The Microchip War

 The proxy war between the US and China

A.T.B. Gilchrist

Since last October, a new proxy has emerged between the US and China, due to the Biden Administration’s introduction of sweeping legislation on “export control rules designed to restrict China’s ability both to obtain advanced computing chips and to manufacture them”, as well as restrictions on U.S. citizens and residents working for chip plants in China. Paired with previous restrictions, this has facilitated a “Chip Choke” in China as the US attempts to cripple China’s electronic chip manufacturing industry. 

Telecom specialists such as Huawei and ZTE, and China’s leading chip manufacturers, SMIC and YMTC, have been particularly affected. Last week US diplomats stepped up their efforts, reportedly concluding a deal with Japan and the Netherlands that imposes new restrictions on exports of chipmaking tools to China. Many analysts have described these US policies together as a “declaration of economic war” on China.

In addition, there has been major advances to revitalizing America’s own chip manufacturing industry evident in the CHIPS Act Congress passed to devote $52 billion in subsidies to “revitalize the domestic semiconductor industry and spur innovation,” as well as Taiwan’s leading chip manufacturer TSMC agreeing to build a major new plant in Arizona.

But why are microchips and their production so important? Well, nowadays the chips (or semiconductors) are used in everyday technology, from our fridges and toasters, to our smartphones and computers. Commercially, this makes them highly sought after, with global sales in 2022 at $573 billion, and, as a result, they have been referred to as the “new oil”. However they’re not just important for public markets, they are also crucial for military and intelligence systems, a significant factor for both nations.

Microchips were invented in the US in the 1950s, after which their use rapidly expanded worldwide. In the first half-decade of chip commercialization, around 95 percent of Fairchild’s chips were bought by NASA or the US military. While the civilian market would soon dwarf the public sector as a buyer of chips, US semiconductor capital and the US state have remained closely connected, though this did not obstruct the decision of its emerging semiconductor firms to offshore production. Texas Instruments, one of the pioneers of semiconductors alongside Fairchild, established a plant in Taiwan in 1969. And so while The United States may have lost their war in Vietnam, offshoring electronics production ensured that American capitalism won.

However, this American hegemony was not to last long, as Taiwan would eventually absorb these companies and soon dominate the market, resulting in its manufacturing of 65% of the world’s semiconductors and almost 90% of advanced chips. In recent years, however, as China overtly displays its intention in following through with it’s One China policy, the Taiwanese market has been threatened, and since the US is immensely dependent on their microchips from Taiwan, it has resulted in this current face off between China and the US, as both nations seek to solidify their own supply chains.

While China has launched a complaint at the World Trade Organisation, a resolution could take years, and the US has invoked rules that allow nations to restrict trade to protect national security interests. Thus, US pressure is having an effect: Apple has reportedly shelved plans to buy memory chips from China’s YMTC because of it; Huawei’s sales collapsed by 30% in 2021. For now, China makes only about 15% of the world’s chip supply, though it plays a big role in producing older, less advanced “lagging edge” chips.

For the next five years at least, the US and the other members of what it calls the “Chip 4 alliance” (Taiwan, South Korea and Japan) are likely to dominate the production of leading edge chips. Their relative success is likely to have a powerful influence on the structure of the global economy and the balance of geopolitical power.