Winner of the 2022/23 Undergraduate Essay Competition: Sonia Lee

First Year University College student, Sonia Lee, discusses the economic and geopolitical implications of the recent US-imposed tariffs on semiconductors in China

In the modern technological world, semiconductors are needed to power computers, phones,

and automobiles. It has become a necessity for the majority of people and is present in our

daily lives. As a result, semiconductors have become one of the modern economy's pillars.

For decades, US has been the largest producer of semiconductors in the world. In 1990, US

produced 37% of the world’s semiconductors. However, due to the semiconductor industry

subsidies in China, South Korea and other countries, the US semiconductor industry has

declined and now produces only 10% of the world’s supply. China is a net importer of

semiconductors, relying heavily on foreign supply of semiconductors. However, through the

Made in China 2025 initiative, China has been able to boost its development of domestic

semiconductor industry, reducing their reliance on foreign suppliers, including the US. In 2018,

the US Trade Representative imposed a 25% tariff on 1,333 Chinese products of US$50billion

of goods imported by the US. This policy has impacted many sectors, including the

semiconductor industry. The US implementation of tariffs on Chinese semiconductors aims at

reducing trade deficit, boosting domestic semiconductors manufacturing, as well as

kneecapping advancements in China’s semiconductors industry.

One reason for protecting the US semiconductor industry is because it contributes significantly

to the US GDP and income. In 2020, the industry itself generated $246.4 billion for GDP and

$160.8 billion in income. These benefits can be distributed across multiple sectors, stimulating

job creation. For example, the industry created a total of 1.85 million direct and indirect jobs.

In 2020, 277,000 domestic workers were directly employed in R&D, design and manufacturing industries. Therefore, the implementation of tariffs is crucial to increase income, accelerate job creation and protect workers’ jobs. However, a gain in one industry needs to be balanced against a loss in another. The industries that rely on semiconductors from China as input in the production process are likely to suffer a rise in manufacturing costs due to the tariffs, thus harming production, which could lead to job losses, potentially undermining the Administration’s Build Back Better goal of creating millions of high-wage jobs for American workers. It could be argued that the US is more concerned with maintaining its technological lead in the world than with the well-being and success of its domestic firms and workers.

The Semiconductor Industry Association (SIA) (2021) believes that the imposition of tariffs is

hampering the expansion of production capacity in the semiconductor industry in order to meet

rising future demand for semiconductors, hence, leading to a shortage of semiconductors. In

early 2021, the world experienced a shortage in semiconductors due to the supply chain disruptions caused during the pandemic period. The additional US tariffs on imported

semiconductors added fuel to the fire by disrupting consumers’ supply chains and introducing

uncertainty. This aggravated the situation of shortage and increased costs, subsequently

promoting inflationary pressure. In addition, semiconductors became a necessity to the pandemic response because they were needed in many medical devices, such as ventilators, that were used to

combat the COVID-19 pandemic. Therefore, the tariffs reduce the accessibility and affordability of

these healthcare products and services. Moreover, because the majority of the chips imported

from China were processed in US semiconductor firms' assembly, test, and packaging

factories, US semiconductors firms will be negatively impacted more than China domestic

firms. As a result, tariffs on Chinese semiconductors could inflict serious economic harm to US firms.

The tariffs will hit the hardest in the Taiwanese semiconductor industry – part of the Republic

of China, 90% of the parts used by the US’s three biggest tech brands, Apple, Hewlett

Packard and Dell, were manufactured in Taiwan. Therefore, many US major customers will

have to substitute parts from Taiwan with cheaper alternatives from other countries. As a result, the Taiwan semiconductor industry will experience a fall in revenue and many Taiwanese firms will suffer. However, domestic demand for semiconductors in China will rise, so domestic firms

will benefit from the localisation policy incentives because they will need to handle an increase

in domestic orders in the short run. The imposition of tariffs is undoubtedly a big blow to China,

but if they can overcome these challenges, they may become more robust in the

long-run. However, by the time China manages to overcome these challenges and is actively

producing high-ends semiconductors, there is a possibility that they might not be as

competitive as South Korea or Japan, and get left behind. Hence, according to Ma (2020),

Chinese enterprises should focus on independent innovation and basic research capabilities. This will reduce China’s dependency on foreign suppliers, pushing the country toward self-

reliance in the semiconductor industry.

China has geopolitical leverage in this semiconductor war to gain an upper hand. China

exports about 80% of the rare-earth elements to US; these materials are critical in the

manufacturing of semiconductor. Therefore, China could limit the export of these materials to

the US, which would lead to a shortage of rare-earth elements in the US, forcing producers to find alternatives promptly. This will increase the costs of firms, harming the US semiconductor industry. For example, in 2010, China halted rare earth exports to Japan, who was a major consumer, during a diplomatic standoff between the two countries. Currently, China has no intentions to implement export controls on rare-earth to the US, but this is an option that remains open to China.

With the trade war on going between between the US and China, ASEAN countries will come

out as winner in this war. The US will be seeking to join with ASEAN countries to create a new

supply chain framework in order to reduce their reliance on China, as well as aiming to reduce

the shortage of semiconductors. ASEAN countries will be expecting a significant increase in

investment in semiconductor production facilities as supply chains moved out from China.

Therefore, countries such as Malaysia and Vietnam could expect to see a huge surge of growth in

the semiconductor industry. One of the reasons is that the population of ASEAN nations is

rapidly growing, whereas China’s population growth is slowing down. Therefore, the cost of

labour in ASEAN will be relatively lower. These clients could relocate their production bases to

countries such as Vietnam, as it is a low-cost Asian manufacturing base with a reputation for

having a diligent labour supply. Furthermore, Malaysians and Singaporeans have good English

command, so the US can establish bases in these countries as well. Not only are US bases

are shifting to ASEAN nations, but Chinese companies are also aiming to expand their

industries to ASEAN nations due to cheaper labour, attractive policies, exceptional infrastructure,

and the desire to avoid US tariffs.

In conclusion, the impact of these tariffs will harm companies in both countries, resulting in a

decrease in revenue for the semiconductor and tech industries, as well as stifling technological

advancement and innovation. The Taiwanese firms will be the primary losers of the war, and

accordingly to experts, China will significantly increase their investment and support for its

domestic semiconductor manufacturing industry. Finally, ASEAN countries should expect a

huge surge of investment in the semiconductor industry, and so the country must be prepared

to ensure that the industry grows effectively. Government should look to improve the nation’s

infrastructures, such as telecommunications systems, to prepare for and welcome the rise of

domestic semiconductor industry.

Bibliography

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