US - CHINA

 Escalating the ongoing ‘chip war’, China on July 3 put curbs on the exports of germanium and gallium, two niche metals used in the manufacturing of semiconductors and electronics. Days earlier, the Netherlands had imposed, in consultation with the United States, new restrictions on the export of the Dutch manufacturer ASML’s advanced chips machinery to Beijing.

China’s Ministry of Commerce and Administration of Customs said the two metals will be subject to export restrictions in a bid to “safeguard national security and interests”,

Semiconductors lie at the heart of the tech war between the West, led by the US, and China. These tiny chips are today’s ‘new oil’,

What are semiconductors?

Also known as microchips or integrated circuits, semiconductors are made from silicon, and consist of millions or billions of transistors that act like miniature electrical switches that flip on and off to process data such as images, radio waves, and sounds.

In his book ‘Chip Wars’, economic historian Chris Miller describes the importance of these microchips as follows: “We rarely think about chips, yet they’ve created the modern world. The fate of nations has turned on their ability to harness computing power. Globalisation as we know it wouldn’t exist without the trade in semiconductors and the electronic products they make possible.”

How did semiconductors become a flashpoint between the West and China?

Lockdowns around the world brought the microchip industry to a standstill. Both the supply and demand of these chips were disrupted as factories shut, and the demand for laptops and computers shot up dramatically with people switching to work from home.

The following year, the situation worsened after a series of mishaps, such as a fire at a Japanese microchip-manufacturing facility, and led to a further scarcity of semiconductors. The sum of these events didn’t just shed light on the importance of microchips, it also exacerbated tensions between the US and China, which were already embroiled in a trade and technological conflict — Washington had imposed sanctions on Chinese telecommunications giant Huawei in 2019, citing a national security risk.

The shortage of semiconductors made both countries realise their dependency on Taiwan, the world leader in manufacturing microchips. Taiwan produces more than 60 per cent of semiconductors globally, and more than 90 per cent of the most advanced ones. The US’s share of the market is only around 12 per cent and European nations together account for just 9 per cent. In 2021, Reuters reported that “more than 90% of semiconductors used in China are imported or manufactured locally by foreign suppliers”, with Taiwan being a “critical supply” source.

There is a related concern for the West. China aims to make the People’s Liberation Army (PLA) a “world class” military by 2049, the centenary of the Chinese Communist Party’s rule. The plan involves developing autonomous weaponry, including hypersonic missiles, and using artificial intelligence (AI) for applications that include electronic warfare — all of which are heavily dependent on microchips.

“If you can’t mass manufacture cutting-edge chips, then you can’t get the data centre capacity that you need to train AI systems.

Washington has resorted to various ways to choke the supply of semiconductors and related technology to Beijing. In January, after weeks of lobbying by the US, Japan and the Netherlands agreed to tighten shipments of their most high-tech machinery to China. Parallely, the US has stepped up its investments in semiconductor manufacturing facilities.

How did Taiwan emerge as the leader of the semiconductor industry?

Taiwan’s rise as a foremost semiconductor manufacturer is quite recent. Earlier, the US dominated the sector for decades after World War II. It was in the US that transistors, the key component in semiconductors, were developed. The US also pioneered the design and production of microchips by making them smaller, cheaper and more powerful.

However, facing tough competition from East Asian rivals such as Japan, South Korea, Hong Kong, and Singapore, the US, during the 1990s, decided to offshore manufacturing to Taiwan and South Korea, which provided cheap labour, to regain its competitive advantage.

This primarily helped in the expansion of Taiwan Semiconductor Manufacturing Company Limited (TSMC),

“The founding of TSMC gave all chip designers a reliable partner. Chang promised never to design chips, only to build them…

Today TSMC has around 55 per cent of the global market for contract chip fabrication, far more than OPEC’s 40 per cent market share for oil, a 2022 report by Time magazine said.

The Europeans too dabbled with microchip technology — largely unsuccessfully, with one notable exception, the Netherlands. Unlike Taiwan, the Netherlands, through its ASML company, began producing advanced lithography tools, which generate EUV (extreme ultraviolet) light and use it to manufacture semiconductors. Currently, ASML is the only firm in the world which produces such tools,

What happens in the chip war now?

Although Beijing produces 60 per cent of the world’s germanium and 80 per cent of gallium, experts believe the restrictions on their export won’t have a major impact as some other countries also produce these metals, and their substitutes are available as well.

Germanium and gallium are mostly used in computers, defence, and renewable energy technology. While germanium is important for low-carbon technologies such as solar cells, semiconductor wafers made by using gallium arsenide instead of silicon can run at higher frequencies and are heat resistant, according to Wafer World Inc., a leading American company.

While the consequences of China’s move may not be severe, it does serve as a warning to the US and its allies that it has enough retaliatory options to stop them from imposing further curbs on Chinese access to semiconductors and the technology to build them.

In the meantime, the future of Taiwan hangs in the balance. Under President Tsai Ing-wen’s “New Southbound Policy”, the Taiwan is trying to shift its trade and investment from China to countries in Southeast Asia, South Asia, and Australasia. It is also deepening economic ties with the US and other Western nations — TSMC, in December 2022, announced that it would open its second chip plant in Arizona, raising its investment in the state from $12 billion to $40 billion

the US says China’s amended anti-espionage law puts businesses at risk

China changed the definition of espionage specifying acts such as carrying out cyber attacks against state organs, confidential organs or crucial information infrastructure as acts of espionage.”

 it states that targets of espionage would now include all documents, data, materials and articles that concern “national security and interests”. This has been interpreted to mean that the government can now demand to look at private information of individuals and organisations, citing this law, and documents and such materials can now constitute spying.

This has raised alarm bells for corporate ‘due diligence’ companies, those who carry out risk analysis for doing business with another company or in a particular environment. For this, they need to go through documents associated with a company and its employees. Under China’s new laws, an attempt to carry out this research work can be classified as an attempt at espionage of Chinese nationals.