The 2022 National Security Strategy released in October under US President Joe Biden highlighted a series of US-led regional frameworks to support its Indo-Pacific strategies, such as AUKUS – the trilateral security pact among Australia, the UK and the US, and the Quadrilateral Security Dialogue among Australia, India, Japan and the US – commonly known as 'Quad' and later 'Quad Plus' as South Korea, Vietnam and New Zealand participated Quad meetings.
The so-called 'Chip 4' alliance currently taking shape under US leadership can be interpreted in this context, as is the US-led Indo-Pacific Economic Framework for Prosperity (IPEF) that raised the possibility of building a formal system for participating countries to access emergency semiconductor stockpiles during supply chain disruptions.
Unlike the IPEF, which does not include Taiwan, the 'Chip 4' Alliance includes Taiwan, Japan, South Korea and the US. Together, the four countries account for 82% of the world's total semiconductor industrial output. Notably, the US also has defense treaties with both Japan and South Korea, possibly enabling the US to leverage its regional security clout in negotiations.
Even though 'Chip 4' is generally perceived as a US initiative to contain China, details pertaining to the alliance remain unclear. In late September, a preliminary meeting was held among the four nations involved, with South Korea wavering on its position, fearing to antagonize China.
In the long run, however, South Korean participation is inevitable as the new South Korean government under President Yoon Suk-Yeol gradually moved away from the previous administration's ambiguity. For example, Yoon's government has recently unveiled its first Indo-Pacific Strategy. A recent report published by the Korean International Trade Association also noted that the country fundamentally relies on the US and its allies for semiconductor manufacturing equipment, with 77% of South Korean semiconductor equipment import value coming from the US, Japan and the Netherlands.
Conflict on the industrial frontier already written into US national security thinking
While it is hard to anticipate possible US and Chinese moves in the Chip War, it is certain that both the US and Chinese leaders will enter 2023 with strengthened political positions at home. Chinese President Xi Jingping has just secured an unprecedented third term in office and is widely expected to stay lifelong at the helm of the country. At the same time, US President Joe Biden has seen the Democratic Party emerging victorious in the midterm election, averting a previously anticipated 'red wave' and retaining control of the Senate.
Most important of all, for the US, building a resilient high-tech supply chain has already become an inalienable part of its national security strategy. The '2017 National Security Strategy' published during the term of US President Donald Trump already emphasized this particular dimension, highlighting what it described as 'the erosion of American manufacturing over the last two decades and the possibility of 'not being able to produce specialized components for the military at home.'
After the CHIPS Act was signed into law in August 2022, the '2022 National Security Strategy' under Biden further connected industrial policies with US national security objectives, stating that 'markets alone cannot respond to the global pace of technological change, global supply disruptions, non-market abuses by the People's Republic of China and other actors. The new national security strategy concluded that strategic public investment in areas where private industry failed to mobilize is the antidote to the problem. Moving into 2023, the updated national security strategy will continue to guide US foreign policies as well as its domestic policies to strengthen the industrial base.
In 2014, the US government floated a 'Third Offset Strategy' seeking to cultivate US capabilities in various fields, including unmanned systems and AI, to offset perceived growing Chinese capability to challenge US military power projection, particularly in the Western Pacific. Following the first 'Offset Strategy' in the 1950s to counter the USSR's numerically superior forces via nuclear weapons, and the 'Second Offset' in the 1970s that countered Soviet nuclear capability via precision strike technologies, the 'Third Offset' particularly emphasized growing synergy between the US defense and commercial sectors, especially Silicon Valley, to foster technological innovations, while hitting at Chinese military-civil fusion. In fact, all three offset strategies notably were complemented with export controls, such as the Arms Export Control Act of 1976 during the Second Offset, and the Export Control Reform Act of 2018. In this sense, the ongoing Chip War can be interpreted as an extention of the Third Offset Strategy, and the strategy will likely continue to influence US actions toward China.
More on 2023 Outlook: Semiconductor Industry 2023 Preview
China to carve an alternative path forward
Without access to advanced manufacturing capacities and HPC chips from AMD and Nvidia, both Chinese IC design houses and end device makers focusing on AI applications will face hardware-related constraints. However, some in the Chinese semiconductor industry saw mature process technologies as a way out, especially when Chinese IC design houses are gradually catching up with international peers in sectors such as Power Management ICs (PMICs), microcontrollers and Micro Electro Mechanical Systems (MEMS).
Similarly, experts familiar with the Chinese AI chip industry pointed out that mainstream domestic AI chip design houses still focus on the image signal and smart camera-related ASICs that can be manufactured on mature nodes, thus showing a path for Chinese AI development that will be more edge-oriented than cloud-based.
Indeed, many homegrown AI chips still see performances constrained by software, leading certain experts to argue that China's AI industry should now focus on software performance breakthroughs. AI chips manufactured on 28nm technology, for example, can be augmented by improved algorithms and software to compensate for hardware constraints. Even though they wouldn't be comparable to AI chips for cloud applications, they would qualify for AIoT and automotive applications.
Meanwhile, China's strategy of civil-military fusion, a major catalyst of US sanctions, is likely to continue, as mature processes can still support the majority of its weapon systems. However, it remains to see if its ability to use supercomputing for weapon development is derailed in the long term.