Intel Corp. is reversing course on a $5.4 billion deal to acquire Israeli contract chipmaker Tower Semiconductor after their merger agreement expired without China giving regulatory approval.

Intel decided to purchase Tower in 2022 and will now pay a $353 million termination fee instead, the company said in a statement.

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"After careful consideration and thorough discussions and having received no indications regarding certain required regulatory approval, both parties have agreed to terminate their merger agreement having passed the Aug. 15, 2023 outside date," Tower Semiconductor said in a statement.

The decision comes amid a strained relationship between the United States and China over conflicts around trade, intellectual property and the future of Taiwan.

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Intel CEO Pat Gelsinger said he has been trying to get the deal approved by Chinese regulators after meeting with government officials there in July. 

At the same time, Gelsinger said the company was also investing in its foundry business, which makes chips for other companies. Intel's foundry business reported second-quarter revenue of $232 million, up from $57 million in 2022.

Chip demand for Intel has been down after two years of growth powered by remote work during the pandemic. It has committed to trimming $3 billion in costs this year, with an aim of saving between $8 billion and $10 billion by the end of 2025.

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On Wall Street, shares of Intel are down approximately 1.10% in the last month.

In June, Israeli Prime Minister Benjamin Netanyahu announced that Intel had agreed to spend $25 billion on a new factory in Israel, marking a new record for international investment in the country.

Reuters contributed to this report.