Chips War 2025
It is the new Great Game. During the 19th century, British and Russian empires contested Central and South Asia. The British wanted to keep Russia from threatening the jewel in its imperial crown, India. Today, the West wants to keep China from threatening its control over chips.
Virtually every electrical appliance requires a chip. Chips power the artificial intelligence revolution. They are so important, in fact, that China spends as much money each year on importing them as it does on importing oil.
Some positive examples of Western semiconductor collaboration exist. US companies such as Intel and GlobalFoundries have received European Union (EU) subsidies, while BAE Systems of the United Kingdom (UK) became the first company announced to receive funds under the US CHIPS and Science Act.
Yet no coherent framework ties together allied industries. Western nations may end up competing against each other rather than working together. The US and Europe must work with like-minded democratic Asian allies, principally Taiwan, South Korea, and Japan.
No single nation today can control the complex chip-making chain. Each region has its strengths and weaknesses. Asians manufacture. Americans design. Europeans build machines that enable production. China today is pouring billions into its chip-building ambitions, fueling economic and military modernization. Together, the West can beat China. Divided, it could fail.
Here are three recommendations to win.
- First, build joint defense. Align on tariffs and targeted bans for selected semiconductor-dependent industries such as drones, electric vehicles, and smartphones.
- Second, double down on the West’s main strength: innovation. Instead of trying to outspend China on subsidies (a losing battle), focus on research and development, boosting start-ups, and coordinating with like-minded allies South Korea, Japan, the UK, and Canada.
- Third, avoid handing out subsidies to a few big companies that are failing to keep up with the pace of change. Rather, direct help at new, nimble companies.
The West invented semiconductors. Bell Labs, Hewlett Packard, and Bletchley Park, to name a few, created major breakthroughs. Bell Labs invented the transistor, which made radios portable and consumer electronics affordable. Texas Instruments created the integrated circuit. Intel built the first processor. Today, innovation continues to be the West’s stronghold. US and UK companies Nvidia, Qualcomm, and Arm lead chip design.
But the West suffers from key weaknesses. One is supply chain vulnerabilities. The COVID-19 pandemic exposed strong dependencies on China, particularly in electronics manufacturing. Chinese capacity, if unchecked, could hollow out legacy semiconductor production.
Another problem is cash flow. The semiconductor industry is specialized and costly. The price tag on new semiconductor fabrication plants is projected to rise over 30% by 2026 to between $35 to $43 billion.
China has exploited these Western weaknesses. Just as with green tech, it identifies key strategic markets and then overruns them by fair means or foul, leveraging a vast toolbox. It hands out massive state subsidies to specific strategic projects, outspending the West. It exploits cheap labor (or at times, forced labor), engages in extensive industrial espionage, and makes targeted acquisitions of Western start-ups.
A good example concerns security cameras. Beijing-backed HiSilicon, the semiconductor subsidiary of Huawei, and surveillance camera firm Dahua and Hikvision. By 2015, 60% of global surveillance cameras contained a HiSilicon chip. In 2019, the US sanctioned these companies on security grounds. Europe, however, did not.
Smartphone processors represent another example of the Chinese playbook. The UK semiconductor company Arm is the global leader in embedded processors. Around 90% of the world’s smartphones contain an Arm chip. China is the company’s largest market, contributing up to a quarter of its revenue. As a condition for Arm to sell to China, Beijing took control of its Chinese operations with negligible compensation for Arm shareholders. It now holds exclusive rights to distributing Arm’s intellectual property to smartphone makers within China.
In response to Chinese actions, both Europe and the US have developed their own offensive and defensive strategies. Yet their strategies both reinforce and conflict with each other.
When chip supply chains crumbled during the COVID-19 pandemic, the Joe Biden administration responded with the CHIPS and Science Act. The goal was to refocus on domestic manufacturing capacity and double down on innovation. On the defensive side, the US imposed strict export controls to limit Chinese access to US-made chips. On offense, the CHIPS and Science Act called for a staggering $52.7 billion in subsidies, with the biggest chunks going to manufacturing ($39 billion) and research and development (R&D) ($13.2 billion).
Practical difficulties ensued. The first subsidy was delivered in only December 2023, though Biden rushed through an additional $53 billion in subsidies after the election. A shortfall of 300,000 engineers and 90,000 skilled technicians are predicted by 2030. The US needs more science, technology, engineering, and mathematics students to go into semiconductors.
Future policy looks unclear. On the campaign trail, Trump argued that targeted tariffs would be more effective at boosting American manufacturing than subsidies. A CHIPS and Science Act 2.0 looks unlikely. Once the R&D funding runs out, the industry will have to sustain itself.
The US deployed extensive export controls to limit China’s access to cutting-edge US chips technology. These measures have proven difficult to enforce, especially on other allies. European companies fear losing a large, growing Chinese market. Export controls force Chinese companies to become more independent, which could be counterproductive. Increasingly, the latest Chinese smartphones and electric vehicles use Chinese-made chips.
The EU has responded with its own European Chips Act, which aims to achieve a 20% global market share in semiconductor production by 2030. While this goal is clear, the path to achieve it is not. Europe remains a net importer of semiconductors, consuming approximately 20% of global production but manufacturing only 9%. The €43 billion ($44.3 billion) in promised public investments is unlikely to fundamentally change these market dynamics.
The EU, while slower than the US to deploy export controls, is becoming tougher. In July 2024, the European Commission launched an industry consultation to address China’s expanded production of legacy chips.
The EU and the US must continue collaborating to ensure these subsidies remain mutually beneficial while avoiding a counterproductive subsidies war. Here are ideas for a joint strategy.
- Impose selective tariffs: Rather than focusing on export controls, which have proven difficult to enforce, allies should shift to other options, particularly targeted tariffs on strategic products using Chinese chips.
The drone market represents a good example totaling $4.4 billion in revenues for 2024. It is of strategic importance, essential to agriculture, surveillance, mapping, and the military. While drones do not depend on any chip in particular, they require specific printed circuit boards (the structure surrounding a chip that allows it to function). The EU and US could put a 100% tariff on any drone with a Chinese-assembled printed circuit board. Crucially, the tax should be on the final product, forcing companies to “design out” the Chinese components required for printed circuit board assembly.
The US and EU should investigate “component tariffs” on products not based on where they are assembled, but on where their components are produced. Current tariffs apply only to the location of final assembly, allowing many Chinese products to evade the fee because they are assembled in Vietnam and elsewhere.
- Bolster innovation: It is a losing battle trying to outspend China. Rather, allies should strategically invest in their own start-ups and double down on their main strength: innovation. For drones, the EU should incentivize drone start-ups. American and European institutions need to collaborate — Belgium’s Imec, France’s CEA-Leti, and the Albany NanoTech Complex already work together and their ties should be strengthened.
The UK must be brought back into the fold. Pre-Brexit, the UK attracted chip investment with lower taxes than most of the EU, and employed many EU nationals in its start-ups. Brexit severed this partnership. It is only slowly being repaired. In 2023, the UK returned to the EU’s Horizon Europe program, which is providing over €100 billion ($103 billion) in research spending from 2021 through 2027.
Other democracies should be embraced. Canada, for example, has birthed 100 home-grown semiconductor companies. Taiwan enjoys nearly 50% market share in manufacturing. South Korea’s Samsung and Hynix are global leaders in memory chips, rivalled only by US company Micron. Japan is the only country that touches every link of the supply chain from design down to packaging.
- Diversify: Both Europe and the US should diversify the companies that receive incentives. It will not help either of them to prop up “lame ducks,” starting with Intel. Although the US champion is struggling, trying to be both a designer and manufacturer of chips, Washington is pumping more cash because of its “strategic importance.”
The United States and Europe need a Plan B, even if it means counting on Asian companies. Taiwan’s TSMC plant is building plants in Arizona and Germany.
It takes years to design and manufacture a new semiconductor. Both the West and China are intent on winning the global chips war. It is too early to say who will win. Success or failure will do much to determine the future of the 21st century.
Christopher Cytera is a non-resident senior fellow with the Center for European Policy Analysis’s Tech Policy Program. He is a technology business executive with more than 30 years’ experience in semiconductors and electronics.
Clara Riedenstein is a project assistant with the Center for European Policy Analysis’s Tech Policy Program.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.