Geopolitics of AI: Chips Are the Choke Point

The United States' strategy hinges on controlling access to semiconductor manufacturing equipment (SME), particularly from industry leader ASML of the Netherlands. Under pressure from the U.S., the Dutch government has restricted ASML's ability to export its most advanced extreme ultraviolet (EUV) and even some deep ultraviolet (DUV) lithography systems to China since 2019. These restrictions were expanded in 2024, directly impacting China's capacity to produce chips at advanced 14nm to 28nm nodes. In response, the U.S. passed the CHIPS and Science Act in 2022, a law authorizing roughly $280 billion to boost domestic research and semiconductor manufacturing. The act allocates $52.7 billion specifically for the semiconductor industry, with $39 billion in subsidies for building new fabrication plants ("fabs") on U.S. soil. Companies receiving this funding are prohibited from expanding semiconductor manufacturing in China for 10 years. Despite these controls, Chinese firms have demonstrated resilience. Companies like Alibaba and DeepSeek have developed competitive large language models, suggesting that hardware limitations have not entirely stalled AI model development, though they may hinder deployment at scale. Huawei also produced smartphones with 7nm processors, showcasing progress in domestic manufacturing capabilities despite the restrictions. China is aggressively investing in its domestic semiconductor industry through state-backed initiatives like the "Big Fund". Top manufacturers like SMIC and Hua Hong Semiconductor are working to expand production of 7nm and even 5nm chips. While still reliant on foreign equipment, China aims to increase its output of advanced chips fivefold to meet domestic AI demand and achieve 50% self-sufficiency in semiconductor equipment by 2025. The export controls have forced major chip designers like Nvidia to alter their strategies. After facing uncertainty with its H200 chips designed for the Chinese market, Nvidia has reportedly halted production and shifted its manufacturing capacity at TSMC toward its next-generation "Vera Rubin" platform. This pivot prioritizes markets with strong demand and fewer geopolitical restrictions. Taiwan's dominance in the supply chain extends beyond just manufacturing. The island holds over 60% of the global semiconductor manufacturing market and more than 90% of the market for the most advanced chips. It also ranks first globally in integrated circuit (IC) packaging and testing and second only to the U.S. in IC design, making it a critical hub for the entire semiconductor ecosystem.