How the U.S. can block China from getting microchips made abroad

By | October 9, 2022

Henry Farrell writes:

On Friday, the Biden administration issued aggressive new regulations, aimed at making it harder for China to access and build high-end semiconductors.

Monday saw the publication of “Chip War,” a new book on global fights over semiconductors, written by Chris Miller, an associate professor of history at Tufts University’s Fletcher School and a visiting fellow at the American Enterprise Institute. I interviewed Chris by email over what the new developments mean and how they reflect a longer history of conflict. The interview has been lightly edited for style.

Q: Most semiconductor manufacturing happens outside the United States. So how is the Biden administration able to set limits on global production of semiconductors?

A: Making chips requires using ultracomplex machine tools, many of which are produced by a small number of firms in just a couple of countries. Certain of the most advanced tools are only produced by U.S. firms. The U.S. Department of Commerce can use a regulation called the “foreign direct product rule,” to restrict the use of these American-manufactured tools for making certain chips. Because Taiwanese, South Korean, and all other advanced chipmakers need these tools, the regulation is effectively global, so long as the United States retains a monopoly on these tools.

Q: Why did semiconductor production move out of the United States to countries like Taiwan in the first place?

A: Partly because it was cheaper. Differences in labor costs are a comparatively small part of the story. Cheap capital and government incentives were probably more important in explaining why it was less expensive to manufacture in East Asia than in the United States. However, cost is only part of the story. The other factor is that chipmaking involves huge economies of scale.

The company that has best capitalized on these economies of scale is the Taiwan Semiconductor Manufacturing Company (TSMC), which today produces more processor chips than any other company. Its vast scale not only provides cost efficiency but also allows TSMC to hone its production processes over a larger volume of chips. Today, TSMC is the world’s most advanced chipmaker, and almost all of its chips are made in a handful of massive factories in Taiwan.

Q: You explain in the book how Chinese President Xi Jinping sees semiconductors as a “vital gate” that can be used to control the Chinese economy. Why does China depend so much on foreign semiconductors?

A: For the past decade, China has spent more money importing chips than it has importing oil, because China has been unable to produce advanced chips like those in phones, PCs, and servers at home. No Chinese firm has reached the leading edge in chip manufacturing, and most foreign chipmakers have kept their advanced technology in their home countries. China therefore relies on foreign firms for advanced processor and memory chips. [Continue reading…]

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