How Semiconductors Are Fueling The U.S.-China Standoff — With A Taiwan Caveat
Beijing can strangle the chip market
Today, political and trade tensions between the U.S. and China are threatening this $550 billion global market. On July 3, Chinese customs and Ministry of Commerce announced that gallium and germanium exports would be subject to visa requirements.
In other words, the Chinese administration can now block exports of these rare earths, used in the manufacture of the highest-performing semiconductors, notably electronic chips used in defense, 5G telephony or solar panels, at any time. According to a study by the European Commission, China supplies 94% of the world’s gallium and 83% of its germanium. With one move, Beijing can strangle the chip market.
How did what had started out as an ingenious American discovery end up trapped in a geopolitical imbroglio in the middle of a frighteningly complex and extremely fragile industrial and logistical circuit? Jack Kilby, of the Texas Instruments company, and Robert Norton Noyce, of Fairchild Semiconductor, revolutionized modern electronics and the Silicon Valley when they invented silicon integrated circuits in 1958.
A global supply chain
Today, 1.15 trillion semiconductors are shipped from one continent to another every year. The semiconductor supply chain could not be more global: the U.S., South Korea, Japan, mainland China, Taiwan and Europe each contribute 8% or more of the industry’s added value.
At some point in its design and manufacture, a semiconductor goes through most, if not all, of these six geographical regions. Before being delivered, a chip must undergo 500 different operations, spanning four to six months and crossing international borders 70 times.
For reasons of cost optimization, the roles are divided.
Christopher Miller, author of Chip War and history professor at the Fletcher School of Tufts University, near Boston, says the process can be divided into three main parts: first, the design of the chips and the softwares that go with it ; second, the development of the industrial machinery needed to produce the chips ; and third, the manufacturing of the chips themselves.
“For reasons of cost optimization, the roles are divided among the U.S. for design and software, Europe and Japan for industrial tooling, and Asia for chip manufacturing,” Miller says.
For example, ASML, a company based in Veldhoven in the Netherlands, holds more than 8°% of the world market for lithographic chip production tools, used by the main “foundries” － companies specialized in semiconductor manufacture: the American Intel, the South Korean Samsung, the Taiwanese TSMC, the Chinese SMIC.
As a consequence, ASML finds itself held hostage in the China-U.S. conflict.
What is state-of-the-art?
Since November, the U.S. had been pressuring Japan and the Netherlands to ban the export of “state-of-the-art” semiconductor manufacturing equipment. In March, The Hague decided to align itself with Washington. “We are waiting for our government to define precisely what constitutes ‘state-of-the-art production equipment’; in any case, these restrictions should have no impact on our future financial results,” explains ASML headquarters.
Rare earths, produced in China, in Samsung “foundries”, via the machines of the Dutch company ASML, the logistics chain that supplies Renault, Apple and Electrolux with semiconductors is sometimes the scene of shady dealings: two Frenchmen and two Chinese, suspected of having passed on to Beijing the secrets of gallium nitride, a material that multiplies the power of chips, were indicted on March 24 in Paris.
For now, only one worst-case scenario is giving everyone involved in this house of cards a cold sweat: China’s invasion of Taiwan. “Ninety percent of the most powerful chips used in the world are produced in Taiwan. And the island is only 180 kilometers away from the Chinese coast,” says Paul Scharre, director of studies at the New American Security (CNAS), a Washington-based think tank specialized in national security and defense issues. Yet Beijing regularly reiterates its ultimate desire to annex the island by organizing major military maneuvers around it.
Supply difficulties during the pandemic gave a foretaste of what the semiconductors market would be without Taiwan. The realization of this dependence triggered a real commotion from Washington to Brussels.
“Chips are now at the heart of reindustrialization policies in the Western world: the goal is to repatriate as many factories as possible in the U.S. and in Europe,” explains Alice Pannier.
The ultimate card
With billions in subsidies, if need be. The CHIPS and Science Act, signed by Joe Biden in August 2022, provides 280 billion to encourage research and manufacturing in the U.S.. This includes $39 billion aid for chip manufacturing on American soil. The EU Chips Act, finalized last April in Brussels, will mobilize 43 billion euros of public and private funds to double Europe’s share of the global semiconductor market to 20% by 2030.
Is this fear of China annexing Taiwan founded? “For Beijing, invading the island is the ultimate card that can only be played once,” according to Jean-François Dufour, cofounder of Sinople, a Paris-based strategic analysis firm specializing in Chinese industry. “If Beijing’s army arrives, the first facilities that the Taiwanese will sabotage will certainly be the chip foundries.”
China consumes 50% of the semiconductors produced in the world, but only produces 10% itself.
For the Chinese, this would mean shooting themselves in the foot. “China imports more chips from Taiwan than the U.S.,” says Graham Allison, an American political scientist and professor at Harvard’s John F. Kennedy School of Government.
“China consumes 50% of the semiconductors produced in the world, but only produces 10% itself: the Americans are well aware of China’s weakness and are doing everything to prevent it from becoming self-sufficient,” says Jean-François Dufour. As a result, China is redoubling its efforts to close the technology gap: between 2015 and 2025, it is expected to have invested the equivalent of 138 billion euros in its semiconductor industry.
“If China were to become self-sufficient, the risk would be twofold: it could take shares away from other players and, above all, it could acquire a technological lead over chips designed in the U.S., which today often constitute the market standard,” says Pannier.
On top of that, once autonomous, Beijing could "feel free" to invade Taiwan.
Hence the idea defended by other researchers of maintaining ties with China at all costs. “Denying China access to Western technology simply encourages it to accelerate the development of its own research and production capacities,” according to Sarah Danzman, Associate Professor of International Studies at Indiana University in Bloomington (U.S.). “It may be strategically preferable, for the U.S. and its allies, to keep China in the current chip development loop.”
In any case, trade sanctions are always very difficult to apply: while war wages in Ukraine, U.S.-designed chips continue to reach Russia, which benefit its armies, despite the embargo.
