, Korea, and Europeans) cooperate with U.S. export controls, China will fail to reach its goals in advanced semiconductor manufacturing nodes.

To attract semiconductor manufacturing investment from major firms in other countries, the U.S. and allies must ensure that intellectual property regimes are robust and that technology transfer is well-protected so that companies do not lose control of their proprietary technology, and firms will not invest or establish facilities in a country without these assurances.

The United States once had all the integrated components and inputs for semiconductor manufacturing (equipment, materials, design software, skilled labor) domestically, but when the U.S. lost semiconductor manufacturing capacity to Asia, it also lost the supply chains and ecosystem inputs, which Korea and Taiwan then reassembled in their home countries largely through industrial policy and mercantilism.

The U.S. should use onshoring for semiconductor parts essential for defense production, and should not be reliant on China to supply components for military hardware, as relying on a potential adversary for defense-critical inputs is unacceptable, though the U.S. has supply chain vulnerabilities in military systems because no one has managed the supply chains well.

Most semiconductor-producing nations, including the United States, are encountering workforce issues, but China is having a very hard time developing indigenous talent including engineers, managers, and PhD-level scientists who can set standards on production lines with minuscule tolerances to ensure quality and yield, which requires internalized knowledge similar to how a master chef knows recipes through experience.

There is a level of clientelism in the Chinese political system in which state power directs capital rather than market-driven forces, allowing people with political power to divert capital to their own factions and patronage networks, which inhibits the kind of efficient allocation of capital needed for an industry evolving at a breathtaking pace.

There is a tremendous concern about intensifying or increasing U.S. vulnerability to China at the lower end of the semiconductor market (mature nodes), affecting medical devices, refrigerators, toasters, and all of those things.

China's most productive and fastest-growing firms have been those most private in orientation and most market-oriented, responsive to market forces and capital allocation, whereas China's semiconductor industry has been dominated by state-led and state-owned enterprises that have burned through phenomenal amounts of capital with only modest goals met, achieving nothing on the scale of what China had hoped.

Chinese firms are seeing U.S. export restrictions as handwriting on the wall and are actually investing abroad in Southeast Asia to get around potential U.S. restrictions, and Southeast Asia sees this as a win.

China identified semiconductors as a technological priority in 1956 and developed its first integrated circuit in 1965, but due to the cultural revolution, political instability, and poverty fell far behind its East Asian neighbors in developing a competitive semiconductor industry.

China has used economic leverage over semiconductor and other markets as a political tool to reward and punish countries based on their foreign policy alignment, including whether they open offices for Taiwanese economic and cooperation bodies, demonstrating willingness to weaponize market dominance for political goals.

There are significant reasons why Southeast Asian countries have not become major semiconductor manufacturing nations already and why capacity flowed to China, requiring more than subsidies to overcome these barriers.