The semiconductor industry, the world’s second most profitable sector, has made further inroads in the bilateral competitive dynamic to become a focal point in the US-China strategic rivalry. Over the past decade, the US has both ramped up domestic production and expanded export restrictions on advanced chips, signalling a bipartisan consensus that semiconductors are critical to national security.
However, the Trump administration may have taken a few steps which could reshuffle the fundamental metrics of the chip war between the US and China. Trump’s decision to allow the H20 chips to China after an initial clampdown could reduce the US’s AI lead over China. Washington’s warming up to China, while doubling down on tariffs with US’ allies and partners, could very well initiate a new scramble among other countries to reduce dependence on the US, including on semiconductors. And Taiwan, a leading US ally and arguably the most important node in the semiconductor supply and value chains, is facing new heat from Washington.
This reshoring push by Trump marks a shift from Biden’s multilateral strategy. Trump has passed the One Big Beautiful Bill (OBBB), a budget package that has extended the CHIPS Act’s advanced manufacturing tax credit from 25 percent to 35 percent and removed per-project caps for semiconductor ventures, incentivising companies such as Intel, Nvidia, Micron, and Taiwan’s PSMC to produce fabs domestically. Trump’s OBBB is framed to augment domestic semiconductor production and enhance trade protection, even at the expense of certain social programs such as Medicaid, food stamps, and student loans, as well as a projected ballooning federal deficit from US$2.8 to 3.3 trillion.
In 2022, the US banned Nvidia from exporting A100 and H100 chips to China, citing national security concerns. In response, Nvidia designed downgraded versions, the A800 and H80 chips, to comply with US regulations. When these were also restricted, Nvidia developed the H20 chip to serve the Chinese market. In April 2025, Trump expanded these export controls to require special licenses to distribute the H20 chip. The Nvidia CEO warned that these restrictions could lead to US$15.5 billion in lost revenue and argued they would hurt US businesses more than China.
After months of lobbying, the Administration reversed this ban and approved new export licenses for Nvidia to distribute to China. While industry leaders welcomed this reversal, national security analysts are expressing concern that these reversals could weaken long-term efforts to stay ahead of China in AI and semiconductor capabilities. The foundation for these moves was largely laid by the Biden administration. The 2022 CHIPS and Science Act committed US$75 billion in domestic semiconductor subsidies and R&D, prompting firms such as Micron, Intel, TSMC, Texas Instruments and Samsung to announce major fab projects, all expected to be completed within 2024-2026.
The China context
Since 2015, Xi Jinping has promoted a national strategy of self-reliance called the “Made in China 2025” Initiative, which initially aimed to increase domestic semiconductor production from 10 percent to 70 percent by 2025, later revised to 75 percent by 2030. To support this goal, China announced over US$150 billion in funding for its chip industry, more than any country at the time. Since 2022, the Chinese company, Semiconductor Manufacturing International Corporation (SMIC) has launched a 12-inch fab which targets mature processing units (28 nm and up) while planning for four more new fabs following 2025.
Additionally, Changxin Memory Technologies (CxMT) has been operating two DRAM fabs and building a third in Shanghai. However, not all efforts have been successful. “Zombie fabs”, or fabs which failed due to mismanagement and an over-reliance on government funding, have plagued China, costing investors between US$50-$100 billion dollars. Despite these setbacks and increasing US export restrictions, progress has been notable, like in 2023, when the (SMIC) surprised observers by producing 7-nanometer chips, a milestone many thought was years away. Even without access to cutting-edge technology like the EUV lithography machines, China is working to stay competitive by leveraging its mature nodes (28nm) and developing alternative architectures to optimize performance.
To counter US sanctions, China introduced its own restrictions, initially by banning Micron chips in critical infrastructure, citing national security concerns. Two months later, it restricted exports on 38 items, including gallium and germanium, key metals for chipmaking. China also controls roughly 80% of the global refining rare earth refining capacity, and has signaled intent to further restrict access to these strategic resources.
Also read: China doesn’t trust Nvidia chips—calls it US strategic trap to prolong tech dependence
Supply Chain Imperative
During the Biden administration, Washington developed multilateral relationships to strengthen ties with semiconductor countries like Japan, the Netherlands, Korea and Taiwan. The most significant of these partnerships was the Chip 4 Alliance, established to reduce reliance on China in advanced semiconductor manufacturing. Together, these countries control 82 percent of the world’s semiconductor market, and nearly 99% of memory chip production, an alliance China cannot possibly ignore.
These were supplemented by regional partnerships such as the Quad Semiconductors Supply Chains Contingency Network and the Indo-Pacific Economic Framework. The Quad introduced a Memorandum of Cooperation for the Semiconductor Supply Chains Contingency Network, aimed at reducing semiconductor supply chain risks, as well as the Quad Investors Network, which fosters multilateral investment in its semiconductor sector. For the IPEF, the US served as the chair for the IPEF Supply Chain Council, aimed at strengthening cooperation among like-minded countries and eliminating trade bottlenecks.
The natural course of the US’ supply chain imperative would have expectedly compelled the Trump administration to follow a dual approach to its chip war with China – decouple from China on one hand while seeking to partner with its allies and partners who are strong in the domain, on the other. Instead, Trump seems to be prioritising a resolutely tough onshoring in the domain above traditional alliances, which has put immense pressure on its allies, partners and friends. The uncertainty around Trump’s end goal with China has left the US’s partners scrambling for options. As such, Trump’s tariff strategy, such as his proposal to impose 30 percent tariffs, even on allied countries, has proven to be a hindrance and has infused instability and risks into the chip supply chain dynamic, complicating the US’s overall China strategy.
What could further impede Washington’s competition with China in the chip war is how it positions itself in key geographies, primarily Europe. Europe has emerged as a key theatre for developing semiconductors. European countries like the Netherlands (home to ASML) specialise in EUV technologies, as well as back-end packaging and material science. In another critical geography, Southeast Asia, U.S. companies have accelerated friend-shoring, pressing on the “Anything but China” policy.
Intel invested $7 billion in Penang in 2024, while Thailand recorded a 35 percent surge in semiconductor investment applications. Countries like Malaysia have adopted a neutral stance in the global tech rivalry, enabling Chinese firms to operate with fewer restrictions. Chinese semiconductor firms such as StarFive have established R&D centers in Penang and launched joint labs focused on AI and new materials research. These partnerships, however, remain largely private-led endeavours, and will depend on Washington’s embrace of Beijing.
To counter American export controls and supply chain realignment efforts, China has expanded its Digital Silk Road initiative, partnering with countries in Asia, Eastern Europe and the Global South. In Russia, despite officially halting operations following the war with Ukraine, Huawei was later found to be spending hundreds of millions of dollars in its Russian operations and supplying nearly 47% of Russia’s chipmaking equipment by 2023, filling gaps left by Western firms. In other parts of the Global South, China has turned to R&D agreements with Brazil through MoUs and infrastructure investments in Africa, driven by access to rare earth minerals, which are critical for chip manufacturing. Chinese companies like Huawei and ZTE are expanding their digital infrastructure projects throughout the continent, securing long-term tech dependencies.
All these considered, none of these partnerships grants China access to advanced chip technology. Most high-end chips came from Taiwanese (TSMC) and South Korean (Samsung) companies. In mid 2025, the US considered revoking authorizations that allowed TSMC and Samsung to supply their Chinese facilities with US technology, a shift from 2022 which allowed foreign manufacturers the authority to receive goods. This underscored China’s vulnerability to foreign export controls. Furthermore, China is allegedly evading export bans by reportedly purchasing chips through third-party markets or shell companies in countries like the United Arab Emirates (UAE), making export control enforcement difficult. By scaling domestic production, investing in R&D, and leveraging regional partnerships, China hopes to build a resilient chip supply chain despite Western sanctions.
As the world order matures characterised by the fourth industrial revolution and a third nuclear age, the metrics of great power competition are changing fast and AI led by chips is hurling to be a frontier domain of competition. While the repercussions of this competition is going to play out most outstandingly at the cross sections of geography and technology, how the US and China approach this competition will be immensely consequential for the forthcoming order.
Vivek Mishra is the Deputy Director of the Strategic Studies Programme, Observer Research Foundation. Yogesh Mohapatra is a Research Intern with the Observer Research Foundation. Views are personal.
This article was originally published on the Observer Research Foundation website.