The Chip War Paradox: How US Sanctions Are Fueling China’s Innovation

By Joel Wong

The US-China tech rivalry finds its sharpest edge in the semiconductor industry. For years, US sanctions, escalating under both Trump and Biden, have aimed to cripple China’s ability to produce advanced chips crucial for AI, military tech, and cutting-edge electronics. But is this strategy truly working, or is it inadvertently empowering China’s drive for self-reliance?

Since 2018, sanctions have broadened from blacklisting giants like Huawei and ZTE to sweeping export controls on advanced chips, chipmaking equipment, and even US personnel supporting Chinese fabrication. The December 2024 update added 140 more Chinese companies and curbed high-bandwidth memory (HBM) chips vital for AI. The stated goal: prevent military advancements and surveillance.

Initially, these measures caused significant disruption. Supply chains fractured, prices spiked, and major Chinese tech firms faced severe constraints. Huawei’s HiSilicon, for instance, saw smartphone production halved after losing access to key foundries. China’s chipmakers, like SMIC, lagged years behind global leaders.

However, the long-term impact presents a different picture. The sanctions have become a powerful catalyst for China’s self-reliance push. The country’s semiconductor industry has surged, growing from $13 billion in 2017 to nearly $40 billion in 2020, with impressive annual growth. SMIC, against expectations, achieved 5nm production by 2024.

Chinese firms are also finding workarounds. They’ve leveraged cloud computing to access restricted chips and reportedly used shell companies to secure vital components. Domestic innovation is flourishing, with Huawei’s Ascend 910C chip now rivaling Nvidia’s A100. China is also strategically focusing on legacy chips, threatening to flood global markets by 2026.

This progress challenges the prevailing “China only steals, not innovates” narrative often reinforced by US rhetoric. While historical IP theft exists, China’s robust R&D spending, massive STEM graduate numbers, and demonstrable breakthroughs like SMIC’s 5nm chips indicate genuine innovation. Critics argue that this narrative is a geopolitical tool, easier to maintain than acknowledging China’s legitimate advancements.

The sanctions face significant limitations. Chips are easily smuggled, and design software can bypass controls. Allied resistance is growing, with some questioning the “economic motivation” behind US restrictions. Furthermore, US firms are losing market share and R&D funds in China, a critical market. China has also retaliated, banning exports of key chip materials like gallium and germanium.

The paradox is clear: by attempting to slow China, the US has inadvertently turbo-charged its drive for indigenous innovation, potentially costing US and allied companies billions.

To move beyond this “stealing” trope, the US needs a strategic shift towards proactive competition, significantly investing in its own innovation, strengthening alliances, and acknowledging China’s genuine progress. Without this, the US risks falling behind as China’s independent chip ecosystem matures.