The Ecosystem Battle: Why the US Needs More Than Chips to Compete with China
After years of China's predatory economic expansion and the decline of globalization, the world is awakening to the need to protect its manufacturing capabilities and supply chain resilience. Economic statecraft is back in focus, yet many policymakers are fixated on individual elements like semiconductor chips for AI while ignoring the broader industrial ecosystem.
The U.S. CHIPS Act, aimed at boosting domestic semiconductor manufacturing, is a step forward but insufficient without an overarching strategy. A coordinated initiative is necessary to revitalize infrastructure, stimulate domestic demand, and ensure the sustainability of initiatives like the CHIPS Act. Without such measures, the US risks falling further behind China, whose thriving manufacturing ecosystem is its ultimate strength. Such an initiative requires coordination with allies and the support of global talent.
The Importance of Ecosystems
A single company or industry cannot thrive in isolation. The livelihood of suppliers, manufacturers, system integrators, distributors, and, crucially, consumers forms an ecosystem that sustains innovation and economic resilience. China has mastered this interconnected model, allowing it to weather external pressures like export controls.
Take Wolfspeed, a U.S.-based supplier of silicon carbide (SiC) substrates, as a case in point. Despite receiving CHIPS Act subsidies, Wolfspeed faces challenges from China’s EV industry, where demand for SiC substrates is robust. With multiple Chinese suppliers flooding the market, prices have plummeted. In our previous article, we reminded our readers that if U.S. policies on clean energy and EVs are reversed, Wolfspeed could lose its domestic market support, leaving it vulnerable to China’s cost advantages and the CHIPS Act subsidy squandered.
Short-Sighted Policies on Export Controls
U.S. export controls, from Section 301 tariffs to the Bureau of Industry and Security’s (BIS) expanded AI chip restrictions, aim to counter China’s advancements in artificial intelligence (AI). However, these policies often lack a macroscopic view. For instance, rumors suggest the U.S. may extend export controls to legacy chip equipment, targeting China’s ability to produce advanced chips like those using deep ultraviolet (DUV) lithography machines.
While this may slow China’s innovation on the supply side, it neglects the demand-side dynamics that underpin China’s resilience. Companies such as Deepseek are optimizing their algorithm with less advanced chips to achieve almost the same performance as American competitors as long as there is robust demand for generative AI services catered to local users.
China’s Ecosystem Advantage
China’s dominance extends beyond semiconductors. It remains the largest manufacturing hub for displays, smartphones, EVs, and other goods. Even punitive tariffs during Donald Trump’s first term led to supply chain shifts, but many Chinese companies adapted by moving factories to Vietnam, Mexico, and even the U.S.—often continuing to source chips and components from China.
Subsidized Chinese fabs have driven down prices for legacy chips and memory products, outcompeting producers in the U.S. and allied nations. Chinese IC vendors have achieved strong synergies with domestic OLED panel manufacturers and local foundries, significantly increasing their global market share in OLED driver ICs with cost advantages. Intense competition has driven down global market prices, likely to force suppliers in Taiwan, Japan, Singapore, South Korea, and the U.S. to exit the market. Meanwhile, Chinese companies persist, sustained by government subsidies that prioritize self-sufficiency over profitability.
Global consumers, indifferent to where chips are produced, continue to buy affordable products like OLED TVs and laptops. Deflationary pressures in China, exacerbated by slowing domestic demand and rising unemployment, have only increased the price competitiveness of its exports.
This is just one example, but consider the implications: if non-Chinese legacy chip producers are forced out of business, global manufacturers would become entirely dependent on Chinese suppliers. Once that dependency is established, prices could begin to surge, with no competitors left to offer more affordable alternatives.
The Global Economic Context
China’s record-high trade surplus of nearly $1 trillion underscores its continued strength. Even as the U.S. threatens new tariffs, Chinese companies maintain control of supply chains and ecosystems, minimizing the impact of external pressures.
At the same time, China has tightened scrutiny on U.S. tech giants like Apple, hampering their efforts to expand production outside China. These actions highlight the strategic nature of China’s policies, which aim to retain control over critical ecosystems while adapting to shifting trade dynamics.
If the U.S. hopes to make the CHIPS Act work to bring semiconductor manufacturing back to America and counter China’s dominance, it must move beyond piecemeal policies and adopt a comprehensive strategy. This means recognizing the importance of ecosystems, boosting domestic demand, and ensuring the resilience of American industries. Without such a macroscopic approach, the U.S. will continue to struggle against China’s deeply integrated and subsidized industrial machine, which prioritizes long-term strategic gains over short-term profits.
Only by addressing the entire ecosystem—supply chains, demand, infrastructure, and innovation—can the U.S. secure its position in the global economic order.