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Visitors walk past the Shanghai Micro Electronics Equipment booth during Semicon China, a trade fair for the semiconductor industry, in Shanghai on June 29. Since 2018, the US has unleashed measures aiming to restrict China’s access to advanced chips and the equipment used to make them. Photo: Reuters
Opinion
Andrew Sheng
Andrew Sheng

US chip war on China weaponises interdepedence, but the outcome is far from certain

  • The US’ two-pronged strategy involves onshoring or friendshoring chip production, and cutting off China’s access to essential tech at vulnerable choke points
  • While the US and its allies currently have the upper hand, especially when it comes to advanced chips, China still manufactures workhorse chips and has market scale
Andrew Sheng
Andrew Sheng
Why you can trust SCMP

How well – or badly – is the US-China chip war going?

As part of the Biden administration’s industrial strategy aimed at revitalising domestic manufacturing, creating jobs, strengthening American supply chains and accelerating future industries, the Chips and Science Act was passed last year, a US$280 billion package of which US$76.7 billion has been allocated to support the US semiconductor industry.
Goodbye free markets, hello industrial policy. The outcome of US-China rivalry hinges on developing and using cutting-edge technology.
In 2018, the Trump administration’s ban on US companies from selling components and software to ZTE for seven years, then China’s second-largest telecoms equipment maker, signalled the start of a tech war. The next year, Huawei, then the world’s largest telecoms equipment maker, was put on the US’ Entity List, requiring it to get US government approval to buy American technology.

In a recent interview, historian Chris Miller, who traces these developments in his book Chip War, released last year, cited three reasons the US focused on chips. First, Washington was concerned about Chinese intentions over Taiwan, home to Taiwan Semiconductors Manufacturing Corporation (TSMC), the world’s leading producer of advanced chips, which are essential to next-generation military and intelligence capabilities.

Second, China was showing signs of narrowing the tech gap with the US. Third, the use of export controls as a deterrent didn’t seem to be effective – as the case of Russia showed – so there was no point in waiting to restrict China’s access to US technology.

01:36

AI chip maker ordered by US government to halt exports to China

AI chip maker ordered by US government to halt exports to China

The Biden administration is adopting a two-pronged strategy to compete with or contain China on the technology front.

First, shifting chip production partly out of Taiwan through “onshoring” – in 2020, the US accounted for only 12 per cent of global semiconductor manufacturing, down from 37 per cent in 1991 – and through “friend-shoring” with allies interested in reducing dependence on Chinese. Getting TSMC and Samsung to move some of their chip production to US soil is an effort in that direction.

Then, there is the “choke point” strategy, which involves strangling your rival at his most vulnerable supply chain points. China’s recognition of its vulnerability to energy imports explains its remarkable shift to solar energy. It is expected to install at least 413 gigawatts of solar capacity between 2022 and 2026. Stable electricity supply undergirds the digital economy.

Dependence on chip imports is another vulnerability, and so Taiwan has become a possible choke point. As Miller shrewdly points out, “China now spends more money each year importing chips than it spends on oil”.

Why are semiconductors so critical in the new great power rivalry? It’s because these chips have become so small and so fast, with so much computing power, that they are the foundations of anything “smart”. My iPhone has at least 100,000 times the processing power of the computer that landed man on the moon over 50 years ago.

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There’s a global semiconductor shortage and this is why it matters

There’s a global semiconductor shortage and this is why it matters

Software is increasingly in focus because these applications are behind the artificial intelligence (AI) computations beyond the capacity of mere human beings. The Chinese are great with hardware, but lag the US in software, partly because China has not yet created the complete tech start-up ecosystem of the kind that exists in Silicon Valley.

ChatGPT sparked the revival of the US “magnificent seven” tech stocks – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – with a combined market cap of over US$11 trillion. However, even though China has its own versions of ChatGPT and a Nasdaq equivalent in the Shenzhen stock market, nothing like that happened in China this year.

Chinese regulators worry about stock market bubbles, whereas the 2000 tech bubble taught the Americans that tech bubbles are not systemically fatal, and that their wealth creation, if ploughed into the next generation of start-ups, create new commercial – and military – technologies. Funding tech innovators is key to the emergence of next generation technology.

Fallout of US-China chip war could be global overcapacity across industries

A choke point of more concern to China relates to the extreme ultra-violet (EUV) lithographic equipment needed to etch the intricate designs onto microchips so they can ultimately function as integrated circuits. Unfortunately for the Chinese, only the Dutch company ASML can manufacture the EUV lithographic machines needed to to fabricate the most advanced chips. Not only was export of EUV lithographic equipment to China banned, this month, the Netherlands announced restrictions on shipments of older “deep ultraviolet” models to China.

In essence, the US, which pressed the Netherlands on curbing ASML’s exports to China, has “weaponised interdependence” – a concept popularised by international relations scholars Henry Farrell and Abraham Newman – against China, which is nowhere near creating its own EUV machines.

Trainees learn how to build and operate an EUV machine at an ASML training centre in Tainan, Taiwan, on August 20, 2020. The company ships its disassembled EUV machines to only five chip makers globally. Photo: Reuters

China can manufacture or buy the less advanced chips that are the workhorse of consumer Internet of Things products. But as AI exponentially demands more computing power, China’s development of cutting-edge technology will be stunted without access to advanced chips. If quantum computing becomes commercially viable, the demand for high-end chips will be even more critical.

Techno-nationalism means that whoever has the best ecosystem of innovation, talent, funding and production dexterity will have an edge. So far, the US and its allies have the upper hand, but China has the market scale.

If by 2030, China accounts for one-quarter of the market, versus 10 per cent for the US, as the Semiconductor Industry Association, an American industry body, estimated in 2020, who knows who will really have a decisive edge in the chip war?

Andrew Sheng is a former central banker who writes on global issues from an Asian perspective

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