The battle to control microchip supplies will define the XXI Century

Semiconductors are as important for global capitalism today as access to energy resources. Only a handful of countries can produce the most advanced microchips, and control over their supply is becoming a key battleground in the US-China trade war.

If energy resources are the heart of global capitalism, pumping fuel around its body to keep it accumulating, its brain is made up of trillions of semiconductors. Cars, bombs, phones, refrigerators, even energy systems — today, they all rely on the computer processing power of chips. Without semiconductors in the information age, capitalism would be brain dead.

Is it more critical for capital and its various nation-states to guarantee a sufficient supply of energy resources or of semiconductors? In his new book Chip War, Chris Miller makes a compelling case for the latter: “Unlike oil, which can be bought from many countries, our production of computing power depends fundamentally on a series of choke points: tools, chemicals, and software that are often produced by a handful of companies — and sometimes only by one. No other facet of the economy is so dependent on so few firms.”

Chips, then, are both essential and difficult to produce. That combination makes them central to the strategic thinking of all nation-states.

The rise of the semiconductor has been all about miniaturization. By getting ever-more transistors onto the same-sized piece of silicon, computer processing power continually expands.

Among the first companies to manufacture commercial chips was Fairchild Semiconductor, widely considered to be one of the founders of Silicon Valley. The first chip that Fairchild sold in 1960 had four transistors. Today, the transistor count in a chip in Apple’s iPhone 14 is fifteen billion.

The US state was key to the chip industry’s liftoff. In the first half-decade of chip commercialization, around 95 percent of Fairchild’s chips were bought by NASA or the US military. While the civilian market would soon dwarf the public sector as a buyer of chips, US semiconductor capital and the US state have remained closely connected up to the present day.

The rise of the semiconductor industry was key to American hegemony both directly and indirectly. In the late 1970s, there was genuine fear in the Department of Defense (DoD) that the United States was falling behind the Soviet Union militarily. Under the leadership of William Perry, the DoD switched to a military strategy that was heavily dependent on semiconductors, known as the Offset Strategy. On that terrain, the Soviet Union — which never got close to catching the United States in computing power — could not compete.

Just as important to American imperialism was the decision of its emerging semiconductor firms to offshore production. Texas Instruments, one of the pioneers of semiconductors alongside Fairchild, established a plant in Taiwan as early as 1969.

The United States might have lost the war in Vietnam, but offshoring electronics production — especially semiconductors — ensured that American capitalism won the peace.

In the mid-1980s, fearing China’s growing power, the Taiwanese government realized it could guarantee its continued importance to the United States by making itself essential to global semiconductor supply chains.

Chang’s Taiwan Semiconductor Manufacturing Company (TSMC) has proved more successful than Taiwan’s government could have ever dreamed. TSMC is now responsible for around 55 percent of all chips produced worldwide, and over 90 percent of the most advanced chips. Its customers include Apple and the DoD. TSMC has succeeded in the government’s ambition of making the island-state indispensable to chip supply chains.

As Asia’s economic power grew on the back of offshored electronics production, one country in particular emerged as the continent’s dominant player. Like South Korea and Taiwan, China began as a source of low-cost labor for Western big tech and evolved from there into a technological powerhouse — one that is big enough to be a major threat to US hegemony.

The United States has the upper hand in almost every sphere of the chip war. While large parts of the semiconductor supply chain are now outside of the United States, they can be found in countries — Taiwan, the Netherlands, South Korea, and Japan — that are Washington’s allies. The United States itself still has a monopoly in some essential manufacturing and software tools.

China produces 15 percent of global chips, and that number is rising quickly as the state pours investment in, but they are almost all low-tech chips.

The real leverage which China possesses stems from its huge consumer market, upon which American big tech is reliant for its revenues. Indeed, the Chinese market is so enticing that two American semiconductor firms (IBM and AMD) have even been willing to trade technology in return for market access.

In May 2020, the United States banned any company which used US chip-making products (basically every chip manufacturer) from doing business with Huawei, the gem of Chinese technology.

In this effort, the United States has been extremely successful in curtailing one of the world’s most important technology firms, by methods that include corralling allies into following its diktats. The impact of this offensive is clear: Huawei has had to divest part of its smartphone and server business, while its 5G rollout has been delayed due to chip shortages.

China’s response to all of this has been almost nonexistent, beyond strongly worded statements and appeals to the World Trade Organization.

The picture that emerges is one of “weaponized interdependence,” as Miller puts it, quoting the title of a 2021 book by political scientists Henry Farrell and Abraham Newman. Weaponized interdependence means that the closer that countries are tied together, the more avenues there are for conflict.

It would not take a lot for weaponized interdependence to escalate to war. In any war scenario, control over Taiwan and keeping TSMC operational would be a key aim for both sides. But one thing is clear: if chip production in Taiwan was cut off for any length of time, the economic impact would be comparable to the global pandemic lockdowns. Such is the centrality of TSMC’s chips to the world economy.

It may not even take a war to knock out TSMC. Its Hsinchu Science Park factories sit atop a fault line that produced an earthquake measuring 7.3 on the Richter scale as recently as 1999. Global capitalism is just one large Taiwanese earthquake — or one major geopolitical miscalculation — away from meltdown…

read more in our Telegram-channel https://t.me/The_International_Affairs