CHIPS was drafted on the premise that the microchip is a vital public good, required for the everyday operation of critical infrastructure, including utilities and food. The public good argument has given further impetus to a growing movement that calls for countermeasures to China’s statist and mercantilist economic practices.

This transition, however, has created tensions between governments and businesses as they struggle to find a balance between market dynamics and national policy. As such, leading semiconductor multinationals now find themselves facing a paradox: they need assistance from their governments to counter Beijing’s large-scale system of innovation mercantilism, but they are suddenly grappling with increased public activism and state intervention in their markets.

Upending the in-China-for-China chip strategy

As a result of the newfound Western enthusiasm for intervention, CHIPS poses challenges for global chip makers investing and operating in China. For years, American and other foreign companies have followed an “in-China-for-China” strategy that concentrated on selling older, so-called “trailing edge” or “legacy” technologies to Chinese manufacturing consumers. This strategy achieved the dual objectives of steering clear of US sanctions and controls on the export of “leading edge” semiconductor technology, while keeping the chip maker’s most valuable intellectual property in a so-called “black box”, out of reach from competitors.

The smaller the semiconductor, the more advanced its technology. US licenses for “leading edge” chips previously targeted the 10-nanometer and below range, regarded as more complex technology. But Washington recently pushed the threshold to 14 nanometers and is considering extending licensing requirements to much older technologies, up to 28-nanometer chips.

In the near to midterm, such intervention would derail Beijing’s master plan to gain chip technology. But it also represents collateral damage to the in-China-for-China business model for companies, not just US giants but many others such as TSMC and Samsung.