► Since the U.S.-China strategic competition evolved into a tech race, China's industrial policy no longer presents a clear message to the outside world, especially in sectors where there is fierce competition between the U.S. and China.

► The Chinese government launched the third phase of its semiconductor Big Fund for 300 billion yuan ($41 billion) ... it appears that China's central government is accelerating the establishment of a Chinese company-centered semiconductor ecosystem by expanding support for semiconductor equipment companies.

► It is likely that China will actively request Korean companies to fill the gaps that cannot be filled by Chinese companies; however, it is important to remember that China's ultimate goal is to establish its own self-sufficient ecosystem centered on Chinese companies through import substitution.

Prompted by the tariff war during the Trump administration in 2018, the U.S.-China strategic competition has now evolved from a trade dispute into a tech war. In the U.S.-China tech race, semiconductor sector can already be seen as a warzone. In August 2022, the U.S. Congress passed the CHIPS and Science Act, which includes subsidies totaling $52 billion to promote domestic semiconductor manufacturing in the United States. Even American think tanks consider this a "turning point for American economic policy" and "the start of a new age of industrial policy." Two months later, on October 7, the U.S. announced export controls on advanced chips and technology to China. With these policies, the U.S. has begun reshaping domestic and global semiconductor supply chains, and at the same time, is attempting to block China's semiconductor ambitions by means of export controls with the United States and its allies.

The U.S-China trade dispute is not only about reducing the trade deficit. At its core, it targets China's aggressive industrial policies like 'Made in China 2025.' Former U.S. President Donald Trump, who initiated the trade war, also criticized China's unfair trade policies related to its industrial policies like 'Made in China 2025' and forced technology transfers for their adverse impact on the U.S. economy. These aggressive industrial policies were already anticipated to threaten the U.S.-dominated high-tech industries. Made in China 2025 along with China's announcement of a concrete timetable for catching up with the United States threw the U.S.-China strategic competition into full-swing. However, as competition intensified in 2018, the Chinese government has shifted its focus from becoming a "manufacturing powerhouse" as outlined in 'Made in China 2025' to economic security, linking security, industrial chains, and supply chains. As a result, the U.S.-China trade dispute, sparked by China's aggressive industrial policy, is escalating into a strategic competition between the two countries. In the midst of this, the United States is also aggressively pursuing a new industrial policy.

Compared to the United States' aggressive industrial policy, China appears to be mostly toning down its own industrial policy. For instance, since 2018, the Chinese government has not updated its official 'Made in China 2025' website, which marked the start of the U.S.-China strategic competition by laying out a specific timetable for China to catch up with the United States. Although Premier of the State Council has changed from Li Keqiang to Li Qiang in Xi Jinping's third consecutive term, there is still a picture of former Premier Li Keqiang on the website's homepage. The lack of updates to the website means that the overall direction of China's industrial policy has shifted following the onset of the U.S.-China strategic competition. This article focuses on the case of the semiconductor sector, where the U.S.-China competition is most fierce, and examines how China is responding to the aggressive export controls and industrial policy of the United States.

Following the start of the U.S.-China strategic competition, the most significant change in China's industrial policy has been the tone. 'Made in China 2025' laid out a specific timetable for overtaking Western industrialized countries and presented a very clear internal and external policy message. However, since the U.S.-China strategic competition evolved into a tech race, China's industrial policy no longer presents a clear message to the outside world, especially in sectors where there is fierce competition between the U.S. and China. The fact that China has toned down its industrial policy compared to the past does not mean China has disposed of it altogether. Rather, by recognizing that the specific and externally-oriented policy of the past causes conflict between the United States and China and negatively affects the development of the domestic industry, China appears to have shifted direction to a more cautious and quieter industrial policy.

Amid this quieter industrial policy approach, there are ongoing discussions regarding potential response measures for the semiconductor sector. One of the more notable measures being discussed is the one suggested by Lu Feng, a professor from Peking University. Lu Feng is known for playing a significant role in China transitioning from its "exchange market for technology" strategy to its "indigenous innovation" strategy in the early 2000s. In an interview with a Chinese media outlet in January 2023, Lu Feng argued that in response to the U.S. decoupling in the advanced chip sector, China should actively weaponize its position as the world's largest chip market while seeking out cooperation in the midst of struggle. According to the Semiconductor Industry Association (SIA), American semiconductor companies accounted for 46.3% of the entire semiconductor market share on the supply side in 2021, reaching 48% in 2022. Meanwhile, on the demand side, the Chinese market accounted for 34.6% of the entire semiconductor market share in 2021, falling to 31% in 2022. Ultimately, with the U.S. driving semiconductor supply and China driving demand, both the U.S. and China wield critical leverage over each other.

Moreover, considering that U.S. semiconductor technology sanctions are becoming a reality, Lu Feng also proposes that China should abandon its current fast-follower development model, and instead develop strategies for full-scale independent manufacturing starting from 28-nanometer legacy processes. For example, since 2000 with the release of State Council Document Number 18, which aimed to promote the development of the chip industry, the Chinese government has concentrated on the advancement of single technical indicators. This development model, which focused on creating links with global supply chains, failed to establish firm supply and demand relationships with the extensive semiconductor supply chain within China and could only function with foreign companies. Considering this context, Lu argues that China should shift its policy focusing away from a model that encourages the development of specific technologies to one that aims to create a complete supply chain composed of local Chinese companies.

The formation of a supply chain composed of Chinese companies can be achieved in two phases. The first phase is the de-Americanization of the entire semiconductor supply chain production line. This entails establishing production lines that do not rely on the U.S. equipment and instead utilize equipment and materials from countries outside of the U.S., such as Japan, Korea, and Europe to mitigate the impact of the U.S. sanctions. The second step is to replace foreign equipment and materials with Chinese-made ones. With this approach, China can pursue independent development in the semiconductor industry with established supply and demand relationships between Chinese companies across the key segments of the supply chain, including design, manufacturing, equipment, and materials. To realize these policy objectives, Lu proposes establishing a "Central Special Committee" to utilize the advantages of China's nationwide system (juguo tizhi). This committee refers to an institution that is directly responsible to the Party Central Committee without any intermediary management and is responsible for how plans are designed and how goals are achieved. By establishing a unified leadership body responsible for the semiconductor industry from the central level, the aim is to achieve another success story like the Mao era's development of an atomic bomb, guided missiles, and nuclear submarine.

It is still too soon to gauge the extent to which Lu's ideas have been reflected in actual policies. However, Reuters reported in September 2023 that the Chinese government launched the third phase of its semiconductor Big Fund for 300 billion yuan ($41 billion). The third phase is expected to be larger than the first and second phases, which raised 138.7 billion yuan in 2014 and 200 billion yuan in 2019, respectively. Reuters also reported that the third phase will mainly invest in chip manufacturing equipment that falls under the U.S. sanctions. There are no reports that confirm whether an organization like a "Central Special Committee" for semiconductors has been established. However, it appears that China's central government is accelerating the establishment of a Chinese company-centered semiconductor ecosystem by expanding support for semiconductor equipment companies. 

The U.S.-China chip war will have numerous implications for Korea. First, China's strategy to de-Americanize semiconductor production lines could be an opportunity or a crisis for small and medium-sized equipment companies in Korea. As the U.S. companies and personnel pull out of the Chinese chip market, it is likely that China will actively request Korean companies to fill the gaps that cannot be filled by Chinese companies. However, it is important to remember that China's ultimate goal is to establish its own self-sufficient ecosystem centered on Chinese companies through import substitution. Second, although the U.S. has allowed semiconductor equipment to be brought in to operate Samsung's Nand Flash and SK Hynix's DRAM facilities in China, it will not be possible to expand production capacity more than 5 per cent over ten years. While production lines in China can be maintained at their current levels, in the long run, it is likely that advanced chip production in China will be phased out. Because the U.S. is monitoring the outflow of used semiconductor equipment sold to Chinese businesses, the likelihood of semiconductor equipment outflow to China is low. However, there is an increasing possibility of Korean semiconductor personnel being pulled to China in the long run. Therefore, the Korean government and companies should take measures to prevent the loss of Korean semiconductor personnel to China.