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Semiconductors and the U.S. China battle
Read more on - Polity | Economy | Schemes | S&T | Environment
- The small chips: Semiconductors, known as chips, are an essential component at the heart of economic growth, security, and technological innovation. Smaller than the size of a postage stamp, thinner than a human hair, and made of nearly 40 billion components, the impact that semiconductors are having on world development exceeds that of the Industrial Revolution.
- What impact: From smartphones, PCs, pacemakers to the internet, electronic vehicles, aircrafts, and hypersonic weaponry, semiconductors are ubiquitous in electrical devices and the digitization of goods and services such as global e-commerce. Demand is skyrocketing, with the industry facing numerous challenges and opportunities as emerging technologies such as artificial intelligence (AI), quantum computing, Internet of Things (IoT), and advanced wireless communications, notably 5G, all requiring cutting-edge semiconductor-enabled devices.
- Latest trends: The COVID-19 pandemic and international trade disputes are straining the industry’s supply and value chains while the battle between the United States and China over tech supremacy risks splintering the supply chain further, contributing to technological fragmentation and significant disruption in international commerce.
- US leadership: For decades, the U.S. has been a leader in the semiconductor industry, controlling 48 percent (or $193 billion) of the market share in terms of revenue as of 2020. Eight of the 15 largest semiconductor firms in the world are in the U.S., with Intel ranking first in terms of sales. China is a net importer of semiconductors, heavily relying on foreign manufacturers—notably those in the U.S.—to enable most of its technology. China imported $350 billion worth of chips in 2020, an increase of 14.6 percent from 2019.
- Through its Made in China 2025 initiative and Guidelines to Promote National Integrated Circuit Industry Development, over the past six years, China has been ramping up its efforts using financial incentives, intellectual property (IP) and antitrust standards to accelerate the development of its domestic semiconductor industry, diminish its reliance on the U.S., and establish itself as a global tech leader.
- As U.S.-China competition has intensified, notably under the former Trump administration, the U.S. has been tightening semiconductor export controls with stricter licensing policies, particularly toward Chinese entities. Concerns continue regarding China’s acquisition of American technology through civilian supply chains and integration with Chinese military and surveillance capabilities.
- Taiwan stuck in between: Caught between these global superpowers is the Taiwan Semiconductor Manufacturing Corporation (TSMC), a leading manufacturer in the industry, owning 51.5 percent of the foundry market and producing the most advanced chips in the world (10 nanometers or smaller). TSMC supports both American and Chinese firms such as Apple, Qualcomm, Broadcom, and Xilinx. Until recently, the firm also supplied Huawei but severed ties with the Chinese giant in May 2020 because of U.S. Department of Commerce restrictions on Huawei suppliers over security concerns. Taiwan has also become a geopolitical focal point because the Trump administration’s moves to strengthen American-Taiwanese relations heightened tensions in the Taiwan Strait and increased China’s military activity in the region, testing the Biden administration’s resolve. As geopolitical, trade, and technology disputes mount and the COVID-19 pandemic continues to harm the supply and value chains, semiconductor firms are trying to secure their manufacturing processes by stockpiling supplies or relocating production facilities—disrupting the industry at large.
- Action taken: The industry continues to experience a range of protective tariff and non-tariff measures that threaten production and competitiveness of the industry. Semiconductors represent the linchpin for U.S. and China’s mutually dependent technological ambitions. Semiconductors are a critical technological vulnerability for both China and the United States, which rely on each other as well as Taiwan for cutting-edge semiconductor devices.
- Despite massive investment, China is highly unlikely to achieve independent semiconductor manufacturing capabilities in the next five to 10 years. Chinese companies are unable to compete against top-tier firms because of limited access to semiconductor manufacturing equipment (SME) and software, and their overall lack of industry knowledge hinders the development of a self-sufficient supply chain.
- Taiwan is set to become the center of U.S.-China tensions. Given the country’s central role in semiconductor manufacturing and technology supply chains, China will likely leverage its economic influence through trade restrictions, talent recruitment, and cyber to attack key companies in order to obtain core semiconductor intellectual property (IP) needed to bolster its domestic industry.
- Summary: Collaboration between the Biden administration and American corporations will be key to balancing national security and commercial interests. Given that multilateral frameworks on semiconductor regulation do not include Taiwan or China, the Biden administration could bolster existing forums for enhanced American-Taiwanese economic relations through the Economic Prosperity Partnership Dialogue (EPP) and Sino-American relations through the Strategic Economic Dialogue.
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