Chips at the heart of power: Why semiconductors define the new world order

The chip industry has grown significantly in recent years due to its critical importance in multiple technological sectors, its vitality for the digital economy, and its extension beyond the economic realm into the sphere of international competition among major industrial powers. This is especially true given the United States’ dominance in chips, its reliance on Taiwan and South Korea for manufacturing, and China’s urgent need for chips as the world’s largest market for these electronic components. Hence comes the insistence on local manufacturing and the drive toward technological supremacy in the chip sector.

Chips are integrated circuits, or semiconductors, capable of storing and processing massive amounts of data, powering software, and serving as the “brains” of devices. The chip industry is an intermediary sector connected to hundreds of other industries — such as medicine, aerospace, aviation, automotive, computing, mobile phones, and most devices used in daily life. It is a massive industry expected to reach $1 trillion by the end of this decade, according to semiconductor consulting firm International Business Strategies.

Faced with China’s ambition to localise high-capacity chip production, the United States restricts Beijing’s access to semiconductors while seeking to remain at the forefront of this vital sector. This serves US manufacturing and advanced technologies, as semiconductor production is viewed as a national security issue. Over the past few years, Washington has repeatedly imposed restrictions on chip exports to China to slow the growth of its technological and manufacturing capacity.

Despite China’s attempts and massive government-backed spending, its chipmakers are still struggling to produce high-performance chips in volumes sufficient for industrial and technological needs. The dream remains out of reach for now, but China is making tangible progress in the global technology race, as advanced industries are now integral to national security and strategic global dominance.

Producing chips requires huge investments — sometimes exceeding $20 billion — and years of work before profitability is achieved. As such, only a few companies dominate this global sector, most notably Taiwan’s TSMC, South Korea’s Samsung Electronics, and US giants Intel and NVIDIA. To localise the industry, China established companies such as Huawei Technologies, Semiconductor Manufacturing International Corporation (SMIC), and Cambricon Technologies, working on everything from smart cars to electronics and artificial intelligence. Yet, US firms remain the industry leaders, while Taiwan and South Korea dominate the manufacturing and assembly stages.

In response to China’s ambitions, the United States is spearheading industry alliances and attracting enormous investments from firms like Taiwan’s TSMC, which is investing around $100 billion, bringing its total US investment to $165 billion. TSMC supplies semiconductors to NVIDIA and Apple for use in artificial intelligence. This investment is a major strategic step that could reshape the global chip market and intensify competition with China, as it reduces reliance on Taiwan and mitigates risks in case of tensions between China and Taiwan.

China, meanwhile, faces major challenges in achieving self-sufficiency. It lags in 5-nanometer and below technologies and remains far from producing advanced chips required for AI and high-performance computing. To address this, Beijing is investing heavily in quantum processors and quantum computing. However, shortages of key resources for chip production present further obstacles, especially in supporting industries.

Another area of competition lies in securing raw materials necessary for chip manufacturing, such as rare earth metals. China holds a strong advantage, producing 60% of the world’s rare earth supplies, unlike the US. Moreover, China benefits from low-cost labour, which reduces production costs and bolsters its weight in this sector, particularly since chips are tied to vital industries ranging from computers and smartphones to defence electronics.

China’s continuous rise in electronics—and particularly chips—is the result of a long-term strategic effort and massive government support worth billions of dollars. Yet, US restrictions remain a major barrier, not only on the export of advanced chips and manufacturing technologies but also on Chinese exports to third countries on the grounds that their chip industry relies on US intellectual property. Washington thus views Chinese exports as a violation of US controls.

In recent years, China has developed the ability to build AI technologies domestically at lower costs than the US, though it has been affected by US restrictions on NVIDIA’s semiconductor exports. Nevertheless, China shows no signs of retreat in advancing chips, AI, and other advanced technologies, as it continues raising investment and committing time and R&D resources to achieve breakthroughs in advanced chip manufacturing.

Major Chinese tech firms already rely on domestically produced chips. For instance, DeepSeek uses Huawei’s chips alongside NVIDIA’s for AI model training. In fact, US restrictions may have backfired, as they accelerated China’s push into chip manufacturing. Although current production remains insufficient to meet demand, companies are working to double AI chip output, with Huawei estimated to produce around 200,000 advanced AI chips, a modest number compared to NVIDIA’s production, which is roughly five times higher.

In conclusion, Chinese companies are racing to manufacture chips despite US export restrictions on advanced H20 chips, relying on massive government support to build an integrated domestic semiconductor supply chain. China is moving rapidly to narrow the gap in chipmaking, securing its resources and global technological capabilities. This competition reflects not only a commercial struggle but also a broader confrontation over national security and international technological leadership between the United States and China.

Najla AlMutasim AlMidfa is a researcher at TRENDS Research & Advisory