By cutting off Western European producers of chipmaking technology and Taiwanese chipmakers from the world's largest market, China, and, at the same time, the Global South, which depends on China, won't we destroy the competitiveness of our chip industry?
Restricting semiconductor tech sales to China presents a core dilemma: it creates immediate revenue and market-share risks for Western and Taiwanese firms, yet proponents argue it prevents adversaries from dominating critical security technologies. This tension forces a complex balance between short-term commercial competitiveness and long-term national security.
Economic and Market Pressures
• Lost Revenue: Major Western firms lose substantial income by being cut off from China, which has historically been the world's largest commercial market for commodity and legacy semiconductors. For instance, Dutch lithography giant ASML saw massive portions of its revenue tied directly to Chinese demand.
• Market Fragmentation: Unilateral or overly broad trade curbs cause supply chain friction and market uncertainty, prompting industry groups like the Semiconductor Industry Association to warn that fractured trade relations can inadvertently hurt the long-term R&D funding capabilities of Western chipmakers.
• Global South Dynamics: As Beijing positions itself as an accessible technology and AI partner for developing nations, locking Western tech out of these emerging regions risks ceding future digital infrastructure and standards in the Global South to Chinese alternatives.
Strategic and Defensive Rationales
• National Security: Policymakers argue that unfettered access to advanced nodes and cutting-edge equipment directly accelerates military modernization, artificial intelligence dominance, and surveillance capabilities for strategic rivals.
• Catalyzing Domestic R&D: Proponents contend that protective industrial policies—such as the push to onshore advanced fabrication via major investments by firms like Taiwan Semiconductor Manufacturing Company—rebuild domestic ecosystems that were previously lost to overseas concentration.
• Spurring Indigenous Substitution: While sanctions aim to stall rival progress, they simultaneously push foreign competitors to invest heavily in domestic workarounds, meaning the long-term competitive landscape depends less on market exclusion and more on whether Western firms can maintain a rapid pace of innovation.
• That is impossible to do, if you have your main market cut off and work against you. Ruining this innovation we are ruining our defense capabilities, getting the same result that we have been avoiding getting to begin with.
“Last summer, top Chinese chip developer Huawei Technologies held a closed-door briefing for the country's technology czar to introduce its latest artificial-intelligence chips. The company laid out a plan for rivaling American behemoth Nvidia and said China could become self-sufficient in some critical areas of AI within three years.
It was just what Ding Xuexiang, a confidant of Chinese leader Xi Jinping, wanted to hear. Three years earlier, Washington had squeezed China's access to cutting-edge AI chips and the tools required to manufacture them -- a potentially crippling blow to the country's ambitions as a tech power. With Xi's blessing, Vice Premier Ding started a fevered effort to forge domestic alternatives.
Ding dusted off the same all-out approach China had used to produce its first atomic bombs, hydrogen bombs and satellites in the 1960s during a rift with the Soviet Union. He set up a committee that drew from the country's best companies and labs to form specialized teams and directed them to master the different elements of the chip supply chain.
Huawei's report on its progress gave Ding leeway to be more aggressive. He delivered a blunt warning to China's largest AI users, according to people familiar with the message: Anyone who resisted employing domestic chips was a traitor.
In May, Huawei went public with more details of its plans. The company already led the way in reducing China's dependence on foreign AI chips from 90% in 2021 to less than 60% by 2025, and the newer designs could help lower that number to 25% over the next half-decade, according to data from Morgan Stanley. What's more, Huawei said it had figured out workarounds for making near state-of-the-art silicon without leading-edge machinery.
"If the U.S. hadn't forced our country, our company and our industry into a corner, we would never have done something like this," said Huawei deputy chairman Eric Xu.
In AI software, China is giving the U.S. an unexpected run for its money. Last week, Beijing-based startup Moonshot AI unveiled a new model, Kimi K3, that closely trails the performance of top models from American AI giants OpenAI and Anthropic. Xi delivered a speech positioning China as the global champion of open, accessible AI. Shares in U.S. chip makers fell.
In hardware, however, China still lags far behind the U.S. even with Huawei's recent progress, and chip-production capacity problems are preventing Chinese companies from deploying AI as quickly as they would like. Moonshot had to pause sign-ups for premium services just two days after launching K3 because it didn't have enough computing capacity.
The outcome of China's effort to catch up has ramifications for the global economy. If the U.S. controls the top technology, the rest of the world will depend on Washington's favor to make progress in fields such as medicine, robotics and autonomous driving -- not to mention weaponry and military strategy. AI advances depend on hardware, in particular the chips that train AI models and help them tackle everyday tasks.
A record of overtaking the West in electric vehicles and batteries gives many in China confidence the country can eventually break the U.S. stranglehold on chip technology. But chips are different from other hardware. The technology is extraordinarily complex, and it is moving at a lightning pace.
"It's trying to catch up with a bullet train," said Kyle Chan, a fellow at the Brookings Institution. Even at "full China speed," he said, it's a daunting challenge.
Ding's committee bets that by hitching China's engineering prowess to the engine of state capitalism, it may eventually get there. The push has made progress that few thought possible back in 2022, when Huawei was starved of U.S. technology and Chinese AI companies depended almost entirely on Nvidia.
China's State Council Information Office didn't respond to requests for comment.
Executives at Chinese tech companies described a change in mindset over the past year. They had previously dismissed local chips as impossibly far behind. Now they think they can do business with Huawei and other local chip makers.
In memory chips, another key AI need, Chinese companies that barely had sales a few years ago can now catch a glimpse of the American and South Korean companies at the front of the pack.
Chinese chip makers aim to boost the production of advanced wafers used to make chips to more than 500,000 a month by 2030, up from roughly 30,000 last year, according to people familiar with the target. Huawei expects to ship around 1.5 million AI chips this year, roughly doubling its 2025 volume, some of them said.
Still, the technology gap remains considerable. Nvidia's top AI chip boasts around four times the computing power of Huawei's best offering. China's AI computing power stood at around 14% of the U.S. in 2025, research house Bernstein estimated. Despite China's aggressive build-out, Bernstein expected China would remain significantly behind the U.S. through 2030.
Under Ding's watchful eye, Chinese companies are using hundreds of thousands of Nvidia chips to stay within striking distance of their American rivals for now.
In 2022, the Biden administration instituted export curbs that aimed to slow China's progress in AI for military uses. They blocked China from purchasing advanced AI chips and tightened access to the top-end, ultraviolet lithography machines and other tools needed to produce them.
Communist Party leaders saw the controls as a threat to its capacity to boost economic growth and compete globally with the U.S. They didn't yet grasp the promise of large language models like ChatGPT, which OpenAI had just released, but they saw dominance of AI in its many forms as critical to China's security and the party's legitimacy.
The chip committee headed by Ding, a 63-year-old who trained as a metalworking engineer, kicked off in early 2023. It identified critical fields -- such as advanced manufacturing and packaging, high-bandwidth memory and chip-design software -- and recruited top teams in each. They also started deciding which companies would get access to the nation's limited supplies of chips.
China's earlier efforts to build a self-reliant domestic chip industry had been marred by corruption and hobbled by bureaucratic mandates. Officials were determined to correct those mistakes. The government encouraged chip-related companies to pursue stock-market listings so they could raise more capital and be subjected to market discipline.
The Ding plan had a rough first year. Dozens of homegrown AI chips were available on the market, but a government-backed research lab told Premier Li Qiang that they were "very unstable," according to state media. None were good enough to train large-scale models.
Beijing worried about the reliance of the country's AI developers on Nvidia. Chinese engineers were locked into Nvidia's software tools, which could barely be used with domestic chips. The American chip giant had tailored products for China that sat right at the performance limit set by U.S. export controls. Chinese firms also bought banned Nvidia chips from middlemen who routed shipments through other countries.
China's central economic planning agency brought in several academics and chip experts to help run the project.
The turning point came last year. Huawei readied a new chip, the Ascend 950, that surprised early testers with its performance.
Around that time, Nvidia Chief Executive Jensen Huang flew to Beijing with approval from President Trump to sell a downgraded chip designed for China called the H20. In Washington, Commerce Secretary Howard Lutnick said on television that letting China buy Nvidia's "fourth-best product" would keep the country hooked on American technology.
Ding and other senior officials felt insulted, people familiar with the matter said. Authorities privately told companies to halt their Nvidia purchases, while officials publicly raised cybersecurity concerns about the U.S. company's products.
Nvidia wanted to win back Beijing. In December, Trump said he told Xi he would allow sales of the company's more powerful H200 chip. But in Beijing, the calculation had shifted. Chinese officials called in tech companies -- sometimes weekly -- to evaluate how vital the H200 truly was. In January, Beijing told some companies they could buy the H200s only when necessary, while demanding a commitment to use more domestic chips.
The squeezing of Nvidia boosted demand for domestic chips, creating a supply crunch.
Huawei's efforts to work around technology restrictions date to 2019. The company had designed an Ascend AI chip that, on paper, matched Nvidia's top chip at the time, but it never got to produce the chip en masse. Weeks later, the first Trump administration blacklisted Huawei's chip unit, cutting off its access to U.S. chip technology.
That meant the Chinese company could no longer work with Taiwan Semiconductor Manufacturing, the only chip maker capable of mass-producing the Ascend. He Tingbo, chief of Huawei's chip division, called it her unit's "darkest hour."
Since then, Huawei has increasingly turned to alternative designs, advanced packaging and networking technology to squeeze computing power from older machinery -- a practice industry insiders dub "diaohua," or fine-carving.
Leading-edge chips are made using extreme-ultraviolet, or EUV, lithography systems. Because of U.S. export curbs, China has access only to previous-generation deep-ultraviolet, or DUV, machines. Huawei has developed a multistep method for producing 7-nanometer chips using DUV, but it complicates circuit layouts, introduces more opportunities for error and slows output.
Huawei revamped the design for its latest Ascend 950 chip, making it more cost-effective. Chinese AI companies including DeepSeek helped Huawei make the chip easier to use. They said it has improved significantly over previous generations and can now effectively substitute for Nvidia chips on certain tasks -- particularly inference, where trained models respond to user queries. That is persuading more Chinese companies to use it for AI applications such as the AI assistants.
An immediate bottleneck is output. Huawei's planned production of its new chip -- around 750,000 this year -- will fall well short of demand. Huawei's bundling strategy also means it needs several times as many chips to match the computing power of Nvidia's systems. The company said it was working to increase supplies.
Huawei unveiled its latest "fine-carving" alternative in May. Instead of trying to make transistors smaller, the company laid out a method for stacking circuits to cram more computing power into a single chip footprint. Huawei said that method would allow it to develop chips by 2031 that could outperform any semiconductor currently in production.
"This isn't about Huawei overtaking the U.S. on a hairpin turn," said Qingyuan Lin, a semiconductor analyst at Bernstein. "It's more about finding a way to prevent the gap from widening quickly."
To truly compete without reliance on foreign technology, China will have to build its own EUV machines, analysts say.” [1]
1. Inside China's All-Out Campaign To Catch Up With U.S AI Chips. Chin, Josh; Huang, Raffaele. Wall Street Journal, Eastern edition; New York, N.Y.. 25 July 2026: A1.
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