Will the EU’s attempts to reduce geostrategic dependencies on semiconductor production backfire?

Both the COVID crisis and the war in Ukraine have caused a shortage of chips—or semiconductors. In an increasingly digital world, these are increasingly important. The ongoing problems with supply chains have a major impact, especially given the totalitarian ‘zero COVID’ policy in China. This has already caused major problems for car production, game console supply and smartphones. In addition, while the sanctions against Russia include restrictions on the export of semiconductors, which has affected Russian car production, Russia and Ukraine are exporters of the raw materials for chip production, such as palladium and neon.

A single company in Taiwan, Taiwan Semiconductor Manufacturing Company Ltd (TSMC), is responsible for about 54% of global chip production and 90% of semiconductor chip delivery. Taiwan also dominates the production of the most advanced chips, those that are 10 nanometres or smaller, crucial in the arms race between the U.S. and China. According to Boston Consulting Group, the loss of production in Taiwan for one year, an event that is not inconceivable given China’s aggressive attitude towards Taiwan, would bring the international electronics supply chain to a standstill. China, which accounts for 60% of chip demand, would also be hit hard.

Reducing excessive dependence

Both America and China want to put an end to this great dependence. The U.S. could persuade TSMC to transfer part of its production to America; moreover, the United States is also investing billions to rebuild their own chip industry. The American contribution to global semiconductor production has more or less halved since the 1990s, just like the European contribution. China is also investing substantial sums, although experts believe that the Chinese chip industry’s backlog in this area will only increase in the coming years.

It should be noted here that TSMC says that “global collaboration is vital for semiconductor industry success,” because it is heavily dependent on designs, raw materials and equipment from around the world: this is also the reason why it is so difficult for China to fulfil its aim of becoming completely self-sufficient in chip production.

The European Union also wants to reduce its dependence on imported semiconductors and has announced a new major spending programme; this is what the so-called “Chips Act” involves. The combined U.S. and European expenditure on subsidies for this would amount to $100 billion; in China, it would amount to $150 billion.

However, there is a major problem with this in that the attempts to become less dependent in semiconductor production go hand-in-hand with disruptive forms of political interference: for example, earlier this year, the German government prohibited the takeover by the Taiwanese company GlobalWafer of its German competitor, Siltronic. In the U.S., the government prevented Dutch company ASML Holding NV, which has a monopoly on advanced lithography machines used by companies such as TSMC, from exporting that advanced equipment to China. It should also be noted there is considerable American pressure on the Dutch government to put this de-facto export ban on paper.

Good intentions

Industry sources believe that the drive to reduce semiconductor dependency may be counterproductive, as the political conditions attached to this support could further stall global supply chains. According to Rudi De Winter, CEO of German chip manufacturer X-Fab Silicon Foundries, the semiconductor industry “is a very global business, and it has done well being a global business.” TSMC founder Morris Chang is also sceptical. In October 2021, he said: “It’s not possible to turn back the clock. … If you want to re-establish a complete semiconductor supply chain in the United States, you will not find it to be a possible task, even after you spend hundreds of billions of dollars.”

For the last 10 years, the EU has tried to double Europe’s own production of chips. It failed. Now it wants to be responsible for 20% of global production by 2030, which in practice means quadrupling EU production in eight years. It remains to be seen whether subsidies to companies will be enough. In any case, many of the materials for making chips will continue to come from Asia, which further makes the plans of Washington and Brussels unrealistic, according to Jan-Peter Kleinhans, a researcher at the German think tank Stiftung Neue Verantwortung. He also warns of the risk of shortages becoming even more acute when politicians start ordering companies to prioritise certain chips for certain regions: “Suddenly, it’s not up to the market anymore. … Governments aren’t chip buyers or chip makers. It’s really 20th century policy tools applied to a 21st century value chain.” 

In sum, we are living in a globalised world, and as much as there are legitimate concerns with regards to geostrategic dependencies, any measures to do something about this may easily backfire. Despite Russia’s invasion of Ukraine, numerous studies have concluded that increased trade leads to fewer armed conflicts among states—so intense dependencies like the ones with regards to semiconductors also come with great long term benefits.