Why US chip controls took a back seat at the Xi-Trump summit

South China Morning Post | Vincent Chowin

Chinese President Xi Jinping and US President Donald Trump omitted semiconductor export controls from official readouts during their September 2026 Washington summit, reflecting a shifting strategic balance in the bilateral tech war. Foreign chipmakers face declining market share in China, projected to drop from 34 percent to 21 percent by 2026.

This quiet stalemate stems from Beijing's advancing domestic chip substitution driven by its 15th Five-Year Plan. While the Trump administration maintained 2022 restrictions and banned exports of Nvidia's H20 chips, Chinese tech firms capped H200 purchases, forcing Nvidia to absorb a $400 million inventory charge. Domestic self-reliance reduced Beijing's urgency to demand immediate relief. However, impending US congressional legislation like the Match Act threatens this fragile October 2025 Busan agreement detente by targeting Dutch ASML immersion lithography equipment. Any expanded restrictions will trigger severe Chinese retaliatory export controls on critical rare earth elements.

Comment

Beijing's decreasing insistence on immediate US export control relief reflects a structural reallocation of capital toward domestic wafer fabrication equipment manufacturers. Front-line Chinese foundries like Semiconductor Manufacturing International Corporation (SMIC) have redirected procurement budgets toward domestic tooling alternatives to replace imported ASML Twinscan NXT immersion lithography platforms. This transition prioritises baseline production survivability over cutting-edge transistor density, accepting lower operational yields to establish an insulated microelectronics industrial base.

This state-backed absorption of yield inefficiencies accelerates domestic supply chain maturity for dual-use semiconductor components. Reduced reliance on foreign silicon foundries insulates Chinese defence industrial production from abrupt Western export restrictions. Consequently, SMIC's expanding mature-node foundry capacity secures steady domestic microchip supplies for autonomous systems and radar signal processors despite perpetual US sanctions.

Strategic Question for Discussion

Which factor will prove more decisive in sustaining Chinese semiconductor self-reliance over the next Five-Year Plan — SMIC's capability to improve wafer yields on legacy ASML Twinscan NXT systems, or the domestic adoption rate of native lithography tooling?

The evidence points toward native lithography tooling adoption as the structural determinant, because multi-patterning workarounds on existing ASML Twinscan NXT platforms face hard physical limits in yield cost-efficiency. While short-term production relies on stretching legacy Western machinery, long-term industrial resilience requires domestic toolmakers to achieve commercially viable precision optical components. Consequently, scaling native foundry equipment will dictate whether China can maintain decoupled microelectronics supply chains without compounding manufacturing bottlenecks.

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