By TIPP EDITORIAL BOARD, TIPP Insights

The U.S. is implementing effective and long-term offensive and defensive measures to counter China’s dominance of the semiconductor chips industry. The Biden administration is focusing on the key ingredient that drives industries, R&D, and military superiority in the modern world. Paying due attention to the role of these tiny powerhouses, America is viewing the product’s development, manufacture, and self-sufficiency as a matter of national security.

Current Position

Compared to the 1990s, when America produced more than a third of the world’s semiconductors, today’s position is highly undesirable. According to industry estimates, American share has fallen to 12% over the last three decades. The problem with depending on foreign manufacturers for such a critical ingredient was laid bare during the COVID-19 pandemic lockdown. Chip shortages are regarded as the reason for the economy losing close to a quarter-trillion dollars in 2021.

Semiconductor chips are set to become one trillion-dollar industry in less than a decade. At present, a handful of countries lead chip manufacturing in the world. Taiwan, South Korea, Japan, and China, dominate the market, with America trailing behind the pack.

CHIPS Act

Schooled by the severe chip shortage caused by supply chain issues, the Biden administration announced a slew of defensive measures to reduce import dependency.

The CHIPS and Science Act will pump $280 billion into the chip industry over the next decade. Addressing all facets, much of the funds will be used to augment and promote scientific R&D and commercialization. Tax credits are being offered, allowing for the massive investment required and the turnaround period. Creating the necessary workforce and augmenting production capabilities are also part of the Act.

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The Act has put aside $2 billion for the U.S. Defense Department to facilitate microelectronics research, fabrication, and workforce training. The state department will receive funds to ‘coordinate with foreign-government partners on semiconductor supply chain security.’ The outlay will also augment supply chains of open radio access networks and 5G networks.

Countering China

Beyond augmenting domestic manufacturing capabilities, the administration went on the offensive, tackling the threat posed by China.

China hoped to steer and dominate the chip revolution, often called the fourth industrial revolution. The country consumes about 40% of all chips made globally. It produces only a little more than a tenth of what it needs to power its tech and other industries.

Recently, the U.S. Commerce Department restricted the sale of advanced semiconductors and other American high-tech goods to China. The measure curbs the unchecked growth of China’s military, intelligence, and security capabilities. China has made massive investments in the chip manufacturing sector in recent years, but it lags behind America in vital sectors.

Though lagging in manufacturing capabilities, a crucial aspect of the process – chip designing, is heavily concentrated in America. The manufacturing units in East Asia also rely on advanced machinery from Europe. Leveraging this advantage, the U.S. is pressing its allies to join the sanctions imposed on the country.

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A concerted ban will significantly affect Chinese chip, tech, and military industries. When Chinese telecom giant Huawei was denied access to advanced chips two years ago, the company was forced to reorient itself. Depriving China of inputs necessary to set up new and advanced facilities will also ensure that Beijing will trail the pack for decades.

Though many American and other multinational companies will be initially caught in the crosshairs of the new sanctions, the measures are necessary to ensure that advanced chips and capabilities do not fall into the hands of Beijing. Forced to catch up with the latest developments and technology, China will have no choice but to pump billions of dollars into increasing production capabilities. Indigenous design and development will take years, if not decades, to come to speed.

Save Taiwan?

Faced with the prospect of a prolonged semiconductor chip shortage, one can hope that President Xi Jinping will defer upsetting the status quo with the world’s largest chip producer – Taiwan – an island-state that Beijing is “willing to use military power to reunite with China.”

Also, the semiconductor industry being capital and investment-heavy, the redirection of resources may slow down Chinese military and naval advancement significantly. Such an outcome is what Washington hopes for. Dragged back by chip shortages, China will probably be forced to ease off on its aggressive stance, especially regarding foreign policy.

Chips are the proverbial horseshoe nail in today’s world. By disrupting China’s race towards chip dominance and supply chain control, the U.S. has, in effect, fired the first salvo to keep the world safe.

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