James A. Lewis, June 2025
US policy went off course in the last Administration because of an obsession with semiconductors (chips) and AI that did not produce results. The CHIPS and Science Act, which was supposed to bring chip fabrication back to the U.S., became a slow-moving, single shot effort. Comparable programs in other chip-making nations make repeated investments for
years. Despite efforts to “onshore” semiconductor manufacturing, dependence on Taiwan for the advanced chips is unchanged since 2020.
Export controls did more harm than good. While blocking exports of the equipment needed by China to manufacture chips, like the recent decision to block EDA (Electronic Design Automation) exports is a good idea, blocking exports of the chips themselves was counterproductive, by incentivizing China while failing to lock in markets and revenue for American companies. Thanks to ham-handed efforts to choke China’s access to American chips, China increased its investments in chip-making. China can now make “good enough” chips it can use to challenge the U.S. for economic and military leadership.
Antiquated policies like “higher fences around fewer goods” don’t help. This policy dates to the late 1980s and was create for exactly the opposite purpose, to justify why export controls for the Soviet Union and Warsaw Pact could be relaxed. China is a different kind of challenger and competition takes place in a different and much more interconnected world. The two Cold War competitors were almost hermetically sealed, with about only $15 billion in trade in 1980 (in 2024 dollars) compared to $438.9 billion in 2024, up 2.8 percent from 2023. Even with tariffs and efforts to increase the U.S. share of manufactured goods, China now makes 29% of global manufacturing output, more than the next four countries combined.
In any case, the fascination with the cutting edge in technology is misleading. The Taliban did not have cutting edge technology and still overcame the U.S. Many U.S. weapons like the F-35 were designed more than a decade ago and rely on chips that are also more than a decade old. The idea (perhaps better described as a hope) that artificial intelligence (AI) will ensure American military superiority despite aging equipment, slow production rates, and China’s near peer technological capabilities, was questionable even before the appearance of DeepSeek showed that China could create AI that is “good enough” for business and military purposes.
China accounted for roughly 16% of global chip production in 2022, ranking third behind the U.S. and South Korea, and with its heavy investment in new capacity (partially in response to export controls), China’s share of chip production could double in the next decade. Abandoning the AI Diffusion Rule, an excessively complex and overly ambitious effort to dictate the world AI market from Washington, was the right thing to do since it only incentivized countries in Europe, Asia, and elsewhere to find alternatives to American AI chips and services. Chip bans accelerated China’s investments to develop an independent semiconductor industry while simultaneously harming U.S. companies. This was an “own-goal” of epic proportions.
The Trump administration has a chance to undo the damage. The recent decision to sell chips and build data centers in the Persian Gulf was the right thing to do, since if we do not build them, the Chinese will. Both sides want to decouple, but both are unwilling partners in the global markets that ensure that the two economies will remain interconnected. This interconnection does create risks, but these can be managed, just not with blunt instruments from the 1990s. China has many problems of its own making. Its Party-led political system is unattractive and corruption undercuts many initiatives. But China is no longer a technological laggard. America’s strength lies in more than making chips. The key to success in this rivalry is to ensure that American companies lead in terms of revenue, market share, and innovation. Keeping American companies the world leaders in these areas rather than trying to hold China back should be the goals for policy and regulation.