Micro-chips and the new Cold War

Written by: (Contributed) on 17 February 2021

The increased significance of the micro-chip industry in many areas of manufacturing has created an industry dominated by hard competition. With the US falling behind in the competition and the main micro-chip producers based in Asia, the present US-led Cold War targeting China has had far-reaching implications for the entire industry.

Recent problems with Intel and the removal of one its main corporate leaders have reduced the number of micro-chip producers down to only two: Samsung in South Korea (ROK) and TSMC in Taiwan. Both places are strategically-placed in Asia with problematic diplomatic relations with the US. The fact there were over 25 micro-chip producers only twenty years ago has revealed the intense competition inside the industry, which is now responsible for producing a trillion chips a year with $583.2 bn of annual sales. (1)

Most electronic devices use increasing numbers of micro-chips and modern electric cars use over 3,000 for each vehicle.

The US, however, has been falling behind with their research and development of micro-chips for some years, while China has been striving to achieve self-sufficiency.

Additional problems to the intense competition to continually update micro-chip production has included vital supply-chains and interruptions caused by logistics and transportation with the COVID-19 pandemic.

A further additional problem which has not been particularly well-publicised has been the US-led Cold War embargo imposed on China, which has become their major diplomatic offensive in the Indo-Pacific region. US-led regional diplomacy has created a situation whereby an Australian defence update in 2020 stated that 'Australia's security environment is increasingly characterised by grey-zone competition; state behaviour that is aggressive but often covert, or at least deniable, and falls short of acts of war'. (2)

Recent US-led diplomatic activity in the region, furthermore, has revealed just how far the balance of forces has already swung away from traditional hegemonic positions with a commission formed by Congress to assess the situation, finding that the 'US is no longer clearly superior … with … implications for American interests and American security … being … severe'. (3) Elsewhere, a recent statement from General Mark Milley, chairman of the US joint military chiefs, provided the military assessment that 'Uncle Sam had lost assured command of the Western Pacific seas to its great power rival'. (4)

Problems for the US were, furthermore, exacerbated by the incompetence and buffoonery of the Trump administration which attempted to establish an anti-China alliance across the region. It led to a diplomatic position in which 'not many allies participated'. (5)

Such developments have far-reaching implications for micro-chip production.

Taiwan already exists in a tense diplomatic position with China; moves by the presidential administration of Tsai Ing-wen to consider full independence recently led to an Australian intelligence assessment warning Canberra that China was 'highly likely to attempt to take over Taiwan using all means short of war as early as 2024'. (6)

The fact the American Institute in Taiwan has nearly five hundred US diplomatic personnel on temporary leave from the State Department has revealed the significance and importance the US attach to their unofficial diplomatic relations with the entity. (7)

Such assessments have already sent shock-waves into the heartlands of US-led defence and security which has been increasingly worried about the growing imbalance across the Taiwan Straits for over a decade; the loss of Taiwan to control by China would remove an estimated fifth of all micro-chip manufacturing together with as much as half of 'cutting-edge capacity' from ready access by the US. (8) It would also devastate the manufacturing bases of countries allied with the US, such as Australia.

It is, nevertheless, the ROK dimension to the problem which has caused the US further serious considerations. The ROK was always considered one of the most loyal regional allies of the US, and still hosts nearly 30,000 US military personnel for rapid deployment with the Defence of Japan doctrine. In recent times, however, favourable and mutually beneficial trade with China has drawn the country closer to Beijing and with the development, a more confident foreign policy marked by an increased pride in their own sovereignty. They, no longer, automatically accept US dictat without question:

Trade Relations China – South Korea

Exports – ROK to China – 1995 - $9.33 bn.
2018 - $160 bn.,

which signify an annual increase of 13.1 per cent over 23 years;

Exports – China to ROK – 1995 - $7.34 bn.
2018 – 107 bn.,

which signify an annual increase of 12.4 per cent over 23 years. (9)

Two further factors have to also be placed into the equation: despite a US-led embargo on China, the country is still able to import an estimated $300 bn worth of micro-chips each year; the annual trade between the ROK and China during 2018, included over a quarter of the total being officially referred to as integrated circuits. (10)

These developments have far-reaching implications for countries such as Australia which has, historically, remained a close ally of the US; Australia clearly runs the risk of being drawn closer to traditional US-led positions, even if they are not in our interest and subsequent interruption to supply-chains for micro-chips may well cause serious problems for manufacturing industries employing hundreds of thousands of workers:

We need an independent foreign policy!

1. Chips the next economic flashpoint as costs rise and the US battles to contain China, Australian, 25 January 2021.
2. We can't combat China's 'grey zone' war while polarised, Australian, 20 January 2021.
3. Study: US no longer dominant power in the Pacific, Paul D. Shinkman, Information Clearing House, 22 August 2019.
4. US losing control of Pacific to Beijing, The Weekend Australian, 5-6 December 2020.
5. Chinese foreign minister visits South Korea, The Diplomat, 27 November 2020.
6. Takeover of Taiwan by China 'likely', Australian, 9 February 2021.
7. Beijing keeps a wary eye on new US Taipei post, Australian, 18 June 2018.
8. U.S. seeks new Asia defences, The Wall Street Journal, 24-26 August 2012: and, Australian, op.cit., 25 January 2021.
9. Website: OEC (Observatory of Economic Complexity), China/South Korea.
10. Australian, op.cit., 25 January 2021; and, OEC, op.cit. China/South Korea.