by: Nathania Azalia
The semiconductor industry has long been highly globalized, and production efforts from many countries are needed to create a single chip. These chips will then be used to power computers, a core necessity embedded in devices such as cars and phones or military technology such as missiles and artificial intelligence (AI), underlining its critical and strategic dual-use value.
The United States, a dominant player in the global supply chain, is in the process of bringing back domestic production and imposing intensive trade restrictions on cutting-edge chips and manufacturing machines through the CHIPS and Science Act, a shift inclining towards protectionism. This move was triggered by the rapidly growing Chinese military modernization utilizing sophisticated semiconductor technology, prompting unease from the United States. Through the Act, the global semiconductor supply chain has become a tool to increase geopolitical competitiveness, making semiconductors a focal point in the 21st-century great power politics.
The global nature of the semiconductor supply chain
Semiconductor technology production is a complex and segmented process, needing raw materials, machines, software, expertise, and fabrication plants (fabs) from the United States, Japan, South Korea, the Netherlands, and Taiwan, among others. They are called choke points. In the semiconductor supply chain, these locations become important as they are the few able to execute certain production phases and own the tools crucial to the end product. When access to one of these chokepoints is shut down, it can result in a shortage in the global market.
There are three main steps of semiconductor production; design, fabrication, and ATP (assembly, test, packaging). The semiconductor design is a critical step in semiconductor production, allowing the production of leading-edge chips. The United States dominates 40% of the global market share in semiconductor design, including its research, electronic design automation (EDA) software, and core intellectual property. In the EDA market, American companies have over 70% of the market share.
The fabrication phase includes using raw materials, manufacturing tools (Semiconductor Manufacturing Equipment/SME), and ATP tools. Taiwan dominates the global market share of raw materials, with South Korea, China, and the United States following. Manufacturing tools, used to etch chip design are dominated by the United States, Japan, and the Netherlands. The Advanced Semiconductor Materials Lithography (ASML), a Dutch company, is the only company able to produce the current cutting-edge lithography machine with extreme ultraviolet radiation (EUV) technology needed to make the most advanced chips available. Lastly, Taiwan, China, Singapore, Malaysia, Vietnam, and the Philippines take part in the ATP phase.
China’s technological innovation acceleration and military modernization
Since the 1980s, China has been investing in accelerating domestic technological innovation, including its semiconductor industry. The Chinese government established the 14th Five-Year Plan detailing the country’s focus on developing semiconductor technology; chip design and SMEs, partnering with companies through the Miltary-Civil Fusion (MCF) strategy. China has also established the Made in China 2025 program and the National Integrated Circuits Industry Development Investment Fund (Big Fund) to support domestic acceleration with an ambitious target of 75% domestic production by 2025. The country also has spent 150 billion USD from 2014 to 2030 to further develop domestic capabilities. The Semiconductor Manufacturing International Corporation (SMIC) emerged as a dominant player in China’s domestic semiconductor industry.
Even so, the country still heavily depends on importing advanced chips and SMEs, particularly from Taiwan and the United States. In 2020, China imported 350 billion USD worth of semiconductor products with companies like Huawei stockpiling US-made components before controls were imposed. As of 2021, it is also the biggest customer market for SMEs with 26% of global market demand. The government has also given out subsidies to purchase foreign SMEs to expand domestic manufacturing. Hence, restrictions on semiconductor trade would interfere with China’s vision of developing its domestic capabilities.
Along with its technology acceleration efforts, China is undergoing a massive military modernization in line with President Xi Jinping’s vision to revitalize the country. This effort is carried out with the concept of “intelligentized warfare” at the core, prioritizing the development of technologies powered by semiconductors such as AI and quantum computing to assist military endeavors in the current global competition. Furthermore, the Chinese government’s military spending has increased by 10% annually since 2000 and has spent 230 billion USD in 2022, showing a serious commitment to fortifying its military capabilities. In 2021, China reportedly used American chip technology to power its hypersonic missiles, prompting further concern by the United States.
The CHIPS and Science Act
On August 9th 2022, President Joe Biden signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act (CHIPS Act) into law. Simply put, the CHIPS Act is a strategy for restricting access to advanced semiconductors while developing domestic semiconductor capabilities.
The Act’s main objective is to bolster the United States’ domestic semiconductor industry and strengthen domestic supply chains. The White House states that the Act functions as part of the country’s intent to maintain its status as the leader in technology, including AI and quantum computing. A government expense of 280 billion USD, including 52 billion in subsidies, has been arranged for domestic and foreign institutions to push for domestic innovation. Moreover, the world’s biggest advanced semiconductor producer and a vital choke point in the chain, the Taiwan Semiconductor Manufacturing Company (TSMC), has also received subsidies to invest and build three large-scale fabrication plants in Phoenix, Arizona.
In addition to domestic investments, the Act imposes strict trade restrictions on advanced semiconductor trade by American companies to countries and entities labelled as “foreign countries of concern” or “foreign entities of concern” which includes the People’s Republic of China and other countries determined as a concern by the state. The law applies not only to domestic companies but also to any companies in the world using American semiconductor technology. Moreover, these restrictions also apply to investments by persons or entities from the United States to those of foreign countries of concern and any persons or entities that have been granted subsidies under the Act. To ensure the Act’s overarching success, key choke points like the Netherlands and Japan have joined hands with the United States to impose trade restrictions on China.
The United States realizes that semiconductor is a critical technology crucial to its national security
The United States realizes that semiconductor is a critical technology crucial to its national security, as it can accelerate military innovation thus its strengthening. The stronger a nation’s military capabilities, the stronger its ability to spread its geopolitical influence. The CHIPS Act can be seen as the United States’ attempt to maintain its geopolitical competitiveness by protecting semiconductor technology, using the highly globalized supply chain and the country’s status as one of the dominant players, especially in the production of advanced semiconductors.
In response to these restrictions, China has filed a suit against the United States stating that it has threatened the global semiconductor industry supply chain. China accused the United States of imposing controls driven by political motives to maintain the country’s edge in technology sectors and pushing technological hegemony.
A 21st century great power strategy
In the wider great power stage, semiconductor technology is now widely crucial to strengthening national security. The CHIPS Act reinforces the United States’ global technological leadership, protecting the vulnerable semiconductor supply chain against global disruptions and making sure the country is producing the most cutting-edge technology which, in turn, boosts their national security. Similar postures emerged at the international level as a consequence, with one prominent policy coming from the European Union with its own Chips Act, passed into law on September 2023, to counter China’s rapidly growing capabilities. As tensions between the United States and China further escalate, it could mean a new technology race mirroring the first Cold War, though with semiconductors at its core.
Furthermore, this technology race signifies a shift in defence technology innovation with countries, especially the United States and China, utilising AI and quantum computing to enhance current military capabilities. This includes the development of autonomous weapons systems, military intelligence, surveillance, cybersecurity, and so on. Global companies, which produce the technology able to power these innovations, become strategic assets to countries in bolstering their national security, resulting in subsidies from countries like the United States through the CHIPS Act and the budding of new potential semiconductor hubs such as Southeast Asia and Africa.
Amid the current multipolar geopolitical dynamic, the CHIPS Act is a strategic move by the United States to maintain geopolitical influence while in competition with China. Both countries are still each other’s major economic partners and achieving a balance between national security and economic interests is crucial in navigating these tensions. We can only see how the Act will boil into in further development, including China’s technological advancements after these restrictions.
Disclaimer
This content is part of ISI Commentaries to serve the latest comprehensive and reliable analysis on International Relations, security, politics, and social-cultural in Indo-Pacific Region. Read more how to to submit it: https://www.isi-indonesia.com/write-for-us
Under:
About the writer
Nathania holds a bachelor’s degree in International Relations from Parahyangan Catholic University. She wrote her culminating thesis titled “The United States of America and Lawfare: the CHIPS and Science Act in the midst of geopolitical rivalry with the People's Republic of China (Amerika Serikat dan Lawfare: Kebijakan CHIPS and Science Act dalam Rivalitas Geopolitik dengan Republik Rakyat Tiongkok).”
Comments