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The Chip War: What Is Fueling the Rising Tension Between the USA and China?

China has outlined some ambitious goals in its ‘Made in China 2025’ policy that its semiconductor self-sufficiency rate will be 40% by 2020 and 80% by 2030. China is not alone in devising ambitious goals when it comes to the semiconductor industry. USA announced CHIPS and Science Act back on 9 August 2022. This is a historic act in terms that companies have announced nearly 50 billion dollars in additional investment in American semiconductor manufacturing, bringing total business investment to nearly 150 billion dollars since President Joe Biden took office. In one of his tweets, the POTUS declared- “The future of the microchip industry is going to be Made in America.” Naturally, a curious mind wants to know the reason behind this sudden urge by the current two superpowers to domesticate the semiconductor industry.

Vulnerable Supply-Chain and Monopolistic Market

In a world where countries run on energy, securing it is a prerequisite for survival. China does not have any natural energy resources. As a result, it stores energy in its reserve for a few days but yet it needs a continuous supply of energy to run the country. This need for energy makes the route of supply through which these countries import energy a national security concern. And as a result, the countries they import energy from become   strategically important.  In the era of the fourth industrial revolution, semiconductor chips are analogous to energy. Hinting that Chris Miller, author of the book ‘Chip War: The Race to Control World’s Most Critical Technology,’ said, “Chips are the new oil.” The more the world digitizes, our dependence on microchips increases rapidly. Everywhere you turn, you will see how heavily dependent the entire world is on them. From the smartphone in your hand to the laptop you work on, automated cars to even the Mars rover; everything has microchips in them. But shockingly a technology so crucial to the world is produced mostly by a single company, TSMC- Taiwan Semiconductor Manufacturing Company. The monopoly of TSMC in the semiconductor industry means both China and USA are not self-sufficient when it comes to semiconductors and as a result depends on TSMC for their supplies. It makes Taiwan a strategically significant territory for both of them because the hegemony of any one power over Taiwan means choking the opponent’s technological abilities. So, how did TSMC create a monopoly over the market?

Even though the production of microchips was started by Intel in the USA, the company decided to outsource the parts of production that are costly but not that profitable. Seeing this as an opportunity, Morris Chang founded the world’s first semiconductor foundry solely dedicated to manufacturing semiconductors, TSMC in Taiwan in 1987. Today, it creates the most advanced semiconductors chips, 5 nanometres chips and is set to produce 3 nanometres ones this year. The only company that comes closer in terms of comparison is Samsung, the only other company that makes the 5nm chips. Still, Samsung is way behind TSMC in terms of market share. The market share of TSMC is currently 56%, whereas the market share of Samsung is 13%. Companies like Apple, Huawei, AMD, Broadcom, and Nvidia are some big names that use TSMC’s microchips.

Apart from the fact that TSMC holds the majority of the market share, it is crucial to understand that it is also the only company that produces advanced microchips. The more advanced the microchip, the more advanced the technology, such as mobile phones, laptops, television, home equipment, military weaponry, etc. In short, the holder of advanced microchips will also have the most mature economy and highly advanced military power. For both USA and China, the previous sentence is crucial. It decides their fate in becoming the dominant superpower.

Technological Hegemony: The Race to Become the Dominant Superpower      

The nature of international politics is that it is uncertain and heavily driven by national interest. As a result, countries are always alert and try to create situations that will favour them, even if it means hampering the self-interest of other nations. The only way to be secure in this anarchic world is to be the hegemon.  The situation with Taiwan is that both countries have selfish reasons to prioritise Taiwan in their strategies because it directly connects with their ability to become the hegemon. This is the reason China exercises its muscle power by showing off its military might around Taiwan, to send a signal to both USA and Taiwan about the territorial proximity as well as their ability. It is also why USA House Speaker Nancy Pelosi spoke with the TSMC Chairman, Mark Liu, during her brief visit to Taiwan. It is believed that the discussion between them touched on the topic of the USA’s CHIPS Act and the 5nm foundry TSMC is currently building in Arizona.

A possible annexation of Taiwan means the USA will be completely cut off from its supply of semiconductors which will push it to a technological abyss. On the other hand, cooperation between USA and Taiwan will further modernise the US military and economy and thwart China from the competition of hegemon. The USA is already making all the diplomatic efforts needed to sideline China. For instance, Washington has been promoting the so-called Chip 4 Alliance, a partnership between the USA, Japan, South Korea and Taiwan, excluding China.

Even though China is heavily dependent on TSMC as well as Samsung for advanced semiconductors, it can analyse the situation very well. And to save itself from the disaster, it has already started taking precautions. The same situation applies to the USA. In an already scarce supply with only three semiconductor manufacturing companies all around the world, depending on one company, that too in a geographically unpredictable zone is a risk too high to take. Therefore, the USA is also taking precautions to safeguard its own interest.

The USA is desperate to ensure China does not become self-sufficient in making high-end semiconductors whereas the Chinese government is determined  to expand its domestic semiconductor industry. To help the Chinese semiconductor industry government has exempted companies from paying corporate income taxes for up to ten years. In China, benefactors of government subsidies – such as the Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies (YMTC) – have been slowly catching up to their foreign competitors in manufacturing leading-edge chips. SMIC now produces advanced 7-nanometer chips, establishing them as one of the few makers of high-performance computing chips.

However, China is yet to produce high-end microchips due to the recent blockade by the USA on Chinese firms from accessing advanced lithography equipment and EUV machines to build chips beyond the 7 nm level. USA has also negotiated with the Dutch company ASML so that it does not provide any advanced machinery to Chinese firms for semiconductor manufacturing. Even though China’s semiconductors are generations behind the ones produced by TSMC and Samsung, its capability of producing legacy chips will help it to reach closer to its Made in China 2025 goals. Moreover, the global demand for legacy chips (28 nm or older nodes) is expected to triple by 2030, offering China huge leverage over the USA.

Apart from blocking China from expanding its industry, the USA is rapidly working to ensure all semiconductor it needs is produced in its territory. The previously mentioned CHIPS Act and TSMC’s ongoing project in Arizona can be seen as a step towards slowbalisation. It is also trying to diversify its sources. The USA is  thinking of using India as a source of supply.

Author- Nayeema Nusrat Arora

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