Chips with everything: semiconductors will define the US-China rivalry

The Javelin anti-tank weapon requires 250 semiconductor chips. Since February, the US has given Ukraine almost 9,000 Javelins. As the Americans say – “Do the math”. Given the recent semiconductor shortage, it adds up to a problem.

The problem is not just military. Semiconductor chips are vital to almost every part of a modern economy – car manufacturing, aviation, robotics, home appliances, quantum computing, artificial intelligence, and other technologies all rely on them.

67 cent of the world’s chips are made in Taiwan, 31 per cent are made in South Korea, and 73 per cent of all processing chips are made in East Asia. So, what happens if there’s war in the South China Sea and or an invasion of Taiwan?

This was one of the questions thrown up at the Price of War conference in London hosted by the CERGE-EI Foundation and Reaction. There would of course be numerous consequences, and one of them would probably be a prolonged global recession. Another would be having a limited supply of advanced weapons which, if used, could not be replaced in short order due to the lack of chips. We saw similar problems arise during the worst of the Covid-19 pandemic when the chip shortage halted the manufacture of cars and consumer electronics across the world. When factories began to produce goods again the demand for chips fuelled inflation.

This is the background to Congress passing the “Creating Helpful Incentives to Produce Semiconductors and Science Act” which, perhaps as part of the helpful aspect, is known as the CHIPS Act. It included $52bn for American companies manufacturing semiconductor chips, and tax incentives designed to spur investments in chipmaking.

Having once been a leader in manufacturing, the US is now playing catch up. In 1990 it made 37 per cent of the world’s chips, now it’s down to 12 per cent. During this period China has been growing its chip manufacturing ability and seeking ways to break into the high-end cutting-edge market. That makes the US, and many other countries, nervous. If China makes the world dependent on Chinese chips, the argument goes, the world must bend to Beijing and watch as it uses this dominance as a foreign policy weapon.

Yet the US remains a major player in artificial-intelligence chips, in chip design, and in the technology most companies use to make them. This has given Washington serious leverage. As well as funding the CHIPS Act to bring manufacturing home, the Americans are restricting China’s access to critical technology.

It had already ensured companies such as Huawei could not directly purchase American-made semiconductors and lobbied governments around the world to restrict supplies of high-end equipment required to make cutting edge chips. For example, it successfully persuaded the Dutch government not to grant licenses to the Dutch company ASML for precision tools for export to China. Most top-rated precision chip-related equipment is made in countries aligned with the US.

In October they went further. President Biden introduced a slew of even tougher controls on the export of US chips, technology, and possibility of foreign companies selling to China. Any Americans, whether living in China or outside of it, are now required to apply for a license if they wish to work with companies involved in advanced semiconductor production in China. Unsurprisingly there is “presumption of denial” at the beginning of the process.

To some these measures may appear draconian. However, they should not come as a surprise. They are a reaction to President Xi’s vow to build a world class military capable of dominating East Asia and eventually pushing the US out of the western Pacific. He also wants to bring Taiwan, and its semiconductor factories, under Beijing’s control.

It would be odd if the US did not move to prevent China from buying the technological means to achieve this, or to build the capacity to develop it for themselves. The Americans are probably a decade ahead on supercomputing and artificial intelligence, both of which are central to a country’s ability to compete economically and militarily in the 21st century. They mean to maintain that gap.

Biden’s hammer blow may slow China’s technological progress for up to 10 years. Beijing will spend the time developing its own precision tools and knowledge required for the next generation of semiconductor chips. They will also have to spend money. Enormous amounts of money. Building a world class facility capable of manufacturing advanced chips costs more than building an aircraft carrier.

The US intends to hobble what was once seen as the inevitability of China overtaking it as the predominant power in the world. Their chosen weapons are technology and sanctions because for Washington, semiconductors are a national security issue.

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