It was 2015, and Intel’s CEO Brian Krzanich couldn’t hide his anxiety about China’s push to seize a bigger share of the world’s chip industry. As chairman of the Semiconductor Industry Association, the U.S. chip industry’s trade group, Krzanich was tasked with hobnobbing with U.S. government officials. Usually this meant asking for tax cuts or reduced regulation. But this time, as he met with senior Obama administration officials, the topic was different: convincing the U.S. government to do something about China’s massive semiconductor subsidies. 

America’s chip firms were all caught in the same bind. China was a crucial market, either because these firms sold directly to Chinese customers or because their chips were assembled into smartphones or computers in China. But, at the same time, the Chinese government had adopted a formal policy of trying to cut them out of China’s supply chain, devoting billions of dollars and its best minds to developing its own semiconductor technology in a bid to free itself from American chips. As one U.S. semiconductor executive wryly summed things up to a White House official: “Our fundamental problem is that our number one customer is our number one competitor.” 

Obama administration officials were used to complaints about China from industries like steel or solar panels. But high tech was new. This was supposed to be America’s specialty, a sphere where it had a competitive advantage. America’s stranglehold on silicon chips, after all, gave Silicon Valley its name. But here Krzanich was raising the alarm, and the “palpable sense of fear” in his eyes got the administration’s attention. 

“This massive $250 billion fund is going to bury us,” one Obama official worried, referencing the subsidies China’s central and local governments have promised to support homegrown chipmakers. 

Still, at the time of Krzanich’s visit, most people in Washington barely knew what a semiconductor was. The Obama administration moved slowly on semiconductors, one person involved in the effort recalled, because many senior officials simply didn’t see chips as an important issue. Moreover, the twin pillars of American tech policy — embracing globalization and “running faster” than your competitor — were deeply ingrained in both industry and Washington’s intellectual consensus. What else could be done? 

As the U.S. government started to take action and update its tech policy, it gradually realized it had a powerful card up its sleeve: it could protect its edge by weaponizing the semiconductor supply chain.

Around 2015, from deep in the U.S. government, gears slowly began to shift. The government’s trade negotiators saw China’s chip subsidies as a flagrant violation of international agreements. The Pentagon nervously watched China’s efforts to apply computing power to new weapons systems. And the intelligence agencies and Justice Department unearthed more evidence of collusion between China’s government and its industries to push out American chip firms. 

Also around this time, Huawei and ZTE, the Chinese telecom giants, were both accused of violating U.S. sanctions by supplying goods to Iran and North Korea. While both companies were espionage challenges — U.S. officials had little doubt they would support Chinese spycraft — the firms were also seen as the first battle in a long struggle for technological dominance. 

As the U.S. government started to take action and update its tech policy, it gradually realized it had a powerful card up its sleeve: it could protect its edge by weaponizing the semiconductor supply chain. This strategy started at the tail end of the Obama administration, gained momentum in the Trump administration, and culminated earlier this month, as the Biden administration announced the most sweeping export restrictions yet. Now, the U.S. limits the flow of many cutting-edge chips to China.

Indeed, seven years after Krzanich’s panicked visit, Washington has become acutely aware of the importance of the semiconductor industry. Perhaps more than anything else, they define the world we live in, determine the shape of international politics, the structure of the world economy, and the balance of military power. And Washington, it seems, is willing to do whatever it takes to stop China from having them.

‘EVERYTHING WE’RE COMPETING ON’ 

It wasn’t until the final days of the Obama administration that the government began to act on semiconductors. In late 2016, six days before that year’s presidential election, Commerce Secretary Penny Pritzker gave a high-profile address in Washington on semiconductors, declaring it “imperative that semiconductor technology remains a central feature of American ingenuity and a driver of our economic growth. We cannot afford to cede our leadership.” 

She identified China as the central challenge, condemning “unfair trade practices and massive, non-market based state intervention” and cited “new attempts by China to acquire companies and technology based on their government’s interest — not commercial objectives.”

But it was easy to condemn China’s subsidies. It was far harder to make them stop. With little time left in the Obama administration, there wasn’t much Pritzker could do. Rather, the administration’s modest goal was to start a discussion that — it hoped — the incoming Hillary Clinton administration would carry forward. Pritzker also ordered the Commerce Department to conduct a study of the semiconductor supply chain and promised to “make clear to China’s leaders at every opportunity that we will not accept a $150 billion industrial policy designed to appropriate this industry.” 

Around the same time, the White House commissioned a group of semiconductor executives and academics to study the future of the industry. They issued a report days before Obama left office, which urged the U.S. to double down on its existing strategy. Its primary recommendation was: “win the race by running faster.” 

“Unilateral action is increasingly ineffective in a world where the semiconductor industry is globalized,” the Obama administration’s semiconductor report declared. “Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread.” 

Yet a fundamental misunderstanding here was that the semiconductor industry had not been “globalized”; if anything, it had been “Taiwanized” as the Taiwanese firm TSMC — which was heavily backed by Taiwan — came to dominate production of the most advanced processor chips. Moreover, technology hadn’t diffused. Instead, it had been monopolized. The global production of computing power depends fundamentally on a series of choke points: tools, chemicals, and software that often are produced by a handful of companies — and sometimes only by one. 

Instead of reality, the Obama administration’s report reflected the extent to which American tech policy had been held hostage to banalities about globalization. U.S. officials found it easier to parrot platitudes about free trade and open competition while ignoring other countries’ efforts to grab valuable chunks of the chip industry.

Hardly anyone understood just how drastic a move it would have been to ban a major Chinese tech company from buying U.S. chips.

Deep in the U.S. government, however, the national security bureaucracy was coming to adopt a different view. This part of the government is paid to be paranoid, so it’s no surprise security officials viewed China’s tech industry more skeptically and its government more cynically. Many officials worried that China’s leverage over the world’s critical technology systems was growing. They also presumed China would use its position as the world’s key manufacturer of electronics to insert back doors and to spy more effectively, just as the U.S. had done for decades. Pentagon officials devising weapons of the future began to realize how reliant they’d be on semiconductors. Officials focused on telecom infrastructure, meanwhile, worried that U.S. allies were buying less telecom equipment from Europe and the U.S. and more from Chinese firms like ZTE and Huawei.

U.S. intelligence had voiced concerns about Huawei’s alleged links to the Chinese government for many years, though it was only in the mid 2010s that the company and its smaller peer, ZTE, started attracting public attention. Both companies sold competing telecom equipment; ZTE was state-owned, while Huawei was private but was alleged by U.S. officials to have close ties with the government. Both companies had spent decades fighting allegations that they’d bribed officials in multiple countries to win contracts. And in 2016, during the final year of the Obama administration, both were accused of violating U.S. sanctions by supplying goods to Iran and North Korea. 

The Obama administration considered imposing financial sanctions on ZTE, which would have severed the company’s access to the international banking system, but instead opted to punish the company by restricting U.S. firms from selling to it. Export controls like this had previously been used mostly against military targets, to stop the transfer of technology to companies supplying components to Iran’s missile program, for example. But the Commerce Department had broad authority to prohibit the export of civilian technologies, too. ZTE was highly reliant on American components in its systems — above all, American chips. 

But, in March 2017, before the threatened restrictions were implemented, the company signed a plea deal with the U.S. government and paid a fine, so the export restrictions were removed before they’d taken force. Hardly anyone understood just how drastic a move it would have been to ban a major Chinese tech company from buying U.S. chips. Several officials in the incoming Trump administration, however, were paying attention. 

“This is really important,” one Trump appointee reported an Obama official telling him during the presidential transition, regarding China’s technological advances, “but there’s nothing you can do.” 

The new administration’s China team didn’t agree. They concluded, as one senior official put it, “that everything we’re competing on in the twenty-first century . . . all of it rests on the cornerstone of semiconductor mastery.”

A DEVASTATINGLY POWERFUL WEAPON

As the Trump administration got underway, a handful of discreet officials on the National Security Council were transforming America’s policy toward China, casting off several decades of technology policy in the process. Rather than tariffs, the China hawks on the NSC — led by Matthew Pottinger, a former journalist and Marine, who eventually rose to become Trump’s deputy national security advisor — were fixated on Beijing’s geopolitical agenda and its technological foundation. They thought America’s position had weakened dangerously and Washington’s inaction was to blame. 

Inaction wasn’t a viable option, they believed. Nor was “running faster”—which they saw as code for inaction. “It would be great for us to run faster,” one NSC official put it, but the strategy didn’t work because of China’s “enormous leverage in forcing the turnover of technology.” The new NSC adopted a much more combative, zero-sum approach to technology policy. From the officials in the Treasury Department’s investment screening unit to those managing the Pentagon’s supply chains for military systems, key elements of the government began focusing on semiconductors as part of their strategy for dealing with China. 

This made the semiconductor industry’s leaders deeply uncomfortable. They wanted the government’s help but feared Chinese retaliation. The chip industry would happily accept lower taxes or reduced regulation, both of which would make doing business in the U.S. more attractive, but it didn’t want to have to change its multinational business model. 

Amid the fire and fury of President Trump’s Twitter feed, most people barely noticed how different parts of the government — from Congress to the Commerce Department, from the White House to the Pentagon — were refocusing on semiconductors in ways unseen in Washington since the late 1980s.

However, the messages coming from the chip industry weren’t any more coherent than the contradictory leaks from the Trump White House. Publicly, semiconductor CEOs and their lobbyists urged the new administration to work with China and encourage it to comply with trade agreements. Privately, they admitted this strategy was hopeless and feared that state-supported Chinese competitors would grab market share at their expense. The entire chip industry benefited from sales to China — be it chipmakers like Intel, fabless designers like Qualcomm, or equipment manufacturers like Applied Materials. 

The China hawks on the National Security Council concluded that America’s semiconductor industry needed to be saved from itself. Left to the whim of their shareholders and to market forces, chip firms would slowly transfer staff, technology, and intellectual property to China until Silicon Valley was hollowed out. 

The U.S. needed a stronger export control regime, the China hawks believed. They thought Washington’s discussion about export controls had been hijacked by the industry, letting Chinese firms acquire too much advanced chipmaking design and machinery. Administration officials cited the revolving door between the Commerce Department and law firms who worked for the chip industry and lobbied against export controls, though these officials were also among the few people in the government who understood the complexity of semiconductor supply chains. Because of this revolving door, Trump administration officials believed, regulations allowed too much technological leakage, weakening America’s position relative to China. 

Amid the fire and fury of President Trump’s Twitter feed, most people barely noticed how different parts of the government — from Congress to the Commerce Department, from the White House to the Pentagon — were refocusing on semiconductors in ways unseen in Washington since the late 1980s. Media attention focused on Trump’s “trade war” with Beijing and his tariff hikes, carefully announced to maximize media attention. Among the many products that Trump imposed tariffs on were chips, causing some analysts to see semiconductors as mostly a trade issue. 

Within the government’s national security bureaucracy, though, the president’s tariffs and his trade war were seen as a distraction from the high-stakes technological struggle underway. In April 2018, as Trump’s trade dispute with China escalated, the U.S. government concluded that ZTE had violated the terms of its plea agreement by providing false information to U.S. officials. Wilbur Ross, Trump’s commerce secretary, took it “very personally,” according to one aide, since he’d played a role in negotiating the deal with ZTE the previous year. The Commerce Department began reimposing the restrictions on U.S. firms’ ability to sell to ZTE, a decision that moved through the bureaucracy “almost without anyone knowing,” according to one participant. When the rules snapped back, ZTE was again cut off from its ability to buy U.S. semiconductors, among other products. If the U.S. didn’t change policy, the company would careen toward collapse. 

Trump himself was more interested in trade than technology, however. He saw the potential strangulation of ZTE simply as leverage over Xi Jinping. So when the Chinese leader proposed doing a deal, Trump eagerly accepted the offer, tweeting that he’d find a way to keep ZTE in business out of concern for the company “losing too many jobs in China.” Soon ZTE agreed to pay another fine in exchange for regaining access to U.S. suppliers. 

Trump thought he’d gained leverage in the trade war, though this proved illusory. Washington’s China hawks thought he’d been duped by officials like Treasury Secretary Steven Mnuchin, who repeatedly urged Trump to offer concessions to Beijing. What the ZTE saga showed above all was the extent to which all the world’s major tech firms relied on U.S. chips. Semiconductors weren’t simply the “cornerstone” of “everything we’re competing on,” as one administration official had put it. They could also be a devastatingly powerful weapon.

This article has been excerpted from Chip War: The Fight for the World’s Most Critical Technology by Chris Miller. Copyright © 2022. Available from Scribner.

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