Writer : Aidan Morgan Chan | Editor: Andrew Ho
Currently, the semiconductors industry is dominated by East-Asian economies. With countries like South Korea and Taiwan controlling over 70% of the world’s market share, companies like TSMC, Samsung, and SK Hynix have the upper hand in advanced semiconductor production. Historically, this has always been the case. Since 1990, U.S. semiconductor manufacturing capacity has declined from 37% to 12% as of 2020, and in 2023, U.S. semiconductor imports have increased by 13%. However, despite these caveats underpinning American industry throughout the last few decades, Congress has never truly meddled with the market—so why now?
The Triad of Trade
The Taiwan Semiconductors Manufacturing Corporation (TSMC) is the world’s largest chip foundry. As of 2019, the company alone held over 50% market share with companies like Apple and Nvidia, which heavily relied on their semiconductors to engineer their own products. Without them, many of our modern technologies would not be made possible.
As the catalyst of industrial progress, TSMC has often been described as one of the most important corporations, given its indispensable role in modern civilization. However, growing tensions in the Asian-Pacific have raised concerns about Taiwan’s sovereignty, threatening TSMC and the global industries reliant on its semiconductors.
China has long considered Taiwan a breakaway province and has explicitly vowed to bring it back under its control, by force if necessary, framing its ambitions as a matter of national unity and historical destiny.
China has intensified military activity in the Taiwan Strait. Heightening fears of conflict, Warren Buffett slashed Berkshire Hathaway’s stake in TSMC by 86% of American depository receipts in February 2023, citing geopolitical risks—a move underscoring broader market anxieties over potential disruption to Taiwan’s semiconductor industry amid escalating China-Taiwan tensions.
Currently, TSMC provides over 92% of the advanced microchips used for modern technologies. Nearly every central U.S. defense system and platform relies on the import of semiconductors, and this is because only TSMC is capable of manufacturing them. However, as onshore semiconductor production capabilities continue to decline, our industrial dependence on Taiwan begins posing a threat to national security. This is believed to have spurred the passing of the CHIPS Act and partially explains why President Xi Jinping is adamant about annexing Taiwan. Doing so would grant them jurisdiction over TSMC, allowing China’s influence to burgeon.
CHIPS Wages War on China
The CHIPS Act, enacted in 2022, was publicly framed by Congress as a strategic initiative to enhance domestic semiconductor manufacturing and fortify the resilience of American supply chains. Allocating $52 billion in subsidies and incentives, the Act seeks to mitigate the U.S. dependency on foreign semiconductor production—particularly from Taiwan, which holds a dominant position in the global market. However, critical analysis suggests that the Act’s underlying objectives extend beyond industrial policy to encompass geopolitical strategy.
In particular, the legislation includes provisions prohibiting U.S. companies receiving federal funds from engaging in certain technology transfers or collaborations with China. Aligning with the Foreign Direct Product Rule, the provisions restrict access to semiconductors and advanced manufacturing tools by targeting firms supplying Chinese entities, effectively severing China’s ability to acquire or develop cutting-edge technologies. Described by some analysts as comparable to an economic act of war, these measures reflect a broader effort to suppress China’s technological advancements in areas such as artificial intelligence and military systems, preserving U.S. hegemony in the global technological landscape.
Caught in the Crossfire
Despite CHIPS standing for Creating Helpful Incentives to Produce Semiconductors, the controversy surrounding its one-sided nature of feeding into the Sino-American trade wars has fueled questions about just how “helpful” CHIPS truly is. Tech-giant Nvidia released a statement that they were having trouble adapting to the new supply chain following disruption from CHIPS. On October 17th, 2023, Nvidia dropped by about 5% after they were reportedly forced to forego a $5 billion order to China under the new legislation. Investors project that the company’s long-term sales prospects will continue to erode, mainly since Nvidia generates about 25% of its revenue from the Chinese market.
On the other side of the Pacific, South Korean companies like Samsung and SK Hynix currently produce about 40% of their NAND chips in Xi’an and more than 30% of their DRAM Chips between Wuxi and Dalian. However, the CHIPS Act requires them to terminate their operations in the near future, only being granted a one-year waiver to continue streamlining production in China. As the U.S. and China prolong their trade war, SK Hynix Chairman Chey Tae-won has stated South Korea will not be able to recover from losing access to the Chinese market. As China received over 67% of South Korea’s semiconductor exports throughout the last decade, this will be a devastating hit on both economies.
K-CHIPS versus CHIPS
Contrary to belief, the U.S. is not oblivious to CHIPS’s consequences on the world. Though they require allies to terminate operations in China, they actively encourage relocation to U.S. territory, offering government subsidies to develop their businesses abroad. However, these propositions have once again been met with criticism from both sides. The Minister for Trade of South Korea described the passage of restrictions as “vast and unconventional.” Due to the CHIPS profit-sharing clause, these subsidies are rendered useless, as the U.S. requires companies to pay a percentage of profits to the government that exceeds the initial agreed-upon threshold.
So why doesn’t South Korea just lessen its ties with the United States? Well, they can’t. Although South Korea holds about 73% of the world’s DRAM market share and 51% of the NAND flash market share, the International Trade Administration states that South Korea imports a lot of manufacturing components from the U.S. and is essentially stuck in a commodity trap. The U.S. was instrumental in mobilizing South Korea’s development of its semiconductor industry on such a vast scale. Both parties recognize this fact, and the resulting dependency leaves South Korea with few options beyond compliance. Attempting to mitigate the economic strain, the South Korean National Assembly Passed its own rendition of CHIPS. The K-CHIPS Act was introduced to encourage domestic growth and raised tax credits from 8% to 15% for companies investing in manufacturing facilities while also providing tax breaks increasing from 16% to 25%.
While it’s too early to say how CHIPS will affect the world in the long run, its short-term effects have been monumental. By reshaping global supply chains and positioning itself as the arbiter of technological progress, the U.S. leverages its influence in a tech war that revolves equally around innovation and power, forcing countries caught in the crossfire to choose a side. The CHIPS Act is not merely an industrial policy; it is a geopolitical gambit aimed at wresting control of the semiconductor industry from East Asia and centralizing it within America’s sphere of influence.
This maneuver is not without its risks. Forcing allies and companies to sever ties with China while demanding compliance with profit-sharing clauses has alienated partners and disrupted established supply chains. Moreover, the U.S.’s strategy inadvertently erodes Taiwan’s “silicon shield,” potentially destabilizing the delicate balance protecting the island from China’s ambitions. By prohibiting U.S. firms from collaborating with China and leveraging the Foreign Direct Product Rule to choke off China’s technological ascent, the U.S. has escalated this economic confrontation to a level some find comparable to acts of war.
The question now remains: Are we gambling with the wrong CHIPS? As the U.S. positions itself at the epicenter of this technological arms race, it risks overplaying its hand. By injecting itself into this fraught landscape, America is not merely participating in the tech war but attempting to take it over, setting the stage for an uncertain future where the stakes grow higher with every passing year. Whether this strategy secures lasting dominance or triggers unforeseen consequences will depend on how the world—and its markets—respond to this bold yet precarious reshuffling of global technological power.
Featured Image by Alexandre Debiève on Unsplash
