Economic Statecraft
Silicon Shield: Will Semiconductors Save the World in East Asia?

With the onset of the sixth wave of technological innovation, the share of science-intensive production in the modern world economy is steadily growing. In Singapore, Japan, the Republic of Korea and Taiwan, the high-tech sector already contributes over 60% of GDP. Semiconductor technologies, based mainly on single-crystal silicon have firmly entered everyday life in the form of integrated circuits that are present in every type of electronic device - from televisions to missile warning radars.

Two years of the COVID-19 pandemic and the disruption of global supply chains have caused significant shortages in the electronic chip world, particularly affecting the automotive industry, aircraft industry, and the production of computers and smartphones. A shortage of electronics increases the vulnerability of a national economy, and therefore reduces the overall level of state security. As a result, a number of governments have decided on serious protectionist or expansionist measures in order to ensure the uninterrupted supply of advanced science-intensive products to meet civilian and military needs.
Semiconductor Market Changes
The shortage of chips in the world became especially noticeable in the second half of 2020. Several factors led to the shortage at once
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Semiconductors with American specifications

The United States is striving to achieve complete autonomy in the manufacture of chips, especially since the country's share in world production in 2021 was only 12%, over the next three years it may even fall to 9%. American giants Intel, Apple, NVIDIA, AMD, Micron, Broadcom, Qualcomm and Texas Instruments remain the owners of patents and intellectual property rights, and develop technological, ergonomic and design solutions, although they traditionally prefer to place production in East Asian countries. However, the prospect of supplies no longer arriving from the island of Taiwan, which is the world's "semiconductor centre", is of particular concern to Washington.

The US lack of industrial capacity and the country’s general shortage of electronic chips, in the context of a complex confrontation with China, eventually forced the country’s leaders to include this issue in the sphere of national security. In particular, in March 2022, President Biden spoke  about semiconductors as a critical national security problem, because America is forced to spend heavily on acquiring high-tech products abroad. The authorities have taken a number of steps to improve the regulatory framework, including the adoption of laws creating favourable opportunities for the production of semiconductors for the needs of the United States, including the Creating Helpful Incentives to Produce Semiconductors for America Act, the Innovation and Competition Act (USICA) and some others. The White House and the Senate have not yet agreed on the details of these documents, but the general idea is to allocate about $52 billion to subsidise the industry. At the same time, Intel CEO Patrick Gelsinger, is strongly opposed  to the financing of foreign companies and proposed only including companies "with American roots" in the list of potential recipients of funds. However, it is unclear whether The Taiwanese company TSMC and the South Korean multinational Samsung, which plan to open factories  in  and , respectively, as early as in 2024 have enough American roots to qualify.

A White House report about the vulnerability of supply chains argues that the private sector is able to eliminate the shortage of semiconductors on its own, and the task of the government is to provide all possible assistance, avoiding excessive intervention. However, a reasonable question arises - who will determine the degree of usefulness of a particular company for the nation? Today, solutions in the field of development and the production of semiconductors   in the United States are actually accepted by politicians and military and intelligence agencies, which casts doubt on the commercial viability of all the initiatives. In particular, the level of regulation, the tax burden, and the cost of labour in the country are significantly higher than abroad, which reduces the competitiveness of products manufactured in the US and leads to financial losses. Consulting agencies estimate the cost of opening and operating a chip and circuit manufacturing plant in the US for 10 years will exceed that for Taiwan or the Republic of Korea by a third, and in China such a project will cost less than a half. There is no guarantee that Made in USA semiconductors will be cheaper or better than foreign analogues. Taking into account the estimates of commercial structures about the shift of the centre of semiconductor production to China and the countries of Southeast Asia in the near future, the level of national security, which has caused extreme worry in Washington, will decrease even more.
In addition, experts warn that diversifying and protecting value chains is not the same as transferring foreign experience, copying advanced designs and terminating any cooperation.
East Asian suppliers and consumers have long been an integral part of the American IT industry, and the forced exclusion or voluntary withdrawal from all schemes will harm the United States itself, first of all.

Non-virtual reality in the Taiwan Strait
The PRC consumes only 6% of the world's microchips, while the US and its allies are buying up to 92%. For now, America still has unrestricted access to virtually any amount of state-of-the-art integrated circuits and components. China produces a huge amount of semiconductors, but their technological level lags behind the Taiwanese or Japanese competition by two generations, which limits the range of applications for products. Chinese companies, such as SMIC, are able to produce chips at 28 and 14 nanometers, while TSMC has already achieved a density of 3 nm, which yields a significant increase in performance and allows for the miniaturisation of the original product. For example, the Apple A15 central processor is made in Taiwan according to the 5-nm process scheme, which has made it possible to integrate about 16 billion transistors and provide an operation speed of up to 15.8 trillion per second.  Their colleagues from the mainland are not yet able to reach such a level, although they are also trying to conquer new technological frontiers, including with the help of industrial espionage and illegal purchases for subsequent copying. Meanwhile the production rate in China has slowed down in the period under review amid current conditions, to overcome difficulties in providing raw materials and organising sales in new markets.

Washington believes that a stable supply of high-tech products may be interrupted in the event of China's invasion of the island of Taiwan. Although the democratic Taiwanese authorities have indicated that they intend to defend their independence using military means, up to inflicting counterattacks on objects on the mainland, they are already in a state close to panic. A recent crash  followed a fake report on local TV about the start of a PLA landing operation and missile strikes against the backdrop of the visit of the American delegation. This demonstrated the extreme emotional instability of the political establishment of the island. In Washington, for the time being, they are limited to encouraging statements, manuals for conducting urban combat  and promises to send the most suitable (and most expensive) weapons to protect the island.

It cannot be ruled out that the scale of the "communist danger" for democratic Taiwan is deliberately exaggerated by Washington, since American strategists proceed from the logic of maximising the level of security and influence through increasing control over key areas of global production. The PRC shows no intention of forcibly annexing the island. The exercises of the Chinese military with practicing landings, suppressing coastal defences, destroying enemy fleet forces and gaining air superiority are aimed more at the United States and Japan to prevent possible interference by a "third" party. Moreover, Beijing has carefully built a relationship of economic interdependence with Taipei to involve the island in common industrial, technological and commercial schemes, in order to prepare the groundwork for subsequent integration. However, the COVID-19 pandemic and the rise of anti-Chinese sentiment in the United States, and therefore in allied countries, have reduced the opportunities for productive dialogue on both sides of the Taiwan Strait to a minimum.
 
Shield or spear?

Today, a kind of “silicon shield” exists, where Taiwan is actually forced to pay for military security and diplomatic support by providing the US, Japan and EU with exclusive access to its own unique technologies and industrial capacities. However, it is extremely interesting how the US authorities and businesses react to the inevitable increase in the technological level of electronic products in China. It is possible that Washington will have to soften its Sinophobic rhetoric and make an attempt to find a compromise on key issues in bilateral relations. However, for the time being, it seems to be beneficial for the Americans to demonise China, forgetting about the irreversibility of this process and the long historical memory of the Chinese people.

In an effort to please its American partners, TSMC stopped cooperation with Russia. Malaysian suppliers have already expressed a desire to occupy the niche of Taiwanese suppliers in the Russian market, although so far the proposed samples consist of auxiliary elements, and one should not forget about the danger of “side sanctions” (for example, according to the CAATSA practice).
It is useful to remember that with any "silicon shield", a "silicon spear" is also attached. China and Russia have real opportunities to limit the access of world semiconductor manufacturers to raw materials - organofluorine, neon, palladium, nickel, platinum, rhodium and titanium.

After the start of the special military operation of the Russian Federation, the cost of some types of materials increased nine-fold. This has already created uncertainty among IT companies regarding production volumes and the pricing of finished products. In addition, Ukraine, which supplied up to 40% of the world's neon, can no longer export it by sea. Today, the main owners of that rare gas are the Russian Federation and China, which obtain it as a by-product of the steel industry. Russia also produces 45% of the world’s palladium and has the largest proven reserves of this metal. Russia provides for more than 20% of the world titanium market, 12-14% of nickel and platinum and 10% of rhodium, which makes Russia a kind of giant in the IT industry, even without the ability to produce complex electronics on its own in the near future.
Economic Statecraft
Digital Chessboard: The Geopolitics of Semiconductors
Stanislav Tkachenko, Natalia Zhiglinskaya Wyrsch
The competition between technological platforms that are being formed at the poles of the modern world economy, which were previously identified by the experts of the Valdai Discussion Club, is growing.
Expert Opinions
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.