Economic Security and America’s CHIPS Act

Economic Security and America’s CHIPS Act

Chinese military exercises in the Taiwan Strait in August 2022 temporarily disrupted international shipping. Like the Russian invasion of Ukraine, this is a reminder of the intrinsic dialectic between war and commerce in human sociality. In anthropology, Claude Lévi-Strauss thought that wars are the result of failed transactions.


On the other hand, Pierre Clastres argued that war was intrinsic to society, making exchange of goods a necessary evil in making alliances. They based their theories on observations of “primitive” societies in the Amazon. Modern weapons, as evidenced in Ukraine, cause human suffering on a scale unimaginable in the past. And even the smallest nuclear war would devastate the global environment, killing billions and wiping out entire species.    

Liberals long argued that free international trade – by virtue of making all goods equally available – renders war unnecessary, costly and irrational. The current champion of this view is Thomas Friedman, inventor of the “Golden Arches Theory” that no two countries with McDonald’s will go to war with each other. Friedman argued that Chinese and Taiwanese interdependence in the electronics supply chain prevents conflict due to “mutual assured economic destruction” (Friedman 2000: 249).  When China and Taiwan joined the World Trade Organization (WTO), he predicted that China would accept free markets and rule-of-law. Two decades later, Russia disproved this liberal hypothesis by invading Ukraine. China’s military posturing vis-à-vis Taiwan also threatens to kill their proverbial hen that lays the golden eggs.  

Macdonalds in Taipei (Wiki images)

If war is human nature, we need to seriously consider economic security as part of strategies to prevent war. This was the main takeaway I had from the CIPS webinar in June 2022 with Nikkei journalist Yasuhiko OTA, entitled “Quest for Economic Security: Japan, Canada, and the Indo-Pacific.” 

Economic security in the digital economy 
In Ota’s analysis, the digital economy is based on two pillars. One is an exchange of data in a global system of servers connected by undersea cables. He used historical maps to show that data flows “perfectly match” historical shipping routes back to the 16th century. This means that the South China Sea, which China is trying to enclose as its historical waters or jurisdiction with a nine-dash line, remains a critical choking point. The second pillar consists of the semiconductor chips that power all electronics, including military equipment. A state’s control of these two pillars now controls its relative standing in the international system. Ota focused on semiconductors. 

Taiwan has become the lynchpin in semiconductor supply chains. The US is still dominant in upstream fields of design and software and controls 96% of EDA (Electronic design automation). Japan controls 56% of wafer manufacturing. Taiwan, long seen as a subcontractor, holds 71% of the world’s semiconductor foundries and 54% of OSAT (Outsourced semiconductor assembly and testing). Ota values these steps as 50% of the global value chain. South Korea is emerging as an important player in design and China in OSAT. ASML, in the Netherlands, is the only manufacturer of chip-making machines. 

Semiconductors are not all equal, and the key is size. The United States is still the largest producer of 10 to 22 nm semiconductors, but Taiwan makes 90% of chips under 10nm. TSMC (Taiwan Semiconductor Manufacturing Company) is the only manufacturer of chips smaller than 10nm. This makes Taiwan’s security of great concern. Ota said, “Without semiconductors, all industry would halt. That means the geopolitical challenge is to protect the Indo-Pacific supply chains leading to Taiwan.” He was too polite to emphasize that China is the only regional state threatening war against its neighbours. 

America’s CHIPS and Science Act
On August 9, President Joseph Biden signed the bipartisan CHIPS and Science Act into law. It includes US$52.7 billion for American semiconductor research and development, plus generous tax credits and other incentives. In a way, this is America’s 21st century “Sputnik moment,” named after the post-1957 drive to outpace the Soviet Union in space exploration and science. The Americans have noticed that, around the world, other countries are making state investments in semiconductors. Even Canada announced that it would provide CAD$240 million to support semiconductor and photonics industries. Liberalism is ceding ground to economic nationalism.  

The CHIPS Act is relevant to economic security because it targets China as a systemic rival.

The CHIPS Act is relevant to economic security because it targets China as a systemic rival. Research funds come with requirements that recipients may not build certain facilities in China and other countries of concern. It even prohibits universities from accepting CHIPS funding if they accept a Confucius Institute without guarantees preventing Chinese influence. Secretary of State Antony Blinken assured American allies and partners that the Act would strengthen supply chain diplomacy. 

The CHIPS Act, by requiring countries and companies to choose between the US and China, has the effect of binding major companies like TSMC and Samsung to the US. It provides incentives for middle powers like Canada to focus on collaboration with allies defined by the US. Canada, which hosts major companies, including TSMC’s “Design Centre” in Ottawa, stands to benefit from free trade agreements and upgrading economic relations with partner countries. The CHIPS Act is America’s reaction to China’s increasing willingness to use economic coercion to silence critics and achieve its political aims. It strengthens the economic security and supply chain resilience for countries committed to the international rule of law. It also deprives China of the semiconductor supply chain on which their military relies. 

Suppose Friedman is right that international trade reduces the risk of war. In that case, countermeasures will be needed by the US and its allies (including Taiwan) to keep China active in other profitable industries. Ota even recommended admitting China into the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). Maybe that will be possible if China demonstrates the will and ability to meet CPTPP standards. In the meantime, policy-makers and diplomats have the difficult task of keeping China engaged economically while creating incentives for China to respect international law and refrain from military aggression. Perhaps the promise of future trade, rather than total free trade as promoted by liberalism, can best promote commerce and prevent the tragedy of war. 


https://twitter.com/uOttawaCIPS/status/1546593643112398854

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