Opinion: What’s China got to do with the price of chips?
Food price inflation is at an eye-watering 45-year high which is concerning for households everywhere. It should, including the price of potatoes, start to ease.
But of more concern perhaps, the price of a different kind of chips – the computer variety – is likely to start going rapidly in the other direction.
Computer chip wars are very much on the agenda. Supply chain disruption resulting from the pandemic and exacerbated by Russia’s invasion of Ukraine led to an acute shortage of semi-conductors which play a key role in all kinds of technology, from cars to mobile phones.
They’re also critical to the kinds of technology that are going to define the future, such as AI and clean tech, as well, crucially, as advanced weapons systems. This has prompted governments, particularly the US government, to look at securing their supply of these vital bits of kit.
The past few years have provided something of a wake-up call to western governments about their dependency on states that don’t have their best interests at heart, including for semiconductors.
They have realised that unfettered offshoring in countries that are strategic rivals has exposed them. “Secure trade” and “friend-shoring” are now very much on the agenda as a result.
Supply chains developed over decades are therefore now being reviewed, rebuilt and realigned. Given the importance of silicon chips to the future of economies, climates, and global security, chip-making is at the forefront of this seismic change.
So, the current semi-conductor supply chain is being threatened by China which wants to ultimately create one if its own, whereas the US and its allies want to protect and reinforce the existing one, and prevent China from succeeding in its plans.
Pre-pandemic, there were already trade wars between the US and China on things like steel. Initially, this was seen as a trade spat between Donald Trump and Xi Jinping. But fast-forward five years and this has developed into something much deeper linked to security, national interest and ideology.
As William Reinsch, who used to oversee US’s export controls said: “America has always wanted to maintain a technological edge over other economic powers. These days we are pursuing that goal in a new way: We have moved from a ‘run faster’ to a ‘run faster and trip the other guy’ policy.”
This means that the US isn’t just slapping tariffs on Chinese goods; it is now actively banning trade with China in certain areas, banning US firms from trading with Chinese companies, and even banning firms and institutions from investing in China.
Some of the deglobalisation policies have included the US Inflation Reduction Act 2002, and the US Chips Act 2022. These provide subsidies to bring supply chains home, and away from geopolitical rivals, and provide stricter investment screening and export controls to keep advanced technology out of enemy hands.
And it’s not just a US thing. The EU is following the US’s lead, with investment screening and they are wanting their own inflation reduction act.
The fight for the world’s most critical technology will only escalate further over the next few years. We’ve already seen tensions between the US and China ratcheting up following the ‘spy balloon’ incidents.
And accusations of spying don’t end there. Issues with Chinese companies have been bubbling for some time, most notably with Huawei. One in four of the over 500 global firms or institutions banned by the US is Chinese (with a similar proportion being Russian or Belarusian).
Now we’re seeing TikTok in the firing line. One senior US lawmaker described TikTok as “the spy balloon in your phone”. And last week, the UK parliament banned TikTok from any government phone. Could we even see TikTok being banned entirely in the US?
Many people may not realise the extent of US actions against China and increasingly Russia already. In October 2022, the US announced export controls on advanced chips used to power super computers and AI algorithms, including banning exports of chips to China.
This is a massive issue for China. Much like the west became deeply uncomfortable with its reliance on China for many things, China is deeply reliant on the US and its allies, notably Japan, South Korea, Taiwan and the Netherlands, for computer chips.
Indeed, ASML, a Dutch company, is the key company producing the machinery that makes semi-conductors. ASML very recently said it was going to ban exports of its products to China, following US pressure. This is a major strategic issue for China.
In short, a reckoning is coming as China bids for semiconductor supremacy and the US and the West move to block it from gaining the upper hand.
We are entering a more protectionist era more broadly, where efficiency and cost go out the window as national security and ideology take precedence. The price of goods using semiconductors in particular will reflect this.
Richard Ramsey is chief economist at Ulster Bank, Northern Ireland