Semiconductors — chips that can process digital information — have become an essential part of daily life. They can be found in almost everything from computers and mobile phones to cars, home appliances, and medical equipment. They are a key enabling technology that will shape the future of digital economies worldwide. But the semiconductor market is notoriously cyclical, subject to gluts and shortages.[1] The current chip shortage, [2] which began in early 2020, is the result of surging demand for products containing chips and pandemic-driven production disruptions, as well as other unforeseen events that have snarled supply chains and logistics.[3]
The US Department of Commerce reported that shortages of semiconductors dented economic growth by nearly a quarter-trillion dollars in 2021 and revealed the worrying extent to which the US relies on Taiwan for the most advanced chips.[4] The economic fallout and heightened concern about vulnerabilities and dependencies resulting from the disruptive shortage has also fueled the tech war between the United States and China. Spurred to action, Washington has adopted a strategy that not only seeks to boost US competitiveness and tackle supply chain fragility, but to thwart China’s aim to produce advanced semiconductors.
What began in 2019[5] as an effort by the Trump administration to cripple Huawei has lately expanded, as the US has introduced sweeping rules aimed at cutting China off from key chips and components for supercomputers. Washington has signaled that it will not hesitate to pursue extraterritorial measures if partners fail to fall in line with the new restrictions. Thus, the US-China battle over microchips has emerged as a proxy for geopolitical competition which Washington’s allies and partners might prefer to avoid but are nonetheless likely to be drawn into. For America’s Gulf allies and Israel, this development poses fresh challenges and difficult choices.
Semiconductor chips and chip-making equipment are the backbone of modern digital economies. A multitude of applications, such as artificial intelligence and machine learning (AI/ML), Internet of Things (IoT), autonomous and electric vehicles, high-performance computing (HPC), aerospace, satellite communications, 5G/6G, and smart cities depend on advancements in semiconductor technologies. Semiconductors are also the raw material for nearly every aspect of modern war fighting and battlefield management — radar systems, satellites, GPS receivers, missiles, tanks, and planes.
Semiconductors are produced in a capital-intensive, time-consuming, and complex value chain[6] — a value chain characterized by choke points and critical dependencies. Advanced semiconductor manufacturing capabilities are highly concentrated among relatively few countries and companies.[7] Nearly three-quarters of fabrication capacity for logic chips lies in East Asia.[8] Taiwan, led by Taiwan Semiconductor Manufacturing Co. (TSMC), dominates the foundry industry with a 53.6% global share of the market.[9] Korea’s Samsung Electronics Co., though a distant second to industry leader TSMC, nonetheless has captured 16.5% of the market.[10] ASML Holding NV of the Netherlands has a near-monopoly on high-end semiconductor equipment fabrication.[11] Japanese companies Shines Chemical and Sum co alone control 60% of the global market for silicon wafers.[12]
The industry-wide shortage of chips was a wake-up call for American policymakers, confirming US supply chain vulnerabilities and the dire risks they pose to the economy. Although five of the world’s biggest eight semiconductor companies — Intel, Micron, Qualcomm, Broadcom, and Nvidia — are based in the US, microchip production largely takes place in Asia. The United States once led the world in manufacturing and as recently as the 1990s 37% of microchips were made on US soil, but today just 12% are made in America.[13] US companies have maintained a strong grip on the Fables IC segment (i.e., design and sale of hardware and chips), though America’s edge in microchip design has been eroding.[14]
American chipmakers are “highly dependent” on sales to China.[15] Under the “Made in China 2025” initiative, launched in 2015, Beijing has targeted US dominance in chips, artificial intelligence (AI), and supercomputers. Since then, China has closed the gap with the United States in state-of-the art technology.[16] But foreign dependence is not a one-way street. China relies heavily on foreign suppliers for critical equipment and software at each stage of the value chain. China’s high degree of external dependence, especially for high-end chips, has not substantially changed despite massive investments.[17] China imports more than $300 billion in semiconductors and relies on equipment from the US and its allies.[18] In fact, China has no viable alternative to using American technology, at least in the short term.[19] This dependence has left the Chinese semiconductor industry greatly exposed to US export restrictions — a vulnerability that the Biden administration, building upon the actions of its predecessor, is determined to exploit. Indeed, as a recent CSIS report put it: “In weaponizing its dominant choke point positions in the global semiconductor value chain, the United States is exercising technological and geopolitical power on an incredible scale.”[20]
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