For those who may believe in the ideal of "free trade," it might seem "protectionist" for governments to intervene in international trade and provide subsidies to nurture their own industries.

But these days, semiconductor powerhouses such as the US, South Korea, Taiwan and Japan, are all racing to present hefty subsidy programs to boost their own industries based on the fear that the lack of governmental support will decide the fate of their key strategic sectors.

The world's largest economies, the US and China, are leading the race, taking aggressive measures such as trade curbs to gain a technological upper hand in high-tech chips.

Chris Miller, an international economic historian best known for his best-selling book, “Chip War: The Fight for the World's Most Critical Technology,” says the latest strategic rivalry impacting the whole chip industry is a result of China's vast subsidy campaign that has created an uneven playing field for key players.

While the US has announced its own massive program to boost chips, the CHIPS and Science Act, which incentivizes global chipmakers running businesses on its soil, it is not intended to press foreign companies to “decouple” from China, Miller, who is an associate professor of international history at Tufts University's Fletcher School of Law and Diplomacy, told The Korea Herald in a recent email interview.

He argued that the US CHIPS Act is rather a countermeasure against Beijing’s great scheme to foster its own chip supremacy to cut ties with the global supply chain, explicitly seen in its strategic domestic funding program, Made in China 2025, which boasts an unrivaled amount of state subsidies.

Under this backdrop, the chip rivalry will continue to escalate, as China will use its massive subsidies as its primary strategy, and resort to retaliatory regulations less frequently, Miller said.

So, for the US and its allies to be less affected by China’s support for its own companies and supply chains, Miller advised they should craft policies that can address China's vast subsidy campaign, while at the same time limiting protectionism among themselves.

The following are key excerpts from the interview:

The Korea Herald: Countries are seen competing to nurture their chip industries by providing substantial funds. How do you anticipate this trend will change the industry landscape for semiconductors in the future?

Chris Miller: I think the key change in recent years is that in the past, some governments heavily subsidized their industries while others did not. Today nearly all are, because other efforts to level the playing field didn’t work. The US CHIPS Act and similar legislation in Japan and Europe are a response to this trend. They’re trying to catch up in the subsidy race.

KH: Is the US-China rivalry heading towards "decoupling?" What is the intention behind the US' restrictions on China?

Miller: I do not think the US or allies want complete decoupling. Far from it. They want to stop China from accessing the most advanced technologies, but to continue selling high-tech goods, such as standard chips, to China, while continuing to benefit from China’s low-cost manufacturing. This is what a series of Western leaders, from Ursula von der Leyen to Janet Yellen have articulated in high-profile speeches in recent months. And it’s clear that foreign CEOs don’t want to lose access to the Chinese market.

However, it is not clear whether China is willing to accept a situation in which it is cut off from advanced tech. So we have seen China (actually) take steps toward decoupling. Made in China 2025 is an industrial policy program explicitly designed to decouple China by reducing China’s reliance on imported chips and other advanced manufactured products. When it comes to semiconductors, this has not worked, because Chinese firms are behind technologically. But there is no doubt that China is not happy with the status quo, especially as the US, Japan, South Korea and other countries tighten control over technology transfer into China.

KH: Some people question that the recent series of new trade rules may hurt free trade and international standards. What is your view?

Miller: I do not think anyone who has actually studied China’s trade policy or industrial policies believes we have ever been in a free trade world. For several decades, the outside world tolerated Chinese industrial policies -- including dramatic subsidies and technology transfer policies -- because Chinese technology was still not very advanced.

Over the last decade, however, China has made substantial progress and is now threatening key high-tech industries: semiconductors, displays, batteries and others. So China’s key trading partners are no longer willing to overlook China’s industrial subsidies. China is not willing to reduce its subsidies – it’s actually increasing the focus on state subsidies. So other countries have felt compelled to respond with their own subsidies, so that their firms have a chance to compete.

KH: With its unrivaled subsidy plan, do you predict China will be able to achieve its goal to secure supremacy in chips?

Miller: China wants to gain an upper hand to overtake other countries in chips, and that is why it has been pouring tens of billions of dollars a year – the equivalent of one CHIPS Act per year – into its chip industry. The question is: “Can it?” The only limits to its ability to do so are the fact that, first, semiconductor technology is very complex and, second, that the US, Japan, and the Netherlands are limiting tool sales to China. The greater restrictions on accessing advanced chipmaking tools, materials, software and other components make China’s task far harder.

KH: Is there a possibility of China imposing sanctions, like the one against Micron Technology, or introducing new regulations to counteract US bans? Alternatively, could China offer significant incentives to attract foreign investment and technology?

Miller: China's primary focus is likely to be continuing its vast subsidy campaign to build up domestic competitors to foreign chipmakers. For example, generous subsidies have helped its chipmaker YMTC become a world-class NAND memory firm, competing with Samsung Electronics, SK hynix, Micron Technology and other firms. I think China is likely to continue its subsidies as its primary strategy and resort to retaliation less frequently.

KH: How should Samsung and SK hynix and other global powerhouses react to the escalating chip war between the two superpowers?

Miller: Every tech company is trying to recalibrate its approach. Most companies in the semiconductor industry were already looking to limit their investment in high-tech production in China, while keeping some low-tech production. I suspect that Korean semiconductor firms already had a similar strategy. And all chip companies need to keep some amount of investment in China, which is the price the Chinese government demands for continued access to the Chinese market.

While they retain access to the Chinese market, they should realize that China’s government eventually wants to replace them with a local competitor. In some cases – such as NAND memory chips – this may happen relatively soon. The only durable strategy is to focus on advancing a company’s technological capabilities and staying ahead of Chinese competitors. At the same time, most companies would want to keep their most advanced capabilities at home, as they are deeply concerned about tech transfer in China. I think this describes Korean firms’ strategy, too.

KH: Will this "protectionist" approach continue in the technology and economic sector even if the administration changes?

Miller: I think there is broad agreement in the US that the government will not let heavily subsidized Chinese industries take market share from US firms in critical technologies like semiconductors. Different political parties will have different tactics for addressing this, but I don’t think the US approach will change until China’s approach changes. There’s broad consensus in the US that the old system – in which China was protectionist, the US wasn’t, and US firms repeatedly lost market share – was a bad deal for the US and allies alike. Now, I think the challenge for the US and its allies is to craft policies in a way that addresses Chinese industrial subsidies but limits protectionism between allies.

KH: Considering Taiwan's strategic importance to the US, would the US be more inclined to support TSMC? Could geopolitical factors hinder Samsung's growth in the foundry business?

Miller: No, if anything, geopolitical factors help, because some companies want to diversify production and not be highly reliant on the Taiwan Straits. But I think the primary factors shaping corporate decision-making are business dynamics.

KH: The recent meeting between US Secretary of State Antony Blinken and Chinese President Xi Jinping appears to be an effort to alleviate heightened tensions. Do you think their meeting and future meetings will have any impact on the semiconductor industry, including on recent regulations and bans?

Miller: The core driver of tensions is China's dramatic military buildup coupled with Xi Jinping's more aggressive diplomacy. China's new diplomatic approach over the past decade has not only been used to bully South Korea, Australia, Japan and other countries in the region, disrupting trade in critical materials like rare earth elements. It has also raised questions about whether China might attack Taiwan. Unless China can make credible steps to alleviate this sense of risk, I think tensions will continue.

Chris Miller is an economic historian who teaches international history at the Fletcher School of Law and Diplomacy at Tufts University. He is the author of the corporate bestseller “Chip War: The Fight for the World’s Most Critical Technology,” published in October 2022. – Ed.