Skip to main content
SearchLoginLogin or Signup

The U.S.-China Tech War Is Reshaping the Global Chip Supply Chain

Published onMar 01, 2023
The U.S.-China Tech War Is Reshaping the Global Chip Supply Chain

On October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued two interim final rules imposing unilateral export controls targeting China’s advanced computing and semiconductor industries. As part of the Biden administration’s ongoing efforts to protect national security against illegitimate foreign acquisition of U.S. technology, the rules are aimed at restricting China’s “ability to both purchase and manufacture certain high-end chips used in military applications.”

The new rules amend the Export Administration Regulations to implement restrictive controls on advanced computing integrated circuits (ICs), computer commodities containing such ICs, and certain semiconductor manufacturing items. Further, the rules expand controls on transactions involving items for supercomputer and semiconductor manufacturing end uses. The rules also require a license for specific activities of “U.S. persons” that “support the development” or “production” of certain ICs in China. These October measures mark the most sweeping, restrictive export controls on China in decades.

Meanwhile, China has initiated a trade dispute with the World Trade Organization to challenge the restrictions. Accusing the U.S. of abusing export control measures, China said that the U.S. actions hindered “the normal international trade in chips and other products,” and threatened “the stability of the global industrial chain and supply chain.”

Along with the pandemic-fueled global chip shortage, the chip war between the world’s two largest economies is reshaping the global semiconductor supply chain and the global regulatory regime.

Worldwide semiconductor revenue totaled $601.7 billion in 2022 and is projected to double by 2030. Importantly, the global semiconductor industry relies heavily on a few large manufacturers – mainly based in Taiwan, South Korea, Japan, and China. These so-called “Big 4” semiconductor players serve as the manufacturing hub for between 75% and 80% of global chip production. Taiwan and South Korea are particularly strong in advanced chip manufacturing, and the two countries combined dominate 100% of the global manufacturing market in 7 nanometer (nm) and 5 nm chips. In the wake of the BIS measures, however, stock prices for chip makers in Taipei, Seoul, and Tokyo plummeted. It is unsurprising that those countries have raised special concerns over the impact that the U.S.-China chip war will have on the overall tech supply chain.

The world’s largest chip manufacturer, Taiwan Semiconductor Manufacturing Co. (TSMC), and its rivals SK Hynix Inc. and Samsung Electronics Co. (Samsung), South Korea’s memory chip titans, have received one-year exemptions from the BIS measures, allowing them to provide chip manufacturing equipment to their fabrication facilities in China. These ad-hoc exemptions, however, were highly exceptional. “If it becomes a situation where we would have to obtain license [from the U.S.] on a tool-by-tool basis, that will disrupt the supply of equipment . . . [i]f we face problems that make it difficult for us to operate our Chinese fabrication facilities including the Wuxi plant, we are considering various scenarios, including selling those fabrication facilities or their equipment or bringing them to South Korea,” Kevin Noh, Chief Marketing Officer at SK Hynix, stated.

Some chip manufacturers are seeking workarounds to relocate their production lines elsewhere. Southeast Asian countries, including Vietnam and Singapore, are emerging as cost-efficient alternative production bases with lower levels of political risk. Samsung, which had already invested $18.2 billion in Vietnam by late 2021, announced it would raise its accumulated capital in the country to $21.5 billion by the end of 2022. TSMC is also exploring the potential of building a new plant in Singapore.

Meanwhile, the Biden administration has been urging its allies to impose similar export restrictions on China. Japan and the Netherlands agreed in January to join the U.S. in restricting exports of advanced chip-making machinery to China. It is critical for the U.S. to bring its allies and partners on board with the BIS measures because otherwise, China could simply purchase foreign substitutes to replace U.S. devices and equipment and acquire know-how for manufacturing advanced chips from those countries.

More immediately, however, the U.S needs to strengthen domestic chip manufacturing to reduce its reliance on Taiwan, particularly for the most sophisticated chips, which could imperil national security.

Despite the CHIPS and Science Act, signed into law in August 2022, allocating $39 billion in subsidies for companies building chip fabrication plants domestically, “reshoring” semiconductor manufacturing to the U.S. is another matter. Above all, chip manufacturing costs, including building and running a new fabrication facility, in the U.S. are 50% more expensive than in Taiwan. Moreover, the U.S. is not the only country that seeks to attract more chip plants. The European Parliament approved its Chips Act in January to strengthen Europe’s semiconductor ecosystem. Japan, Taiwan, and South Korea have also passed their version of the Chips Act. Thus, if chip companies end up not figuring out how to balance the higher costs in the U.S., they will not be incentivized to keep investing in domestic manufacturing in the long term.

China’s semiconductor manufacturers appear to have little choice but to achieve self-sufficiency in chips. Thus far, China’s chip exports have been overwhelmingly dominated by the most advanced foreign firms. China now plans to invest more than 1 trillion yuan ($144 billion) to strengthen domestic semiconductor manufacturing and research. Attention is being paid to whether the U.S.-led technology embargo will succeed in hampering China’s ambitions to become a tech superpower or will backfire against the U.S. by forcing China to strive toward tech sovereignty.

Minseong Kim is a second-year student at Wake Forest University School of Law. She holds a Bachelor of Arts in Philosophy and a Bachelor of Science in Business Administration from Hanyang University, where she graduated summa cum laude. Upon graduation, she intends to practice in the areas of cross-border mergers & acquisitions and intellectual property law.

Reach Minseong here:

No comments here
Why not start the discussion?