World trade in semiconductor chips, which are used in our computers and cellphones, among dozens of other applications, has reached such a significant level that it is having a major influence on international trading relations, in a similar vein as oil.
In 2020 semiconductors surpassed crude oil as the most traded good by export value, which is quite astounding if you think about it. Oil has been the bulk commodity driving economic growth over the last 50 years, and now semiconductors are starting to tip the scales. Like oil, semiconductors are economic drivers and also hold considerable strategic weight: the application of the most advanced semiconductors in artificial intelligence and defence are making supply a national security issue for many countries.
The problem, from a global perspective, is that production is extremely concentrated. About 92% of the most advanced semiconductors, which enable the likes of AI, are produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company. South Korea, through Samsung, produces the other 8%.
Looking at the broader semiconductor market, US manufacturing capability has been in constant decline, from a height of 37% of global capacity in 1990 to just over 12% today. This has happened whilst China has steadily been building its own manufacturing capability from zero in 1990 to currently producing about 15% of the global share. The key distinction is that the Chinese capability, which is separate from that of Taiwan, is about two generations behind the far more powerful chips produced in Taiwan and consumed in the US, and that’s at the heart of this conflict around trade.
While there are efforts at onshoring, production is much more expensive in the US – a chip produced in the US costs about 40% to 50% more than one made in Taiwan, and building a new fabrication plant and running it for 10 years would cost about 30% more. This has meant that in order to secure supply chains through onshoring, the US government has had to significantly increase subsidies to align private-sector interests with those of national security..
The reality is that, given the concentration of supply chains, it’s unlikely that complete self-sufficiency will be achievable. Instead, what is occurring is something more like “reglobalisation”, with the formation of very specific trade relationships, to supplant broad global trade as envisaged by the World Trade Organisation. For example, we’re seeing the emergence of a group called the “Fab Four” – the US, Taiwan, Japan and South Korea – which is essentially a much smaller yard with much higher fences, limiting global access to the advanced chips.
This policy is focused at not only securing supply, but also limiting the ability of the Chinese to access and produce these exceptionally advanced chips. In 2022, the most high-powered chips were put on a banned list and prohibited from being exported to China from the US, and these sanctions affected any company using US semiconductor technology, effectively covering all leading chip makers. Last week, the US upped the ante announcing further trade restrictions covering a broader subset of chips, indicating an escalation of this industrial trade policy.
Global trade is being impacted by more protectionist policies, the impact of which could see a reframing of one of the most powerful deflationary forces over the last 30 years, globalisation.
