Although semiconductor chips are ubiquitous nowadays, their production is concentrated in just a few countries, and this has left the US economy and military highly vulnerable at a time of rising geopolitical tensions.
While the US commands a leading position in designing and providing the software for the high-end chips used in artificial intelligence (AI) technologies, production of the chips themselves occurs elsewhere. To head off the risk of catastrophic supply disruptions, the US needs a coherent strategy that embraces all nodes of the semiconductor industry.
That is why the CHIPS and Science Act, signed by then-US president Joe Biden in 2022, provided funding to reshore manufacturing capacity for high-end chips.
The impact has been significant: Planned investments should give the US control of almost 30 percent of global wafer fabrication capacity for chips below 10 nanometers by 2032, the Semiconductor Industry Association (SIA) said.
Only Taiwan and South Korea have foundries to produce such chips. China, by contrast, would control only 2 percent of manufacturing capacity, while Europe and Japan’s share would rise to about 12 percent.
However, US President Donald Trump is now trying to roll back this strategy, describing the CHIPS Act — one of his predecessor’s signature achievements — as a waste of money. His administration is instead seeking to tighten the export restrictions that Biden introduced to frustrate China’s AI ambitions.
It is a strategic mistake to de-emphasize strengthening domestic capacity through targeted industrial policies. Coercive measures against China have not only proved ineffective, but might have even accelerated Chinese innovation. DeepSeek’s (深度求索) highly competitive models were apparently developed at a fraction of the cost of OpenAI’s.
A substantial share of the semiconductors used in DeepSeek’s R1 model comprises chips that were smuggled through intermediaries in Singapore and other Asian countries, and DeepSeek relied on clever engineering techniques to overcome the remaining hardware limitations it faced.
Meanwhile, Chinese tech giants such as Alibaba (阿里巴巴) and Tencent (騰訊) are developing similar AI models under similar supply constraints.
Even before the DeepSeek breakthrough, there were doubts about the effectiveness of US trade restrictions. The Biden administration’s export ban, adopted in October 2022, targeted chips smaller than 16 nanometers, banning not only exports of the final product, but also the equipment and the human capital needed to develop them. Less than a year later, in August 2023, Huawei (華為) launched a new smartphone model (the Mate 60) that uses a 7-nanometer chip.
Even if China no longer has access to the most advanced lithography machines, it can still use old ones to produce 7-nanometer chips, albeit at a higher cost.
While these older machines do not allow it to go below 7-nanometer (Taiwan Semiconductor Manufacturing Company [TSMC, 台積電] is working on 1-nanometer chips), Huawei and DeepSeek’s achievements are a cautionary tale. China now has every reason to develop its own semiconductor industry, and it might have made more progress than we think.
To reduce its own supply-chain vulnerabilities, the US cannot rely on an isolationist reshoring-only approach. Given how broadly the supply chain is distributed, leveraging existing alliances is the only viable way forward. ASML, the Dutch firm with a near-monopoly on the high-end lithography machines used to make the most advanced chips, cannot simply be recreated overnight.
So far, the US has focused on reducing security risks related to the most sophisticated chips, giving short shrift to the higher-node chips that are needed to run modern economies. Yet these legacy chips — those above 28 nanometers — are key components in cars, airplanes, fighter jets, medical devices, smartphones, computers and much more.
According to the SIA, China is expected to control almost 40 percent of global wafer fabrication capacity for these types of chips by 2032, while Taiwan, the US and Europe would account for 25 percent, 10 percent and 3 percent, respectively. China would thus control a major strategic chokepoint, enabling it to bring the US economy to a halt with its own export bans.
It would also have a sizable military edge, because it could impair US defenses by cutting off the supply of legacy chips. Finally, China’s security services could put back doors into Chinese-made chips, allowing for espionage or even cyberattacks on US infrastructure.
Compounding the challenge, Chinese-made chips are usually already incorporated into final products by the time they reach the US. If the US wants to curtail imports of potentially compromised hardware, it would have to do it indirectly, tracking down chips at customs by dismantling assembled products. That would be exceedingly costly.
Fortunately, the US does not lack policy tools to reduce its vulnerabilities. When it comes to military applications of legacy chips, it can resort to procurement restrictions, trade sanctions (justified on national security grounds) and cybersecurity defenses.
As for expanding domestic production capacity, it can use anti-dumping and countervailing duties to counter unfair Chinese practices, such as its heavy subsidization of domestic producers.
Chips, and the data they support, would be the oil of the future. The US needs to devise a comprehensive strategy that addresses the full range of its current vulnerabilities. That means looking beyond the most advanced chips and the AI race.
Edoardo Campanella, senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, is co-author (with Marta Dassu) of Anglo Nostalgia: The Politics of Emotion in a Fractured West. John Haigh is co-director of the Mossavar-Rahmani Center for Business and Government and a lecturer in public policy at the Harvard Kennedy School.
Copyright: Project Syndicate
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