The Biden administration has two tactics to slow — or ideally halt — China’s indigenous development of its advanced semiconductor sector. The core tactic is extensive, unprecedented, unilateral export controls on American advanced semiconductor technology to China.

Supporting this core approach is the ad hoc tactic of periodically badgering key semiconductor countries to follow our export controls so that their semiconductor businesses do not simply take over the significant market share in China required to be abandoned by American semiconductor companies.

In January of this year, I predicted this supporting tactic would fail. In April, it did.

The Netherlands and Japan both refused senior U.S. officials’ requests for tighter export controls because these two key semiconductor supply chain countries wanted additional time to evaluate their existing export controls and to see who would win the upcoming U.S. election. Germany’s response was neutral, neither signaling support nor rejecting the U.S. officials’ requests.

Since then, crickets.

That leaves only the core tactic, which on its own is self-defeating. The competing semiconductor businesses of these key three semiconductor countries, along with South Korea and Taiwan, will simply vacuum up the abandoned American semiconductor market share in China. In those embarrassing parts of the advanced semiconductor supply chain where the semiconductor companies are completely absent from American shores, the sales to China will now still go through.

China is the “pacing challenge” for the U.S. As previously explained, semiconductors are not simply another important technology or even a first-among-equals technology; semiconductors are alone in a class of the first order because they undergird all other advanced technologies.

Dishearteningly, the Biden administration doesn’t even have a strategy for this apex technology. Headlines, such as “Blacklisted China chipmaker SMIC becomes the world’s second-largest pure-play foundry by revenue — outsells GlobalFoundries and others,” confirm the real-world consequences of this strategy void.

As if this were not disastrous enough, with certain types of Chinese advanced technology armaments we currently face, such as hypersonic missiles, or might expect to face in the future, such as autonomous killer robots, there are many additional physical components to these weapons that might be successfully caught by either our own or other U.S. allies’ export controls because they are physical things. When it comes to artificial intelligence, however, once you have the high-end silicon, you need only the software algorithms and large data sets.

While technically such advanced AI technology would be likely caught by either our own or other U.S. allies’ export controls, the real-world, practical difficulty of stopping such AI technology transfer is almost insurmountable because no physical goods are involved. An electrical outlet, a laptop and internet access are all that is needed for this AI technology to be transported to China.

That is particularly the case when the AI software is open source instead of proprietary. For example, Meta Platforms, which owns Facebook, has adopted an open-source AI software business model that allegedly contains national security safeguards. That has not stopped China from using this advanced AI software as the base for a majority of its homegrown AI models. That makes the state of play for China’s advanced semiconductors all the more critical as a last line of defense.

So if China succeeds in buying from other countries the advanced semiconductor technology America has either banned its own companies from selling to China or would if they were domestically resident, expect China’s cyberattacks, biological weapons, robotic submarines, warships, fighter jets, swarming aerial drones and ground combat vehicles to be powered by AI.

And of course when AI is being considered as significant an inflection point equivalent in human history as fire, electricity, the internet or nuclear weapons, the implications to our and our allies’ economies versus China cannot be exaggerated. As succinctly explained by historian Michael Mastanduno, “ military power rests upon a foundation of economic power both qualitatively and quantitatively.”

During the second presidential debate in 1992, Ross Perot famously said the North American Free Trade Agreement would create a “giant sucking sound” of American jobs to Mexico. China is creating a second giant sucking sound by buying from our foreign competitors as much advanced semiconductor technology as possible. This time, the giant sucking sound from China is because there is no export control treaty — only a failed, voluntary export control regime known as the Wassenaar Arrangement, with Russia as its most notorious member.

Thus, it is only a slight exaggeration to state that if we do not get our semiconductor export control strategy right, not much else matters when it comes to the technology arms race with China.

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Given deepening cooperation between China and Russia, especially regarding semiconductors, our semiconductor export control strategy cannot be just about China. More than 80% of the semiconductors that Russia has purchased since its full-scale invasion of Ukraine in 2022 have come directly from China. This shockingly high number is yet another example of how critical it is that we get a strategy — and get the right one. This deep semiconductor linkage between China and Russia is another arrow in U.S. officials’ quiver for European countries such as the Netherlands and Germany, who are equivocating regarding tighter semiconductor export controls on China.

I have argued before in short and long form that we need a semiconductor export control strategy — not failed and self-defeating tactics. Our relationships with the Netherlands, Germany, South Korea, Japan and Taiwan are multifaceted and deep, and they contain within them many potential horse trades we could make if we were determined to create a binding semiconductor export control treaty among us that is focused on China, Russia, North Korea and Iran.

The People’s Liberation Army recently surrounded Taiwan’s main island, as well as smaller islands like Matsu and Kinmen, as “punishment” because of Taiwan’s recent inauguration of its democratically elected president, Lai Ching-te. According to Taiwanese military experts, these PLA military drills simulated for the first time a full-scale attack rather than an economic blockade. There is no time to waste.

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China pours more money into Big Fund III: $47.5 billion and counting

China has launched its third government-backed fund — the so-called Big Fund III — to support the semiconductor industry, registering a capital of 344 billion yuan ($47.5 billion), reports Reuters. The third installment of the Big Fund was originally designed to raise $27 billion, but as it turns out it raised $20.5 billion more as China is seeking to achieve self-sufficiency in the semiconductor sector, especially in the wake of U.S. export restrictions aimed at limiting China's access to advanced technology for potential military use.

One of the primary focuses of the third phase is to boost domestic development and production of equipment for chip manufacturing, a critical area for advancing China's semiconductor capabilities as companies like ASML, Applied Materials, and Tokyo Electron can no longer supply their most advanced tools to China due to export restrictions.

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The fund, known as the China Integrated Circuit Industry Investment Fund or Big Fund, established its third phase on May 24. In its inception phase, the Big Fund III is the largest of the three phases and is registered under the Beijing Municipal Administration for Market Regulation. This move has already positively impacted the market, with the CES CN Semiconductor Index rising by over 3%, marking its biggest one-day gain in more than a month, according to Reuters.

China's Ministry of Finance is the largest stakeholder in the fund, holding a 17% share and contributing 60 billion yuan in capital. The China Development Bank Capital follows with a 10.5% share. Additionally, five major Chinese banks, including the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications, are also significant investors, each contributing about 6% of the total capital.

Since its commencement in 2014, the Big Fund (2014-2018, approximately $100 billion) and the Big Fund II (2019-2023, approximately $41 billion) have collectively raised hundreds of billions of dollars and invested in numerous microelectronics companies. Meanwhile, according to a Bloomberg report, the assets managed by the Big Fund are currently valued at around $45 billion. This valuation may be influenced by U.S. sanctions against China's semiconductor sector, which have significantly impacted major companies such as Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies Co. (YMTC), China's leading 3D NAND manufacturer.

To efficiently manage the Big Fund III, the government plans to hire at least two institutions for investment management.

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