If there is one certainty about this year, it is that geopolitical rivalries will persist. For the EU, this could translate largely into an effort to reduce dependence on foreign suppliers, especially of critical goods. For the US, the focus would be on maintaining military supremacy by denying potential adversaries — namely, China — access to relevant technologies. Both approaches overlap in an important area: the chips industry.
As advanced microchips are central to many advanced weapons systems and integral to economic security and prosperity, the industry has become a key arena in today’s geopolitical competition. To improve their chances of prevailing in the “chip war,” all large economic powers have implemented major programs to support their domestic chipmakers.
The US enacted the CHIPS and Science Act in 2022. As part of the legislation, the US Department of Commerce is planning to hand out US$50 billion in direct funding, federal loans and loan guarantees to support semiconductor research and development, manufacturing and workforce training.
The EU, whose share of global chip production is falling, has adopted the European Chips Act, which should mobilize billions of euros to bolster “competitiveness and resilience” in semiconductor technologies and applications. As there is limited room for maneuver in the EU budget, the European Commission has also relaxed its state aid rules, enabling some large countries, such as France and especially Germany, to promise large subsidies — totaling 20 billion euros (US$21.8 billion) — for the construction of chip-production plants. As a proportion of GDP, Germany’s subsidies are even larger than those of the US.
In Asia, Japan and South Korea have introduced multibillion-dollar plans to support their chips industries. Not to be outdone, China is crafting a massive chips-industry support package, reportedly totaling more than US$140 billion.
A common element of all these plans is that the largest sums are earmarked for the construction of so-called fabs — the plants where chips are made. This is misguided. Given the specialized equipment and ultra-clean environment fabs require, they are extremely expensive. However, these plants represent only the most visible stage of a multi-step production process that occurs in many locations.
The process begins with silicon, which is refined, sliced into wafers and polished until extremely smooth. The wafers are then covered in a thin film of semiconducting material, before highly specialized machines at the fabs etch intricate circuit patterns onto them. This enables the application of a huge and growing number of processing elements — over a billion — that make the chips work.
Today, the biggest and cleanest fabs are in Asia, the most advanced machines (such as for etching) are produced in Europe and the best software (needed to organize the patterns on the chips) comes from the US. To become truly self-sufficient in chips, one of these locations would have to master all stages of the production process.
This is easier said than done. Rapid progress in making chips smaller and faster — as described by Moore’s Law — reflects the accumulation of highly specialized know-how by a limited number of firms, which contribute the key components necessary to make the most advanced chips. This know-how is so vast, specific and complex that the technologies that underpin chip production cannot simply be imported and copied. By the time this accumulated know-how could be replicated, chip technology would almost certainly have advanced, leaving the imitator perpetually at least a generation behind.
This explains why China has so far failed at becoming competitive in chipmaking, despite having already poured billions of dollars of Chinese government funds into the industry. The Made in China 2025 strategy, unveiled in 2015, aimed to ensure that domestic production covered 70 percent of the country’s semiconductor needs by the target date. However, with just one year to go, domestic production remains very limited.
Instead, China is the world’s biggest importer of integrated circuits, which total more than US$400 billion annually — more than China’s imports of crude oil. By contrast, the EU imports only about 50 billion euros of chips each year, about the same level as the US.
This points to a fundamental asymmetry. The Chinese economy would be crippled without foreign-made chips, whereas the US and the EU would experience problems only in sectors that rely on the older generation of chips made in China. Moreover, whereas China does not produce most of the advanced chipmaking equipment it would need to develop its own industry, EU exports of such equipment are large enough to cover all of its chip imports.
Two conclusions can be drawn. First, while China has managed to gain dominance in less specialized, more mature industries like electric vehicles, there is no need to fear an imminent Chinese takeover of the semiconductor industry. Second, an uncoordinated subsidy race is tantamount to a competition among different Western suppliers, and when all these subsidized fabs start producing, the price of chips is likely to fall.
As the biggest importer of chips by far, China stands to gain the most from this. A 20 percent fall in chip prices would reduce China’s import bill by US$80 billion annually. Since a large share of the chips China imports are used as inputs in exports of electronic goods (such as smartphones), subsidies for chip production in the US, the EU and elsewhere amount to implicit support for Chinese exports, courtesy of Western public money.
The uncoordinated chips subsidy race in the West is unnecessary. It is also counterproductive, as it could end up benefiting mainly China.
Daniel Gros is director of the Institute for European Policymaking at Bocconi University.
Copyright: Project Syndicate
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