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
How well – or badly – is the US-China chip war going?
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.
The Biden administration is adopting a two-pronged strategy to compete with or contain China on the technology front.
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.
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.
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
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.
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