Semiconductor Diplomacy: New Dimension in US-China Tensions

The past several months have seen rapid developments in the US policies on the deeply intertwined matters of China and semiconductors. The current semiconductor shortage has convinced the US and China alike that they are overdependent on foreign manufacturing for their domestic semiconductor needs, which not only poses a challenge to commercial activity but also to national defense. Both have concluded that reshoring critical aspects of these supply chains is the key to protecting their economies, even if these efforts likely will not impact the current shortage. But semiconductor policy is not just about preventing future shortages, it is also increasingly about great power competition.

While China is a leading manufacturer in many areas, it continues to lag South Korea and Taiwan in semiconductors. This has been an area of concern for the government, which made semiconductor self-sufficiency a priority in its 13th Five-Year Plan as well as last year’s 14th Five-Year Plan. China has managed to boost production but still needed to import over $300 billion worth of chips in 2020. Over the next five years, China will continue its massive investments in semiconductor R&D and manufacturing.

In the US, meanwhile, conversations surrounding semiconductors are increasingly being framed in terms of a tech “Cold War” with China. During deliberations over last year’s defense Bill, Congress authorized new measures that would contribute to the construction of new fabs, increase funding for semiconductor R&D, and forge new public-private partnerships with American tech companies. One of the driving rationales in favor of these programs was that they were necessary to maintain America’s global standing and combat China’s rise, showing the growing importance of technology to national security and economic health. As notorious China hawk Senator Tom Cotton (R-AR) warned in a special report, if Congress failed to act, Americans would “wake up to discover ourselves poorer, weaker, and disadvantaged by a global order dictated by China”.

The rivalry-fueled focus on semiconductors has already begun to impact private firms. The Department of Defense expanded its contract with American semiconductor manufacturer GlobalFoundries by $400 million, leading GlobalFoundries to purchase 122 acres of land for potential expansion of one of its facilities in New York. Additionally, TSMC will build a new fab outside of Phoenix, Arizona, with financial support coming from the municipal, state and federal governments. But the real heft of government assistance is yet to come.

This past month, President Biden issued an executive order that called for the review of four supply chains for critical products, including pharmaceuticals, high-capacity batteries, critical minerals and semiconductors. This order was driven by concerns over US dependence on other countries, especially China, for personal protective equipment during the pandemic. He additionally called on Congress to pass legislation to fund the measures authorized in last year’s defense Bill that would boost domestic manufacturing and research in semiconductors (the Bill authorized these programs but did not allocate funds for them). Recent reports indicate that funding for these measures is likely to draw bipartisan support, as Republicans and Democrats increasingly agree that China’s influence must be curbed.

There is a message in the measures that both countries are taking – overdependence on a handful of countries’ production generates risks that diversification can mitigate. Plus, subsidizing private firms to develop overflow capacity for emergencies or shortages like the current one will save headaches later. But China and the US must be careful. The more they decouple their economies, the smaller their overlap in interests and room for cooperation will be. Currently, the two countries are interdependent on one another and other major chip manufacturers, creating a broad interoperable tech ecosystem that businesses and consumers have benefitted from. Self-sufficiency, or full decoupling, would disrupt this mutually beneficial arrangement and make the US and China less secure than they currently are. Instead, the two countries should invest in emergency production capacity for chips, and then work toward new avenues for cooperation in technology. Otherwise, the “Cold War” narrative may become a reality.