Volume 3, No.

3 March 2024 (586-601)

p-ISSN 2980-4868 | e-ISSN 2980-4841
https://ajesh.ph/index.php/gp

Neo-Mercantilism in The Semiconductor Industry: The Chinese

Strategy

Oscar Rodrigo Victoria Velasco

Universitas Indonesia, Jakarta, Indonesia
Email: [email protected]

ABSTRACT
This paper examines the impact of China's neo-mercantilist policies on its semiconductor
industry. China strategically employs a neo-mercantilist approach to enhance its technological
capabilities and strengthen its position in the global semiconductor sector. The research
method used in the paper is qualitative. The study analyzes the multifaceted strategies
encompassing industrial policies, trade practices, and technological advancements to
understand their contributions to the industry's growth and resilience. It also explores how this
growth benefits China's economy and highlights the role of economic factors in shaping political
partnerships. The findings demonstrate that China's neo-mercantilist policies have played a
pivotal role in fostering the development of its semiconductor sector through targeted
industrial policies and trade practices. The emphasis on technological advancements has
reduced dependence on foreign technology and enabled the production of high-quality
semiconductors domestically. The semiconductor industry's growth in China has positively
impacted the economy, contributing to job creation, increased exports, and enhanced
economic competitiveness. Moreover, the paper highlights the importance of economic factors
in driving political partnerships, as China's semiconductor industry growth has facilitated
collaborations based on mutual economic interests.
Keywords: Neo-Mercantilism, Semiconductors, Industry, China, United States

INTRODUCTION
Despite unprecedented technological advances, economics and politics have maintained
their basic foundations throughout the history of nations as we know them. While hundreds of
years ago most of the trade between regions consisted of basic goods such as spices and
textiles, the exchanges now include complex manufactured electronic devices. One of these
devices is semiconductors (sometimes referred to as integrated circuits, ICs, or chips) which are

Page Asian Journal of Engineering, Social and Health

586 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

an essential component of electronics, enabling advances in communications, computing,

healthcare, military systems, transportation, and more.
This paper does not aim to delve into the technical engineering aspects of the
semiconductor industry. Instead, it focuses on examining the strategies employed by China in
this sector and how these strategies have unexpectedly contributed to its economic growth.
The perspective of "new mercantilism" is adopted to analyze this issue, as it recognizes the
inherent drive of individuals and nation-states to create and maintain wealth and power in
order to safeguard their security and independence against various real or perceived threats
(Balaam & Dillman, 2018). In this particular case, the perceived threats mainly stem from the
United States and its allies.
China and the United States have had a recent history of tiff-for-taff exchanges that have
been extensively researched by scholars in the fields of economics, technology and trade
examining the geopolitical and economic dimensions of the semiconductor industry, focusing
on the motivations of both China and the United States in their engagement in the so-called
"chip war." But still, the discussion does not connect these motivations to the growth of the
gross domestic product and draw links on how these economic strategies have enhanced
China’s political alliances in its search to expand its influence abroad.
The main literature on these topics revolves around the US-China trade conflict (Bown,
2021; Liang & Ding, 2020; Medlock III et al., 2021), neo-mercantilist practices and its impact on
the global political economy (Berdell et al., 2019), neo-mercantilism and its dynamics (Ziegler &
Menon, 2014) and China’s neo-mercantilist practices and its impact on innovation (Atkinson,
2012; Ezell, 2021) or investment (Huimin et al., 2018; Wen & Zhao, 2021), rise as a global power
(Yu, 2017) and consequences for industrial countries (Wübbeke et al., 2016).
China's motivations are primarily driven by its desire to reduce its dependence on foreign
semiconductor suppliers, particularly from the United States. The Chinese government has
identified the semiconductor industry as a strategic sector crucial for national security and
economic development. They have pursued an aggressive strategy of investing in domestic chip
manufacturing, technology acquisition, and fostering innovation. China, recognizing the
strategic value of semiconductors, has adopted neo-mercantilist policies to advance its
domestic semiconductor capabilities and aims to become self-reliant in semiconductors and
challenge the technological dominance of the United States in the industry.
The United States, on the other hand, has been concerned about national security
implications, especially in the context of intellectual property theft, and seeks to protect its
technological leadership. The U.S. government has taken measures, such as imposing tariffs,
export restrictions, and sanctions, to curtail China's access to advanced semiconductor
technology. This is partly driven by economic considerations to protect American industries and
jobs, but also by security concerns related to the use of semiconductor technology in critical
infrastructure and defense applications.

Page Asian Journal of Engineering, Social and Health

587 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

One of the key concerns associated with neo-mercantilist policies is the requirement for
global account balances to sum up to zero. This means that if there are deficit countries, there
must also be surplus countries. When all nations strive to achieve positive trade surpluses, the
paradox of thrift arises, indicating that such efforts can lead to a decrease in overall economic
activity. Deficit countries may respond by implementing protectionist measures to restrict
imports from surplus countries in an attempt to restore external balance. However, such trade
restrictions often result in retaliatory actions, leading to a slowdown in global trade that is
detrimental to all parties involved. Additionally, it can foster resentment between surplus and
deficit countries, undermining the potential for alliances and partnerships to form (Berdell et
al., 2019). Interestingly, China stands as an exception to this trend.
Given this context, it can be understood that neomercantilism is a risky bet with
implications for numerous countries, especially in a globalized market and even more so
antagonizing the United States. However, its semiconductor industry has been successful with
its neo-mercantilist practices despite the many efforts from the United States to hinder this
strategic industry.
Considering these facts, this paper will investigate the motivations and implications of
China's recent mercantilist strategies in the semiconductor industry by addressing three
questions. How have China’s neo-mercantilist policies strengthened its semiconductor
industry? What are the factors that have driven its success despite having to compete with the
United States? And finally, how has this competition helped China to gain more power and
allies? The paper will be divided in three parts: first introducing the theoretical framework of
neo-mercantilism, then the discussion on China’s policies in the semiconductor industry and
finally how these strategies have help to foster competitive and interconnected economic and
political relations with other countries.
Mercantilism is an economic and political doctrine developed in Western European
countries between 1500 and 1800 in which statesmen, policymakers, and merchants sought to
increase wealth through state action (F.-L. T. Yu, 2019). Heckscher (1935) reports in detail how
Western European nations pursued mercantilist policies through the 16th and 18th centuries. It
differs from neo-mercantilism in its historical context and modern application. Key differences
between the two are found in their A) historical context: Mercantilism guided the economic
policies of many nations -particularly in Europe. Neomercantilism, on the other hand, emerged
as a term in the 20th century to describe certain aspects of modern economic practices; B)
goals: Mercantilism aimed to maximize a nation's wealth and power by promoting exports and
accumulating precious metals, such as gold and silver. The focus was on maintaining a positive
trade balance through a combination of protectionist measures and state intervention in the
economy C) role of the state: In mercantilism, the state played a significant role in guiding and
controlling economic activities. Neomercantilism, while still recognizing the importance of state
intervention, also considers the role of market forces and international economic institutions.

Page Asian Journal of Engineering, Social and Health

588 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

Neomercantilism is a modern iteration of mercantilism that emerged after World War II.
Unlike traditional mercantilism, which primarily emphasized policies aimed at generating trade
surpluses, neomercantilism encompasses a broader range of protectionist trade, finance, and
development measures with the objective of fostering economic prosperity and bolstering
national security (Balaam & Dillman, 2018).
Robert Gilpin introduced a valuable distinction between malevolent and benign forms of
mercantilist behavior. Malevolent mercantilism refers to aggressive economic tactics and
expansionist policies employed by nations to enhance their territorial, political, and economic
influence at the expense of other nations, often going beyond what is considered reasonable
for self-protection. On the other hand, benign mercantilism is characterized by defensive
measures aimed at safeguarding the domestic economy against adverse economic and political
forces. Differentiating between the two forms, however, can be challenging, as the distinction
often appears to be a matter of degree rather than a clear dichotomy (Balaam & Dillman,
2018).
It would be unconventional to categorize Chinese practices strictly as either malevolent or
benign. Only time and market developments will ultimately reveal which policies may be
perceived as more malevolent or benign in their consequences. (Scott & Scott, 2011)defines
neo-mercantilist strategies (which he prefers to call enhanced mobilization strategies) as
“overarching economic development policies designed specifically to enable a country to catch
up to its competitors”.
The implementation of neo-mercantilist policies by China is well documented and
scholars (Beeson, 2009; F.-L. T. Yu, 2019; Ziegler & Menon, 2014) generally agree on the
essence or the nature of these practices. However, they differ in the fact that their policies are
beneficial. Beeson (2009) observes that “China is actively embracing elements of
Neomercantilism and state interventionism” in international economic affairs but there are
some paradoxes in its developmental state that do not completely make it right, despite its
unprecedented recent growth spurt. For (Verma, 2016) China is the modern world's most
successful mercantilist state whose policies have developed the country into a global industrial,
economic, and military power and in doing so accumulated the largest foreign exchange
reserves in history.
Some of the concepts and variables of the neo-mercantilist framework are trade
balance, industrial policy, protectionism, state intervention, strategic resources, and intellectual
property protection. Trade balance refers to the difference between a country's exports and
imports of goods and services over a certain period. A positive trade balance -or trade surplus-
occurs when a country's exports exceed its imports. Conversely, a negative trade balance, or a
trade deficit, happens when a country's imports exceed its exports.
Industrial policy refers to a government's strategic approach and interventions to
support and promote the growth and development of specific industries within a country. It

Page Asian Journal of Engineering, Social and Health

589 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

involves a range of measures such as financial incentives, tax breaks, subsidies, infrastructure
development, research and development support, and trade policies designed to enhance
competitiveness and foster innovation within targeted sectors.
Protectionism is an economic policy approach that aims to shield domestic industries
from foreign competition through the implementation of trade barriers and restrictions.
Protectionist measures can include tariffs (taxes on imported goods), quotas (limits on the
quantity of imports), subsidies to domestic industries, and regulations that favor local
businesses over foreign competitors. The primary objective of protectionism is to safeguard
domestic industries, preserve jobs, and maintain or improve the trade balance.
State intervention refers to the active involvement of the government in economic
activities and decision-making processes. It can take various forms, such as direct ownership
and operation of industries, regulations and oversight, fiscal policies, and monetary policies.
State intervention is often implemented to correct market failures, promote economic stability,
address social issues, and achieve specific policy objectives, such as supporting strategic
industries or ensuring equitable distribution of resources.
Strategic resources are essential materials, commodities, or assets that are crucial for a
country's economic, political, or military interests. These resources can include energy sources
(such as oil and gas), minerals, rare earth elements, water, arable land, and other valuable
natural resources. Governments often develop strategies and policies to secure and protect
access to strategic resources, as their availability can significantly impact a country's economic
competitiveness and national security.
Intellectual property protection refers to legal frameworks and measures designed to
safeguard the rights of creators and innovators over their intangible assets, such as inventions,
patents, trademarks, copyrights, and trade secrets. Intellectual property protection aims to
encourage innovation and creativity by granting exclusive rights to individuals and organizations
and ensuring that they can reap the rewards of their intellectual efforts. This protection allows
creators to control and monetize their creations, fostering economic growth and technological
advancement.

RESEARCH METHODS
The research method used in the paper is qualitative. The researchers rely on secondary
data sources, including journals, articles, book chapters, official government publications, and
news from reliable sources. Data collection for this research is conducted through a technique
called Desk Research. This involves gathering existing information and data from various
published sources without directly interacting with individuals or conducting primary data
collection methods such as surveys or interviews. The researchers review and analyze the
available literature and documents related to neo-mercantilism in the semiconductor industry,
specifically focusing on the Chinese strategy.

Page Asian Journal of Engineering, Social and Health

590 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

Data analysis in this research is performed using the technique of triangulation.

Triangulation involves comparing and cross-referencing multiple data sources to validate and
strengthen the findings. In this case, the researchers likely analyze and synthesize the
information obtained from different secondary sources, looking for patterns, themes, and
insights related to the Chinese strategy of neo-mercantilism in the semiconductor industry. It's
important to note that the provided information is based on the title of the research paper and
general knowledge of qualitative research methods. For a more comprehensive understanding
of the specific research methods and techniques employed in the paper, it would be necessary
to refer to the complete research document.

RESULTS AND DISCUSSION

Old policies in a new world: Neo-mercantilism
To address how China's neo-mercantilist policies have bolstered its semiconductor
industry, it is essential to outline the significance of semiconductors in today's market.
Semiconductors serve as the foundational technology for modern electronics and play pivotal
roles in various sectors such as communications, computing, transportation, healthcare,
energy, and more, which are at the forefront of global technological advancement. With the
semiconductor industry currently valued at $334 billion, its global nature underscores
interdependence, reliant on intricate global value chains driven by international collaboration,
substantial investments in research and development (R&D), open markets, protection of
intellectual property, talent cultivation, and complementary policies. Notably, China stands out
as the world's fastest-growing and largest market for finished semiconductors, accounting for
nearly 27% of global demand, as reported by the World Semiconductor Trade Statistics (WSTS)
organization. Participation in China's expansive market is imperative for global companies, just
as involvement in the extensive global semiconductor supply chain is crucial for Chinese firms
to thrive on a global scale (Goodrich & Policy, 2016).
Neo-mercantilism, also known as enhanced mobilization strategies, typically requires a
country to perceive and acknowledge an external threat or challenge that justifies the adoption
of market-distorting policies. These policies aim to increase savings, lower wage and capital
costs, enhance risk-adjusted returns on investment (both human and physical), maintain an
undervalued exchange rate, and divert economic resources from consumption to production,
thereby reducing imports and promoting exports. When implemented successfully, these
policies can result in rapid industrialization and economic growth. However, they often face
challenges when their initial objectives are met, and a transition to a post-enhanced
mobilization strategy becomes necessary.
Sweden, Japan, and Ireland serve as examples of countries that implemented successful
enhanced mobilization strategies but encountered difficulties in transitioning from those
strategies, leading to substantial economic setbacks. In contrast, China has managed to

Page Asian Journal of Engineering, Social and Health

591 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

withstand the pressures and sustain its successful strategies up to the present day. However,
China's success has been identified as having come at the expense of its trading partners,
particularly those that provide the demand for its goods. According to (Palley, 2006), China's
neo-mercantilist policies, which heavily rely on the United States as a destination for its
manufactured goods, have played a significant role in the expansion of the United States' trade
deficit, the decline of its manufacturing sectors, and the vulnerability of its financial sector..
Palley also points that these factors together may undermine the strength of the US
economy, forcing it to grow more slowly or fall into recession, either of which would lead to a
reduction in demand for Chinese goods and thereby rebound on the Chinese economy, driving
it into recession or lowering its rate of growth. Nonetheless and oddly enough, the contrary has
happened mostly due to the neo-mercantilist policies applied to its semiconductor sector with
China overtaking Taiwan and South Korea as the leading manufacturer of semiconductors in the
world.
Table 1. Source: Semiconductor Equipment and Materials International (SEMI, 2022)

Country

South North
Year China Taiwan Japan Europe Others
Korea America
2022 28.3 26.8 21.5 10.5 8.4 6.3 6
2021 29.6 24.9 25 7.6 7.8 3.3 4.4
2020 18.7 17.2 16.1 6.5 7.6 2.6 2.5
2019 13.5 17.1 10 8.2 6.3 2.3 2.5
2018 13.1 10.2 17.7 5.8 9.5 4.2 4

Another indicator of China’s aggressive investment into industrialization is found in the

fact that among the biggest world economies, China is the one with the biggest share of its
Gross Domestic Product (GDP) invested in the industrial sector, surpassing most G7 economies
and India.

Page Asian Journal of Engineering, Social and Health

592 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

Figure 1. Source: Center for Strategic and International Studies (CSIS, 2021).

China's massive industrial and manufacturing production has been a driving force behind
the country's economic expansion. However, it has also made China heavily dependent on
exports. Economic policymakers have aimed to shift China away from export-driven growth
towards an economy more fueled by domestic consumption. Yet, China's GDP continues to be
substantially tied to exports. During the Global Financial Crisis of 2009, a sharp drop in global
demand led to a steep decline in Chinese exports, resulting in a significant decrease in the
contribution of net exports to China's GDP growth. On the other hand, during the Covid-19
pandemic, large government stimulus measures in the United States and Europe boosted
demand for Chinese exports. As a result, 25 percent of China's GDP growth in 2020 came from
exports—the highest level since 1997
Furthermore, China's international infrastructure development policy is specifically
designed to bolster its neo-mercantilist and hegemonic influence in Asia and beyond, solidifying
its economic and political dominance in the region. This behavior bears resemblance to the
historical English pursuit of trade route dominance in the seventeenth century, aiming to
secure power and prosperity. While not everyone agrees that China's policies are unabashedly
neo-mercantilist, the consequences in terms of external balance remain largely the same,
regardless of their underlying motivations.
As previously stated, the trade balance serves as a significant gauge of a country's
economic well-being and its interactions with other nations. In 2021, China emerged as the
leading global exporter of semiconductors, with exports amounting to $49.2 billion. In contrast,
it ranked as the second-largest importer, with semiconductor imports totaling $13.4 billion.
Consequently, China achieved a positive trade balance of $35.8 billion in the semiconductor
sector (Observatory of Economic Complexity, 2023).

Page Asian Journal of Engineering, Social and Health

593 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

China implements a range of mercantilist policies to enhance its trade surplus, allowing
for the accumulation of significant foreign reserves. Atkinson (2012) outlines two main types of
Chinese mercantilist policies in trade. The first type comprises measures aimed at stimulating
exports and reducing imports. These include currency manipulation, imposing high tariffs, and
providing tax incentives for exports. It is worth noting that while these policies benefit both
Chinese firms and foreign companies operating in China, they primarily aim to foster Chinese
exports.
The second type of mercantilist policies focuses on supporting Chinese firms while
creating obstacles for foreign companies operating within China. These policies can involve
preferential treatment, subsidies, or regulatory barriers that favor domestic firms over their
foreign counterparts. This discriminatory approach aims to provide advantages to Chinese
companies, promoting their growth and competitiveness in the domestic market while limiting
the market opportunities for foreign businesses.Overall, China's mercantilist policies aim to
bolster its trade surplus and support domestic industries, but they often result in imbalances
and trade tensions with other countries.
These policies include land grants and rent subsidies to Chinese-owned firms; preferential
loans from state banks; tax incentives for Chinese-owned firms; benefits to state-owned
enterprises and generous export financing. To help Chinese firms catch up with foreign
technology, the Chinese government controls foreign purchases and joint-venture
requirements to force foreign firms to transfer technology to China (Atkinson, 2012).
(Goodrich & Policy, 2016)identifies three crucial pillars of China's national policy structure
that support its semiconductor industry. Firstly, there is a high-level government task force in
place, led by Vice-Premier Ma Kai, which oversees industrial strategy and sets development
targets for the semiconductor sector. This task force, known as the leading small group (LSG)
for semiconductor development, includes an experts group that consists of industry
representatives. However, the participation of foreign stakeholders in this group has not been
extended.
The second pillar involves the implementation of national strategies. In 2014, China
released the Promotion of a National IC Industry Development Guidelines, which aims to build a
comprehensive semiconductor industry ecosystem within the country. The objective is for
China to become a global leader in all major segments of the semiconductor industry by 2030.
Notably, the "Made in China 2025" policy has received significant attention, particularly in
addressing the deficiencies of the Chinese manufacturing industry compared to developed
nations. This policy emphasizes the need to enhance key technologies and independent
innovation capabilities, primarily through increased research and development (R&D)
investments in Chinese firms.
These pillars of China's national policy structure demonstrate a clear commitment and
prioritization of semiconductor technology development, production, and control at the highest

Page Asian Journal of Engineering, Social and Health

594 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

levels of Chinese leadership. The government's involvement, strategic planning, and substantial
funding play integral roles in supporting the growth and advancement of the domestic
semiconductor industry.
The plan, also known as MIC2025, was launched in 2015 with the aim of “transforming
China from a big manufacturing country to a strong manufacturing country”. These authors
conclude that CM2025 helped increasing firms’ R&D investment mainly through government
subsidies and financing facilities and that the bias towards state-owned enterprises (SOEs) is
significant. However, the findings reveal a serious problem of MIC2025: providing subsidies may
increase firms’ R&D investment in the short term, but it goes against the goal of improving
firms’ independent innovation ability as it breaks the principle of competition neutrality.
Another one of these policies can be found in China's “Five-Year Plans”, which outline
ambitious targets for technological self-sufficiency and innovation. The semiconductor industry
has been a focal point, with policies encouraging domestic R&D, fostering collaboration
between academia and industry, and incentivizing the establishment of semiconductor
manufacturing facilities.
China's support for state-owned semiconductor enterprises, such as SMIC (Semiconductor
Manufacturing International Corporation), plays a pivotal role in its neo-mercantilist strategy.
Financial support, preferential treatment in procurement contracts, and strategic partnerships
have enabled these entities to compete globally and enhance their technological capabilities.
Finally, regarding the third pillar of massive government funding, A key aspect of China's
IC Promotion Guidelines is the massive investment funds established by the central and local
Chinese governments and state-directed entities aimed at building or acquiring a leading
semiconductor industry. Until 2016, the National IC Fund had raised $21 billion, while local
government funds had raised $26 billion. The majority of this investment capital comes from
government sources and other quasi-governmental "societal" funding, primarily state-owned
enterprises (SOEs). These funds finance investment, merger, and acquisition activities targeting
companies and technologies across all stages of the semiconductor development and
fabrication lifecycle. China has leveraged its economic clout to gain access to critical
semiconductor technologies through international trade practices. It has employed strategic
acquisitions, joint ventures, and technology transfers to reduce reliance on foreign suppliers
and foster domestic innovation.
Another important factor is that Chinese leaders believe that a strong and powerful
nation can be enhanced through science and technology. China’s Fifteenth National Congress
set the goals and tasks of invigorating China through science and education. Action Scheme is
formulated to push forward educational reform to enhance China’s innovative capacity
(Ministry of Education, P.R. China, 1998). Nationalism in China’s technological development
picked up the pace after the government introduced two key policies: the medium- and long-

Page Asian Journal of Engineering, Social and Health

595 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

term Program for Science and Technology Development in 2006, and the “strategic emerging
industries” initiative in 2010 (Hansen, 2014).
Protectionism encompasses a variety of other measures in addition to tariffs, including
quotas, subsidies, regulations, and non-tariff barriers. Quotas restrict the number of imported
goods that can enter a country. Subsidies provide financial assistance or incentives to domestic
industries, making them more competitive. Regulations can be imposed to favor domestic
products or to create technical barriers to trade. Non-tariff barriers include various
administrative and bureaucratic requirements that can hinder imports.
Semiconductors play a crucial role in the ongoing trade war between the United States
and China, making them a primary target of US sanctions against China. The United States has
been implementing technology sanctions on China for an extended period, leveraging its status
as the world's leading technology power. These sanctions primarily stem from the United
States' prominent position in relevant industries and concerns about China's rapid
advancement in the high-tech sector.
According to (Hu et al., 2022; Y. Yu et al., 2024), the production of chips holds a unique
status as the core element within the semiconductor industry, impacting national economic
development and international competitiveness. Recognizing this, the United States has sought
to impede China's progress in high technology by utilizing its industrial supply chain influence
and leveraging its dominant position within the global political and economic power
structure.Through its industrial supply chain power, political influence, and economic strength,
the United States aims to hinder China's development in high technology. By imposing
technology barriers and sanctions, the United States aims to limit China's access to advanced
semiconductor technologies and impede its growth in the industry. These actions reflect the
United States' strategic utilization of its industrial and geopolitical leverage to obstruct China's
advancements in high-tech sectors.
Moreover, when examining the semiconductor trade dynamics between the United
States and China, it becomes evident that there exists an unequal relationship in terms of
supply and demand. The United States, serving as China's largest chip supplier, annually exports
over a third of its total chip sales to China. As the technological leader in high-tech production,
the United States has historically dominated the US-China semiconductor trade (Ravi, 2020). In
July 2018, the US imposed a 25% tariff on semiconductor imports from China, marking one of
the initial Chinese products targeted by the US government. Interestingly, integrated circuits
and the equipment necessary for their production were noticeably absent from China's
extensive list of retaliatory measures. Despite the trade war, China continued to increase its
imports of these products from the US by 2020, underscoring the dependence and
irreplaceability of Chinese companies on US-related semiconductor imports.
Although export subsidies are considered illegal under the World Trade Organization
(WTO) regulations, China has employed them to support domestic firms. Reports from 2005

Page Asian Journal of Engineering, Social and Health

596 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

indicated that the Chinese government provided over $2.4 billion in export subsidies (Atkinson,
2012). Additionally, in 2007, China allocated over $15 billion in subsidies to boost exports in its
steel industry. The United States filed a legal complaint with the WTO, alleging that China's
support for its steel exporters involved unfair cash grants, rebates, and preferential loans.
However, it is worth noting that Chinese subsidies extend beyond the steel industry. The
Chinese government also provides subsidies to various clean energy sectors, particularly the
solar and wind power industries
In short, the Chinese government successfully adopted mercantilist weapons including
exchange rate manipulation, tariff, and export subsidies to boost its industries and export and
restrict foreign competition. However, it is not the only country that has been implementing
this type of policy to try to take advantage of its position in such a crucial commodity in the
tech race. The United States also has implemented certain neo-mercantilist practices as well as
other developed countries.
In most cases, the media and research tend to focus on the perceived "malpractices" of
developing countries, while overlooking the historical use of similar policies by advanced
industrialized nations. This raises the argument that it is somewhat hypocritical for developed
countries to attempt to prevent developing nations from employing these policies today. Many
emerging economies desire a balance between weak protection of Intellectual Property Rights,
a combination of protectionism and free trade, and sufficient time to enhance their institutions
without undue pressure from Western countries and institutions to swiftly adopt democracy
and eradicate corruption. However, it appears that developed nations are conveying the
message to emerging economies: "Do as we say, not as we did (and sometimes still do)!" This
highlights the perceived double standards in the approaches and expectations of developed
countries towards emerging economies (Balaam & Dillman, 2018). Regarding technological
development, by promoting domestic semiconductor companies, China aims to strengthen its
technological capabilities and reduce reliance on foreign technology. This can accelerate the
development of indigenous innovation, research and development, and intellectual property
creation in China. It may also lead to increased competition and innovation within the global
semiconductor industry, contrary to what some scholars (Atkinson, 2012; Ezell, 2021) argue.
To summarize this section, China’s neo-mercantilist policies have strengthened its
semiconductor industry and its semiconductor industry has strengthened its neo-mercantilist
policies. Additionally, the factors that have driven its success despite having to compete with
the United States are major state intervention with precise objectives and guidelines: strategic
state-led industrial policy, investment in Research and Development (R&D), state-owned
enterprises (SOEs) and subsidies, long-term planning and vision (MIC2025, 5-Year Plans, etc.),
technology transfer and acquisition, global trade practices (leveraging its economic power to
secure access to critical technologies and markets), flexible regulatory environment (showing
flexibility in accommodating and supporting the growth of strategic industries) and a massive

Page Asian Journal of Engineering, Social and Health

597 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

domestic and international market, in addition to its technology-oriented education system and
talent pool.
The last question to answer is how has this competition helped China to gain more power
and allies. It was mentioned in the first section of this paper that increasing trade restrictions
typically lead to retaliation and that can result in a slowdown in trade, which is undesirable for
everyone, and it can even lead to resentment between surplus and deficit countries reducing
the possibilities of making allies and establishing partnerships, nevertheless, this is not the case
of China.
First, we have elucidated that the Chinese government possesses a unified vision for all its
strategies. It would be naïve to think that China would establish economic or political relations
with a country without having a potential benefit to get out of that partnership. In this case, we
have two elements: the main commercial partners and the Belt Road Initiative (BRI).
Regarding the first one, China has trade partners all over the world and in 2022 had
individual trade surpluses with the overwhelming majority of its trade partners: 174 of the 234
countries and territories listed. These trade surpluses are especially visible in China’s trade
relationships with many of the world’s largest economies, including the U.S. and India, with
$401.1 billion and $100.3 billion surpluses respectively.

Figure 2. China’s Imports and Exports by Country in 2022. Source: Visual Capitalist,
2023.

A significant portion of China's trade deficits are observed in its dealings with major Asian
economies. The largest deficit is with Taiwan, primarily driven by imports of semiconductors.
China also experiences deficits with Japan (amounting to -$11.9 billion) and South Korea
(amounting to -$37.8 billion), the second and fourth-largest economies in the region,
respectively. These deficits are largely attributed to imports of electronics and machinery. In
addition to economic considerations, China's trade deficits are also influenced by strategic

Page Asian Journal of Engineering, Social and Health

598 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

needs. For example, deficits exist with oil-producing countries such as Russia and Saudi Arabia.
China also has a trade deficit with Australia, which is a crucial supplier of raw materials like iron,
gold, lithium, and liquefied petroleum gas.
As highlighted by Du and Wallace (2023), China's trade relationships extend beyond
economic factors and encompass historical, geopolitical, and strategic considerations. These
relationships are also utilized for political purposes. The case of Taiwan exemplifies this
complexity. Taiwan plays a crucial role in the chip market, making it both a valuable trade
partner and a contentious rival. China considers Taiwan as part of its territory, while Taiwan
operates as a separate, self-governed entity.
Furthermore, China's increasing investments in infrastructure across Asia and Africa are
reflected in growing trade balances with developing countries, which are poised to become
significant trade partners in the future. This aligns with Beijing's objective of integrating
diplomacy with neighboring countries, major powers, and developing nations under a
comprehensive framework of "new type of international relations underpinned by win-win
cooperation."
Regarding Southeast Asia, there has been a shift from aggressive foreign policy to
economic engagement and subsequently back to assertive foreign policy. Xi Jinping has
integrated development and security, as well as institution-building and island-building, to
establish a network centered around China, organized according to Chinese interests, and
guided by Chinese values. While the Belt and Road Initiative (BRI) is promoted as an "inclusive"
project, notable absences include the United States and Japan. This reflects Xi Jinping's efforts
to reshape the norms, rules, and institutions of global governance, aspiring to transition from
what is perceived as the US-led global liberal order to a Chinese-style globalization (Callahan,
2016).

CONCLUSION
In conclusion, China's neo-mercantilist policies have played a pivotal role in strengthening
its semiconductor industry. Through a combination of industrial planning, state support for
SOEs, strategic trade practices, and technological advancements, China has positioned itself as
a formidable player in the global semiconductor market. However, the challenges and
controversies associated with these policies underscore the delicate balance that must be
maintained to ensure sustainable growth and global cooperation in the semiconductor industry.
While China's neo-mercantilist approach has strengthened its semiconductor industry, it
has also faced criticism and challenges. Issues such as intellectual property concerns, market
distortions, and accusations of unfair trade practices have generated tensions in the global
semiconductor landscape. Wen and Zhao (2021) for example, note that China’s economic
policies can hardly be sustained in the long run and in the next years there must be changes in
its approach to avoid a recession that would stop its growth.

Page Asian Journal of Engineering, Social and Health

599 Volume 3, No. 3 March 2024
 Neo-Mercantilism in The Semiconductor Industry: The Chinese Strategy

However, combined with other strategies such as the “MIC2025”, the Five-Year Plans and
especially the Road Belt Initiative, which serve as a vehicle for creating a new global economic
and political order attempting to increase its influence in Africa, Latin America, Middle East and
South Asia, China pursues a pragmatic Mercantilist policy that combines a wide array of
diplomatic and economic devices, China can keep growing and gaining more political and
economic allies to balance the United States as the superpower.
Regarding whether the “Chinese model” can be transferable to other economies, authors
such as Dellios (2005) conclude that China’s rise as a global power provides an alternative to the
US development model by incorporating capitalism into a socialist polity. China’s economic
success through Neo mercantilist strategies may become an incentive for other Asian
developing nations such as the Philippines or African nations to follow. More research is
required with other theoretical approaches to determine the possible outcomes for the long
term consequences of Chinese neomercantilist practices and its implications for the global
political economy as well as the influence of economics in politics and diplomacy.

BIBLIOGRAPHY
Atkinson, R. D. (2012). Enough is enough: Confronting Chinese innovation mercantilism.
Washington, DC: The Information Technology & Innovation Foundation.
Balaam, D. N., & Dillman, B. (2018). Introduction to international political economy. Routledge.
Beeson, M. (2009). Developmental states in East Asia: A comparison of the Japanese and
Chinese experiences. Asian Perspective, 33(2), 5–39.
Berdell, J., Mondschean, T. S., & Pecchenino, R. A. (2019). Where Has All the Demand Gone?
Challenges to Growth in a “Neo-Mercantilist” Age. SPOUDAI Journal of Economics and
Business, 69(3), 35–54.
Bown, C. P. (2021). The US–China trade war and Phase One agreement. Journal of Policy
Modeling, 43(4), 805–843.
Callahan, W. A. (2016). China’s “Asia Dream” the belt road initiative and the new regional order.
Asian Journal of Comparative Politics, 1(3), 226–243.
Ezell, S. (2021). Moore’s Law Under Attack: The Impact of China’s Policies on Global
Semiconductor Innovation.
Goodrich, J., & Policy, G. (2016). China’s 13th Five-Year Plan Opportunities & Challenges For the
US Semiconductor Industry. Written Testimony for the US-China Economic & Security
Review Commission.
Hu, G., Ni, R., & Tang, L. (2022). Do international nonstop flights foster influential research?
Evidence from Sino-US scientific collaboration. Journal of Informetrics, 16(4), 101348.
Huimin, M., Wu, X., Yan, L., Huang, H., Wu, H., Xiong, J., & Zhang, J. (2018). Strategic plan of
“Made in China 2025” and its implementation. In Analyzing the impacts of industry 4.0 in
modern business environments (pp. 1–23). IGI Global.
Liang, G., & Ding, H. (2020). The China–US Trade War. Routledge.
Medlock III, K. B., Temzelides, T., & Chung, W. (2021). Mercantilism’s Groundhog day: The US-
China trade war and US energy exports to Northeast Asia. Energy Strategy Reviews, 38,

Page Asian Journal of Engineering, Social and Health

600 Volume 3, No. 3 March 2024
Oscar Rodrigo Victoria Velasco

100741.
Palley, T. I. (2006). External contradictions of the Chinese Development Model: export-led
growth and the dangers of global economic contraction. Journal of Contemporary China,
15(46), 69–88.
Scott, B. R., & Scott, B. R. (2011). Neo-Mercantilist or Enhanced Mobilization Strategies.
Capitalism: Its Origins and Evolution as a System of Governance, 377–421.
Verma, K. K. (2016). Impact of Chinese mercantilism state on India. Journal Global Values, 7(2),
1–8.
Wen, H., & Zhao, Z. (2021). How does China’s industrial policy affect firms’ R&D investment?
Evidence from ‘Made in China 2025.’ Applied Economics, 53(55), 6333–6347.
Wübbeke, J., Meissner, M., Zenglein, M. J., Ives, J., & Conrad, B. (2016). Made in china 2025.
Mercator Institute for China Studies. Papers on China, 2(74), 4.
Yu, F.-L. T. (2019). Neo-mercantilist policy and China’s rise as a global power. Contemporary
Issues in International Political Economy, 175–196.
Yu, Y., Ma, D., & Wang, Y. (2024). Structural resilience evolution and vulnerability assessment of
semiconductor materials supply network in the global semiconductor industry.
International Journal of Production Economics, 109172.
Ziegler, C. E., & Menon, R. (2014). Neomercantilism and great-power energy competition in
Central Asia and the Caspian. Strategic Studies Quarterly, 8(2), 17–41.

Copyright holder:
Oscar Rodrigo Victoria Velasco (2024)

First publication right:

Asian Journal of Engineering, Social and Health (AJESH)

This article is licensed under:

Page Asian Journal of Engineering, Social and Health

601 Volume 3, No. 3 March 2024