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Taking Up (Economic) Arms 

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The microchip – a tiny, unassuming slab of silicon at the heart of an intensifying economic struggle between superpowers. This article explores the reasons behind the ever-increasing vitality of the microchip and its role in geopolitical tensions today.

At the heart of an intensifying technological arms race between China and the US lies a deceptively small and unassuming slab of silicon: the microchip. Over the past decade or so, microchips have joined the ranks of those select few domestic industries funded and protected by global superpowers looking to arm themselves against economic (and military) threats.  

The evidence for this is seen through the hundreds of policies and billions of dollars poured into domestic microchip industries for the sole aim of preventing a dependence on exports — a fact recognized by policymakers. In fact, U.S. Senator John Cornyn once remarked that “ensuring our leadership in the future design, manufacturing, and assembly of cutting-edge semiconductors will be vital to United States national security and economic competitiveness.” 

How did these tiny chips find their way into the heart of a global economic power struggle? Why exactly are powerful nations attempting to control their trade? And how do they determine future global stability? 

The Importance of Microchips 

Microchips are used for a wide variety of applications:, from personal computers and smartphones (and every other electronic device) to AI technology. It is the growing importance of the AI industry that has propelled the mad dash for microchips — it makes use of highly specialized microchips that are produced through great difficulty. In fact, there are only about 30 companies worldwide that can actually produce these chips, giving them considerable strategic importance in this power struggle. These chips, in turn, are used for technologies that power the national security defense of nations and are crucial for intelligence and military electronics.  

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It doesn’t just stop there though — these handy little objects have spawned advancements in all industries, from healthcare to computing and clean energy. Their use and applications in countless industries has made them a vital product of the new technological age. 

Global Tensions 

The vitality of microchips helps to explain why they now constitute a significant portion of the Pentagon’s annual defense spending. The power held by these microchips was seen, clear as day, when the U.S. Senate amended the 2021 National Defense Authorization Act – the annual spending bill for the Pentagon – to include a provision that approved $22 billion for the American semiconductor industry.  

Meanwhile, in 2020, the Chinese government pledged more than $58 billion in government semiconductor investment funds, which was supplemented by pledges of another $60 billion from funds created by local governments, as well as a 10-year corporate tax exemption for chipmakers producing advanced chips. 

Predictably, the evident attempts of the US and China to wrest control of the microchip industry has manifested in the form of rising global tensions — but not just between these two nations. Taiwan, for example, is one of the key players in the global industry, in large part due to the existence of the Taiwan Semiconductor Manufacturing Company (TSMC), which controls a whopping 50% of the global market of advanced chips. Fears abound over how this will play out in the future, with many speculating that China could use economic coercion or cyberattacks to try to seize or harm Taiwan’s semiconductor industry.  

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What Next? 

The standoff between the US and China has been compared often to the frigid years of the Cold War. This is no more true than in the struggle for microchips, which bears frightening similarity to the technological competition between the US and the USSR in the Space Race.  

The ongoing global chip shortage could result in two potential scenarios: China pulling ahead in the microchip race or its efforts being thwarted by the US. Although China has been investing billions of dollars into strengthening its domestic microchip production with some notable successes, such as the fact that its microchip industry grew by 14% in 2019 while the global industry shrank by 13%, their quality does not hold a candle to its Western counterparts. Furthermore, the US’ efforts to pull China back have also been met with some success: Washington managed to convince TSMC not to sell its advanced chipsets to Huawei, effectively severing it from its primary supplier.  

At the same time, however, key private players in China, such as Alibaba and Tencent, have become involved in the trade, and channeled their resources to its development. Besides, China has the geopolitical advantage: TSMC’s decision to withhold chips from China could result in increasing pressure and military threats from China, which it could easily make good on.  

The eventual champion of the microchip industry remains to be determined. Until then, geopolitical tensions and concerns over national security will continue to persist, especially as the shortage of these chips persists.

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