Globalization over previous decades has created economic interdependence between states allowing supply chains to benefit from cross-border openness and the division of tasks in production processes. The US-China trade dispute, however, has called these collaborative advantages into question. As part of the MERICS European China Talent Program 2020, Brigitte Dekker of the Clingendael Institute and Anna-Lena Rhiem of the Infineon Technologies AG examined the effects on the semiconductor industry – a key building block of nearly all high-tech products – and recommend a way forward for Europe.
Semiconductor technologies play a pivotal role in most high-tech products (see Figure 1). However, the semiconductor industry has been particularly affected by current geoeconomic developments. While export control measures for semiconductor products are not new, President Trump took restrictions to the next level. After choosing a unilateral path in 2018 by introducing restrictions on the export of emerging and foundational technologies through its Export Control Reform Act (ECRA), the US administration then began pressuring European allies to cut off technology exports to China and actively limited the re-export of American equipment to third countries.
Being the world leader in software and chip design allows the United States to implement such unilateral restrictions, thereby exploiting chokepoints and exerting downstream pressure on foundries and integrated device manufacturers (IDMs) alike. These different types of players are each important – IDMs have design, manufacturing, testing and packaging capabilities whereas so-called “fabless” companies focus on chip design alone, collaborating with contract foundries (or “fabs”) to manufacture their chips.
The United States may have taken the lead, but it takes two to tango: one aspect of the US-China trade conflict has been the Chinese government’s politicization of key technologies. Indeed, the Chinese export control regulations that entered into force on 1 December 2020 are an unmistakable step to counterbalance Washington’s export control regime. Similarly, the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, issued on 9 January 2021, seek to undermine the US sanction regime. If individuals or companies are prevented from doing business by foreign law, the new regulation allows the Chinese government to release firms from compliance obligations. Moreover, Chinese companies that encounter losses due to the compliant behavior of foreign companies can sue for compensation in Chinese courts. For the semiconductor industry, the new rules represent more pressure to choose sides.
The attempts of both countries to limit each other’s innovation capability are accompanied by tremendous efforts to strengthen their respective local value chains. By 2030, Beijing wants to position its semiconductor industry as the world leader and meet 80% of domestic chip demand with domestic production. To achieve this goal, China has created several Integrated Circuit Funds, with a total funding volume of USD 150 billion.
In response, Washington is considering initiatives to strengthen its semiconductor industry at home. The CHIPS for America Act and the American Foundries Act were combined and passed as part of the National Defense Authorization Act (NDAA) in December 2020. The legislation establishes the framework for a semiconductor incentive program to build new or re-equip existing fabs, and to expand federal spending for semiconductor research. Funding for the program still requires approval, but its target is USD 25 billion for fabrication capacity and USD 5 billion for research.