Small powers caught in the US-China chips competition | East Asia Forum - 3 July 2023 |

While WTO agreements discipline certain subsidies where a harmful effect on competitors can be demonstrated, the new subsidies are often beyond the reach of international agreements.

The most expensive and spectacular example of the new subsidies is the intense battle between the United States and China over advanced chips. Beijing has long been determined to catch up in chip technology, while Washington strives to stay ahead. Both China and the United States now lavishly support the development and production of advanced chips, though neither produces leading-edge chips on their own territory in commercial quantities.

Under programs announced in October 2022, the United States has adopted twin policies of subsidising advanced chip production at home, while arranging with security allies to deny China access to advanced chips and advanced chip-making machinery.

Since the United States does not currently make leading-edge chips or the machinery to produce them, it relies on Taiwan to refuse to make advanced chips for Chinese businesses and the Netherlands to refuse to supply them with advanced chip-making equipment [ASML]. At the same time, Washington is paying billions of dollars to the Taiwan Semiconductor Manufacturing Company and South Korea's Samsung to establish advanced chip-making foundries in the United States.

China currently produces 16 per cent of the world's chips, more than the United States. But it cannot yet produce in quantity the advanced chips the United States is seeking to deny it.

While presented as a denial of one of a `narrow set of sensitive technologies' in the 20 May 2023 G7 communique, it is widely understood that the US objective is to block China's progress in artificial intelligence technologies. These technologies are already widely used in military applications such as eavesdropping and self-guided drones but, more importantly, hold the possibility of large-scale commercial transformation. As CSIS expert Greg Allen explained in 2022, the US strategy has shifted from slowing the pace of China's advance to actively seeking to reverse it.