This briefing was written by former Bluebird Editor and third-year BSc International Relations and Chinese student Bokyung (Aree) Kang. In this briefing she analyses the current role of semiconductors in growing US-China competiton, and what a potential technological decoupling could look like for countries involved in the industry. This briefing was edited by Malou van Draanen Glismann (Managing Editor).
Semiconductors are arguably the most important foundation of the modern world. Also known as integrated circuits, ICs, chips, or microchips, these tiny devices utilize the qualities of semiconductors to power computers and electronics. Smartphones, laptops, TVs, cars, cameras, microwaves, and refrigerators all need them; so do the factory machines that manufacture them, medical equipment that diagnose illnesses, and solar panel systems and wind turbines that heat our homes.
They are also at the heart of US-China great power competition. How so?
IC chips have military uses– a much less neutral realm of usage of technology. Firing guided missiles, conducting reconnaissance with satellites, and enabling stealth capabilities of fighter aircraft, are all possible due to advancements in semiconductors. It’s also not just the mere fact that these technologies need chips to function. Consider how the American F-35 Lightning II aircraft are powered by chips manufactured by TSMC, a Taiwanese company whose fabrication plants are located uncomfortably close to China on the western coast of Taiwan.
Technology, and especially semiconductors, have become almost synonymous with military capability and national security.This article will discuss the two ways that chips shape Sino-American rival dynamics; firstly in how the unique supply chain structure of the semiconductor industry affects geopolitical dynamics. Second is the role of semiconductors as a vital component of a larger trend of technological decoupling– or the divergence from technological cooperation, of the United States and China.
A fragile supply chain
While the demand for semiconductors comes from every corner of the world, supply is dominated by only a handful of countries such as Taiwan, South Korea, the United States, and Japan. The industry has a unique global division of labor with a few countries specializing in one or more of the segments in the supply chain.
In the supply of raw materials and equipment, ASML of the Netherlands supplies 90% of the photolithography machines used to manufacture chips. Japanese companies also specialize in raw materials and equipment as well as production. South Korea and the United States have strong capabilities across all segments including design and manufacturing. Lastly, Taiwan’s TSMC is the world’s largest semiconductor manufacturer, accounting for around 53% of the global foundry (AKA fabrication plant) market. It also dominates the market for advanced chips, estimated at a whopping 92% share, according to the 2021 report by the Boston Consulting Group (BCG) and Semiconductor Industry Association (SIA).
This unique structure characterized by extreme specialization creates various chokepoints which contribute to the fragility of the global semiconductor supply chain. This means if one step of the chain falls, that segment is hard to replace. Research has found, for instance, that a short disruption of a semiconductor fabrication facility in Taiwan for 10 days could lead to a domino of additional disruptions across the entire supply chain that would last almost a year.
Moreover, 75% of manufacturing is geographically concentrated in East Asia, a region susceptible to geopolitical tensions such as those in the Taiwan Strait and the Korean Peninsula. There are also additional risk of natural disasters and resource complications from offshoring production. In the United States, these insecurities have led policymakers to prioritize ‘supply chain resilience,’ focusing on reshoring production and invigorating domestic industries and markets. Most recently, this has manifested as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act.
The CHIPS and Science Act
Signed into law by the Biden administration in August 2022, the CHIPS & Science Act aims to bolster US semiconductor manufacturing and R&D, authorizing $52.7 billion in subsidies. Besides domestic incentives, it also aims to diminish China’s advanced chip manufacturing ability by banning the export of cutting-edge chips and equipment to China. The export controls cover those from not only US firms but also non-US chip-makers that use American technology. Some experts have analyzed that these new controls represent an unprecedented systematic shift in US strategy. They mark a new step in a strategic trend dubbed as technology decoupling or technology bifurcation, which emerged in the mid-2010s and now dominates American strategic thinking. This trend refers to the divergence of national technology ecosystems wherein research, development, funding, investment and sales of technology become less integrated between states.
The Chinese Challenge
The shift away from cooperation has been more evident in the past decade and especially after the tariff wars and Huawei sanctions under the Trump administration. The CHIPS Act reflects the continuation by the Biden administration of this tough stance and its prioritization of maintaining an edge in the chips industry even through “offensive” means such as export curbs.
The main motivator of this approach is increased concern over national security. Over the years, US leaders began to view China with growing distrust and have defined China as a competitor rather than partners. Accordingly, they also began to view technological innovation as a realm of zero-sum competition rather than that of cooperation and mutual benefit.
With this backdrop, the CHIPS Act aims to achieve several goals. One is maintaining a competitive edge in cutting-edge technology, including advanced semiconductors, which many experts believe will greatly contribute to military dominance. For example, there is ever greater emphasis on the effect of semiconductors on the United States’ defense capability, especially that on the realization of Artificial Intelligence (AI) capability. The decision to ban exports of high-end technologies will curb China’s access to AI chips which many experts expect to revolutionize warfare.
Others have pointed to the need to counter China’s asymmetric competition tactics of technology transfer such as surveillance, intellectual property theft and supply of counterfeit devices that undermine regulated cooperation and national security. So concerning was the effectiveness of these illicit methods that they have already been addressed by the US Congress with the China Technology Transfer Act of 2021.
Lastly, some view that Chinese military-civil fusion of the tech industries warrants heightened caution. ‘Military-civil fusion (军民融合)’ is embraced by Beijing to transfer critical technologies into enhancing China’s military capacity. The decades-long strategy makes it more difficult than it already is to divide the flow of dual-use technology such as semiconductors to military and civil users.
The Chip4 Alliance
The recent US measures have a strong political character. Biden’s alliance diplomacy expanded into the chips realm as the proposal of the Chip4 Alliance which includes Taiwan, South Korea and Japan, all of whom are important US allies as well as major players in the semiconductor value chain.
At the same time, however, they are the closest neighbors of China, which they are also highly dependent on economically. A large part of the reaction from its participants has been that of skepticism and hesitation regarding unilateral US controls against their largest market.
South Korea was the most reluctant to join the initiative likely due to economic stakes and fear of retaliation. Korean semiconductor giants Samsung Electronics and SK Hynix have already invested billions of dollars in key manufacturing facilities in China. Furthermore, Mainland China and Hong Kong account for around 60 percent of Korea’s chips exports. Korean leaders remember how the deployment of the American missile defense system THAAD in 2016 led its tourism and exports revenue to dry up overnight, making them more resistant to explicitly siding with the US.
Taiwan’s challenge is similar to Korea’s in that China is its largest trade partner, accounting for 25% of its total trade, while 60% of its chip exports go to China. Officials have expressed dismissal at the notion of decoupling from China as being simply ‘not realistic.’ To put it bluntly, no East Asian (including Japanese) firms are too enthusiastic about the Chip4 limiting business with China, despite the US’ determination to do so.
Aside from economic and geopolitical dilemmas, there are internal challenges as well that have made leaders more skeptical about cooperation. One is the awkward status of Taiwan. Both Japan and South Korea have expressed concern at joining an intergovernmental initiative that includes Taiwan, lest it is interpreted as a challenge to the One China Policy. Furthermore, tensions between Japan and South Korea over the 2019 export controls of semiconductor raw materials are yet to be resolved, raising concerns of an incomplete and opaque partnership.
While the US has been slowly garnering support from the Netherlands and Japan to curb exports of equipment to China as of January 2023, no further progress has been reported on Chip4 after the preliminary meeting last September. Whether the US and its closest East Asian allies will be able to cooperate to further boost the effect of US policies is still in the shadows.
Challenges for China
Technological self-reliance is the foundation of the Chinese Communist Party’s ambitions for power both at home and abroad. For example, it enables control over public opinion and preserves social order according to the Party’s ideals. It drives military modernization: a central task to China’s great power ambitions.
At the 20th Communist Party Congress last October, Chinese leader Xi Jinping outlined the goal for the coming five years to “join the ranks of the world’s most innovative countries, with great self-reliance and strength in science and technology”. Yet despite this strong message, China’s technology sector has historically been far from being innovative or self-reliant.
China has been technologically inferior due to its late start in industry development and still remains dependent on foreign countries, spending billions in importing equipment and intellectual property. Regarding semiconductors, China is a major producer, yet cannot meet most of its domestic needs, has zero indigenous capacity for advanced chip production, and is highly dependent on the United States on various fronts of the industry such as the supply of various advanced chips, materials and electronic design automation (EDA) software and tools.
What does the future hold for China? A Peking University think tank report predicts that the ongoing technological decoupling will hurt China more than the United States. In the report, authors acknowledged and expressed concern over US technological superiority and have outlined suggestions for Chinese leadership to both extract as much utility from existing links with the US while enhancing its independent capacity amidst decoupling trends. Yet the more China is cut off from US technological cooperation, the more difficult it is for China to learn and develop its own technology, suggests findings by the Stanford Center on China’s Economy and Institutions. Thus, both internal and foreign analysis suggests that even with heightened emphasis on technological progress, China will still most likely face delay in reaching its ambitions.
Another CCP goal that semiconductors may affect is Cross-Strait reunification. China views reunification with Taiwan as “indispensable for the realization of China’s rejuvenation.” Xi Jinping proclaimed China will not renounce the use of force as an option to achieve this goal. The US and Taiwan have no military alliance, let alone official diplomatic ties. Yet TSMC and the rest of Taiwan’s chips industry are often cited as enough reason for the US to intervene in a situation of military aggression by China. The PLA’s siege of Taiwanese chip companies or even the disruption of production amidst fighting alone will send the global chips ecosystem toppling down in a matter of days– a disaster China is not exempt from– not when 36% of its chip imports come from Taiwan. Simply because it is so important, the chip industry is a powerful leverage for Taiwan. It provides a buffer from Chinese aggression and raises US stakes in the region, reducing the possibility of geopolitical showdown. For China, this presents geopolitical odds not entirely in its favor.
In conclusion, chips represent important emerging trends in great power politics. One is how the belief that high-end technology will determine military dominance and influence national security are leading both the US and China to view each other as competitors over partners and embrace technological decoupling as the new paradigm. The difference is that the United States is seeking to maintain its technological dominance while China, as a rapidly rising power, is striving to close the gap, even with US pushback.
Vital players of the industry such as Taiwan, Japan, the Netherlands and Korea also find themselves in tricky positions as new US policy tries to reshape supply chains and further exclude China from the picture. For America’s East Asian allies, their interests clash as much as they coincide. Various factors such as the prospect of deteriorating relations with China or competition among the members may make space for nuanced cooperation but nothing close to strict allegiances.
This ongoing race will continue to produce far-reaching effects for the global technology industry and international politics. No matter what kind, the world of semiconductors is definitely one to give heed to for many coming years.