China's Chip Push Undermines US Controls
US Firms Lose $130 Billion Market Cap
The New York Federal Reserve reports that affected US suppliers have already experienced a $130 billion decline in market capitalization, alongside reductions in profitability and employment. The CHIPS Act of 2022 authorizes $280 billion in funding to boost domestic research and manufacturing. Major industry players, including Nvidia, Intel, and Qualcomm, collectively generate over $50 billion in annual revenue from the Chinese market. However, US firms failed to form new supply chain relations with alternative customers either domestically or in politically aligned regions in the three years following the implementation of export controls, suggesting these subsidies may not fully offset the financial drag.
ASML DUV Sales Exploit Dutch Exemption
The House Select Committee on the CCP found that ASML exploited this DUV exemption category, selling a majority of its DUV immersion lithography systems to China in 2024 and dry lithography systems in 2023 and 2024. The Foreign Policy Research Institute explains that US export control policy explicitly restructures global technology governance, replacing interdependent market networks with state-managed chokepoints and thereby ending the belief that economic interdependence promotes stability. This shift is driving global technology governance toward a bifurcated "One World, Two Systems" model, where both the US and China prioritize domestic capabilities. US design companies like Qualcomm, Nvidia, Broadcom, and Advanced Micro Devices control 68% of the market share for chip design, which accounts for 45% of the final chip value. While the US has secured cooperation from Japan and the Netherlands on advanced chipmaking tools like ASML lithography, this unilateral approach has generated skepticism among allies, who view US restrictions as serving protectionist goals. Japan’s law, for instance, lacks re-export restrictions, does not restrict non-resident Japanese citizens working on semiconductor projects abroad, and permits outward investment on an after-the-fact reporting basis without security screening. The Netherlands’ framework, by contrast, has a narrower scope of lithography controls, banning Deep Ultraviolet (DUV) equipment only for specific Chinese companies rather than imposing a country-wide ban. The Chinese Communist Party (CCP) stockpiled this DUV equipment at sophistication levels just below current restrictions. Chinese companies, such as Huawei, used "entity obfuscation" through sprawling networks of affiliated companies to circumvent end-user controls and acquire older but highly capable ASML DUVi machines. Japanese firm Tokyo Electron (TEL) also increased its sales to China, receiving 44% of its revenue from Chinese entities in 2024 as US controls tightened.
TSMC's Taiwan Chokepoint Creates US Risk
The Hoover Institution reports that TSMC produces 50% of the world’s semiconductors and over 90% of advanced nodes, establishing a chokepoint that leaves US strategic autonomy highly vulnerable to regional geopolitical shocks or conflict in the Taiwan Strait. Fundamental bottlenecks in Extreme Ultraviolet (EUV) lithography and advanced packaging create a persistent capability ceiling for China. Restrictions on EUV tools, for example, hinder memory chip firm ChangXin Memory Technologies (CXMT) from producing High-Bandwidth Memory (HBM), which leaves a large performance gap between Chinese HBM2 and providers in Korea and the US. China remains a marginal producer of AI chips; for 2025, Huawei was projected to produce only 200,000 AI chips, whereas China legally imported around 1 million downgraded Nvidia chips in 2024. However, the forced decoupling of advanced semiconductor supply chains increases systemic national security risks for the US by over-concentrating manufacturing dependencies in politically volatile regions like Taiwan. Brookings observes that 100% of the world's most advanced semiconductor manufacturing capacity (below 10 nanometers) is located in Taiwan (92%) and South Korea (8%). China controls around 24% of global capacity for mature node (50–180 nm) chips, a share projected to surge to 50% by 2030. China also extracts 60% of the world's rare earth minerals and handles over 85% of their processing, providing Beijing with significant leverage to weaponize foundational supply chains.
Beijing's $70 Billion Semiconductor Fund
China is deploying up to $70 billion in state-backed semiconductor funding and forcing public-sector adoption of domestic chips through government procurement lists. US export controls have triggered a self-reinforcing causal chain in China, where restricted access forces massive state R&D investment, accelerates domestic substitution, and drives algorithmic efficiency innovations. A Harvard Business School paper found that affected Chinese firms sharply reduced imports of controlled products while increasing R&D spending by 49.1%, patenting by 41.3%, and active inventors by 30.4%. To compensate for hardware deficits, Chinese AI labs have pioneered algorithmic efficiency innovations, such as mixture-of-experts architectures, sparse attention, and aggressive quantization techniques. These software optimizations allowed models like DeepSeek's R1 to achieve competitive benchmark scores with less computational resources than US counterparts. Brookings notes that "China’s top AI models continue to lag behind American frontier models by several months or more," and "Chinese AI labs, particularly startups, are constrained by access to compute, due to a combination of U.S. export controls on advanced AI chips and limited capital resources." Consequently, firms like DeepSeek must restrict API access due to inference compute limitations.
One World, Two Systems Emerges
US semiconductor export controls to China consolidate short-term strategic leverage by impeding Chinese military modernization and AI development. This dynamic, however, fosters a bifurcated "One World, Two Systems" model, where the long-term efficacy of preserving US technological dominance remains genuinely debated as China's state-backed investments and algorithmic innovations work to circumvent hardware bottlenecks. These controls, the evidence suggests, simultaneously accelerate China's drive for technological self-sufficiency, straining allied consensus and imposing economic costs on US firms.
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