Abstract: With the current shortage of semiconductors worldwide and China being the largest exporter of rare earth, the US recently passed its CHIPS and Science Act. The agreement seeks to ensure that the US regains dominance and self-reliance in the semiconductor industry while addressing its current economic and national security concerns. Granted that semiconductors are applicable in various sectors, the dominance of any one country in producing and exporting such chips will undermine the national security of those countries that are completely dependent on importing such chips. China holds that the Act is driven by a Cold War and zero-sum game mentality, whereas the US perceives the Act along with QUAD and the proposed Chip 4 Life as pathways to ensure that the US regains dominance with assistance and support from its allies and strategic partners.
Problem statement: How to assess the CHIPS and Science Act as a strategic move by the US to regain its global dominance in the semiconductor industry?
Bottom-Line-Up-Front: The passage of the CHIPS and Science Act is a step in the right direction to strengthen domestic semiconductors production in the US. This will further diversify the global supply chain of semiconductors, restrict their use by any country, and use it as a tool to gain geopolitical advantage.
So What?: Considering current supply chain issues worldwide and addressing monopolisation of semiconductors production process, the Act will push other countries to be self-reliant. If needed, they could cooperate to secure the supply of semiconductors and their national interest.
Source: shutterstock.com/Tada Images
Creating Helpful Incentives to Produce Semiconductors
Today, semiconductors play a vital role in our daily lives and the defence and space sectors. China, which possesses a vast reserve of rare earth and is its biggest exporter, intends to become a dominant manufacturer of semiconductors worldwide, strained US-China ties in recent years. In the case of the US, the share of semiconductors manufactured domestically has declined since 1990 from 37% to 12% today, which has alarmed the US government[1]. Moreover, as the US’s share of research investment in its GDP remains flat, other countries, including China, have increased their investments in chip research over recent years. To address such issues, regain dominance and self-reliance, and make the US competitive, the Biden Administration passed the ‘Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act’[2].
China, which possesses a vast reserve of rare earth and is its biggest exporter, intends to become a dominant manufacturer of semiconductors worldwide, strained US-China ties in recent years.
China has the world’s largest reserves of rare earth, followed by Vietnam, Brazil, Russia, India, Australia, and the US, so it is critical to manufacturing semiconductors. Thus, easy access to rare earth’s import, refinement, and processing has become a major global issue. As the Covid-19 initially impacted the production of semiconductors, later high demands for chips for space and military equipment, the automobiles industry, and high-tech gadgets like smartphones and laptops, semiconductor industries failed to mass produce such chips in a short time. With large dependence on the TSMC for such chips caused massive global supply chain issues, which worsened with growing tension over Taiwan forcing nations worldwide to secure the supply of semiconductors. The Act intends to subsidise the domestic production of semiconductors in the US and lower its dependence on China and other countries. With a USD $280 billion budget, it will enhance the Research and Development budget for semiconductors and upgrade the domestic manufacturing capacity of chips to address US security concerns. President Biden argues that “the bill is exactly what we need to be doing to grow our economy right now”[3]. Constituently, the funds allocated under the Act will be used for government subsidies (above USD $52 billion), investment tax credit (above USD $24 billion), and scientific research (surpassing USD $170 billion).
The “CHIPS and Science Act” in the Sino-US Relationship
For a long time, Intel, an American company, controlled the largest share of the global semiconductor industry. Today, the US has been replaced by Taiwan (TSMC) and South Korea (Samsung), while China remains the key competitor for the US. Referred to as the “rice of industries”, the broad application of semiconductors makes them indispensable as components. Indeed, a dominance over semiconductors is reflected in the US’s stringent sanctions taken under the former Trump Administration against China to restrict them from designing and manufacturing the chip[4]. For the US, China’s acquisition of US-American technology through the civilian supply chain and its integration with military and surveillance capabilities has become a significant concern. With geopolitical rivalry and a space race that shadows the US-China relationship, the issue of semiconductors remains at the heart of their strategic and technological competition. Although semiconductor production is a complex and multi-layered process from extraction to refinement and its manufacture[5], the US embargo on China manufacturing such chips and China’s Zero Covid policy has put pressure on the TSMC to increase its production which amplify the disrupted supply chain of chips globally.
For the US, China’s acquisition of US-American technology through the civilian supply chain and its integration with military and surveillance capabilities has become a significant concern.
Since the Huawei episode, recent 7-nanometer (nm) chip development by China’s state-owned Semiconductor Manufacturing International Corporation (SMIC) has alarmed the US as it counters US dominance in semiconductor technology[6]. To manufacture semiconductors, rare earth plays a relevant role, with its total value to global trade being small at approximately USD $1.15 billion, which is small compared to oil. Still, it occupies a significant value in goods produced using rare earth, which is substantial[7]. Therefore, China’s dominance in rare earth supply worldwide and willingness to use its position as leverage to achieve its political objective has alarmed many countries.
To address the issue of rare earth and semiconductors, the Quadrilateral Security Dialogue (QUAD) members agreed in their Tokyo Summit; held between 23-24 May 2022, to enhance cooperation among themselves and like-minded countries to reduce their dependence on China for its supply. On the other hand, to counter China’s dominance in rare earth, the US proposed a “Chip 4 Alliance” with Japan, Taiwan, and South Korea to become a global semiconductor powerhouse[8]. On the other hand, China approved a USD $29 billion semiconductor fund to secure its global dominance and added semiconductors as an independent category in its five-year plan. China has been investing in rare earth deposits for a long time; its investment increased after the launch of the Belt and Road Initiative in 2013 in Myanmar, Afghanistan, Madagascar, Greenland, and the Pacific Ocean region to revitalise its production capacity and global reserve[9].
High demand, the impact of Covid-19, and the US-China trade war have disrupted the supply of semiconductors worldwide. Moreover, the Ukraine-Russia war has further stopped the supply of Ingas and Croyin, elements required to produce semiconductors, thus shortening the supply of semiconductors globally[10]. The supply of semiconductors is predicted to remain low until 2023 thus, countries are looking for ways to secure the supply of chips. In particular, the US has passed its CHIPS and Science Act. Under said Act, the US will encourage its companies to produce advanced chips by providing them with tax credits and granting them more than USD $52 billion to spur advancement in the development of semiconductors and other US technologies[11]. US lawmakers see the Act as an important development for their economy and national security that will help them domestically manufacture advanced semiconductors and further match up with Taiwan.
The supply of semiconductors is predicted to remain low until 2023 thus, countries are looking for ways to secure the supply of chips. In particular, the US has passed its CHIPS and Science Act.
Semiconductors are essential to our daily lives through the use of appliances and gadgets. Similarly, the demand and role of advanced semiconductors have increased in modern warfare. Thus, relying on other countries for their supply begins to undermine national security. The Act is a top priority for the Biden Administration as US lawmakers argue that it will create jobs in the country and increase the production of semiconductors. Likewise, it will help lower the cost of consumable goods, lower inflation, strengthen the US economy, and address US national security concerns[12]. As President Biden asserts, “the Act will not allow the US to compete with China in the future; it will assist the US in leading the world and win economic cooperation of the 21st century”[13]. In contrast, China opposes the Act and perceives that its implementation reflects a Cold War and a zero-sum game mentality, which will only impact cooperation and exchange between US-China[14].
An Act for the Future
As reflected in the US-China great power competition, semiconductors remain significant to our daily lives. Nancy Pelosi, the US House of Representatives Speaker, sees “the legislation as a major victory for American families and economy”. China could advance its semiconductor manufacturing capacity despite the current US sanctions by acquiring US technology. It could also use industrial espionage like SMIC 7nm chip design, similar to TSMC, which is closer to becoming self-reliant.
The US, under the CHIPS and Science Act and assistance from its allies, QUAD, and proposed “Chip 4 Life”, will restrict China from taking advantage of its rare earth dominance and disrupting the supply chain of global semiconductors. The Act not only addresses US economic and national security concerns, but it also protects other countries’ interests like India, which is working to develop a self-reliant semiconductor industry, and such an Act only complimented Indian government efforts[15].
The Act not only addresses US economic and national security concerns, but it also protects other countries’ interests like India, which is working to develop a self-reliant semiconductor industry, and such an Act only complimented Indian government efforts.
In the current Sino-US ties, the ‘CHIPS and Science Act’ concurrently with the proposed ‘Chip 4 Life’ has pushed countries worldwide to cooperate with like-minded countries to be a self-reliant and secure supply of semiconductors to thwart any future Chinese move to disrupt the export of rare earth. As the Act increased the domestic production of semiconductors in the US, it also ensured rare earth and semiconductors don’t become a monopoly, as is currently the case with China.
Kashif Anwar, his area of research interests are China, the US, India and geo-strategy, geo-economic and geopolitical developments in the Indo-Pacific region. Earlier, he published papers in the Financial Express and The Rise and has an M.Phil in International Studies. The views contained in this article are the author’s alone and do not represent the views of Centre for Air Power Studies (CAPS).
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[2] Ethen Kim Lieser, “House Passes $280 Billion Bill to Boost Domestic Semiconductor Production,” National Interest, July 29,2022, accessed July 31, 2022, https://nationalinterest.org/blog/politics/house-passes-280-billion-bill-boost-domestic-semiconductor-production-203904.
[3] Idem.
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[13] Idem.
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