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Semiconductor Supply Chains

Updated: Jul 17, 2023


Since its invention by engineers in the United States in the 1950s, the semiconductor chip has become a focal point of trade relations between the United States and East Asian powers. As the technology industry in the US expanded in the 1960s, fueled by the US military and space programs, companies such as Texas Instruments, Philips, and IBM looked towards Asia as a means of cheap production for these powerful chips. In 1961, the first foreign direct investment occurred when Fairchild Semiconductor outsourced the process of taking a manufacturing silicon wafer and assembling and packaging it into the semiconductor chips to be sent to end-user firms to Hong Kong (Brown, 2020). Since this part of the process is relatively labor intensive, the abundance of low-cost labor in Asia was attractive for these companies to move their manufacturing. Along with this, Asian countries were not yet a national security concern for the United States, so the American government did not feel threatened by allowing these countries to manufacture their precious, high-tech chips. As the demand for high-end semiconductors intensifies in the 21st century, Asian powers such as Japan, South Korea, Taiwan and China are competing for dominance in the industry. The semiconductor industry has become geopolitically significant in East Asia as it advances China’s claim to the island of Taiwan, as well as the US-China great power competition.

As prominent Asian allies to the United States during the Cold War, Taiwan and South Korea’s economies greatly benefitted from US capital and technology transfers. South Korea first entered the semiconductor supply chain in the 1960s through FDI by American companies like Fairchild and Motorola. Korean firms such as Samsung, Hyundai Electronics and Goldstar led this market entry. While these firms initially only handled assembly, testing, and packaging, in 1983, Samsung decided to enter in DRAM production by licensing technology from Micron (Brown, 2020). When DRAM prices began to increase as a result of the US-Japan 1986 Semiconductor Trade Agreement-- where the Japanese government agreed to end the dumping of semiconductors in the world markets and to help secure 20 percent of their domestic semiconductor market for foreign production within five years (Irwin, 1996) -- South Korea was able to expand its share of the US import market from around 8 percent in 1988 to 15 percent in 1989. The increasing importance of South Korean companies in the industry led to trade conflicts in the US, which prompted the US to impose the same antidumping duties against Korean DRAM chips in 1992-- however they were later removed in 1997 when the Korean government filed a WTO dispute (Brown, 2020)

Around the same time South Korean companies advanced in the industry, Taiwanese companies followed. Taiwan also first entered the semiconductor supply chain in the 1960s, when foreign firms such as General Instrument, Philips and Texas Instruments set up assembly and packaging plants on the island. In the 1970s, the Taiwanese government was able to send its first batch of engineers to the United States for training. These engineers would later return to Taiwan to establish the island’s first semiconductor foundry-- Taiwan Semiconductor Manufacturing Company (TSMC) (Yvette, 2021). In 1987, the Taiwanese government provided $100 million to help develop TSMC, which has become one of Taiwan’s most crucial companies.

TSMC was able to fill a gap in the semiconductor manufacturing industry. TSMC’s founder Morris Chang-- a Chinese-born engineer who worked for Texas Instruments before being recruited by the Taiwanese government to join the research body that founded TSMC-- combined forces with Philips to construct a foundry that would manufacture chips under contact. TSMC was chiefly able to fill a gap in the semiconductor industry that Japanese and South Korean companies could not. Rather than designing semiconductor chips, their business model is focused on manufacturing chips designed by other companies (Shattuck, 2021). Since building the infrastructure to manufacture chips is expensive, not every company can afford to build its own foundry-- so TSMC was able to fill that component. Instead of having Taiwanese companies compete with large tech companies, TSMC is contracted to assist in the process which allows them to focus on increasing production, scale, quality, and efficiency (Shattuck, 2021). TSMC’s dominant position in the industry makes it Taiwan’s most important company, however as they have become increasingly successful in the industry, China has begun to see Taiwanese semiconductor manufacturing as a threat to their self-reliance.

Recently, a top priority for the Chinese Communist Party has been building China’s technology industry in order to promote their autonomy in semiconductor manufacturing. Rather than relying on imports from the island, Chinese leaders are focusing on developing their own in-house core technologies. In 2019, China developed only 30 percent of their chips domestically, however, in 2020 the State Council has released a series of policies offering tax cuts and incentives for the development of their semiconductor chips which aim to increase their self-sufficiency to 70 percent by 2025 (Sutter, 2021). Despite these investments by the Chinese government, the technological gap between China’s and Taiwan’s remains imbalanced in favor of Taiwan.

While China works to develop their manufacturing foundries, TSMC remains 7-10 years ahead in creating cutting-edge chips. TSMC has created a positive feedback loop where they are able to develop the latest technology before anyone else. Their frontline technology allows them to charge higher prices, which in turn, provides them the resources to develop the next generation of advanced chips before their competitors (The Economist, 2021). TSMC produces high-end 5-nanometer semiconductor chips, while the mainland’s SMIC has only recently been able to mass produce 14-nanometer chips (Yvette, 2021).

China’s motive for semiconductor self-sufficiency stems from the US sanctions that restrict the supply of chips using US technology to China. In 2017, the US government initiated a Section 301 investigation into China’s unfair trade practices. Through restrictions on foreign investment, China selectively grants market access to foreign investors in exchange for commitments to transfer technology (USTR, 2018). As a result of this investigation, in 2018, the United States imposed 25 percent tariffs on semiconductor imports from China. After China imposed retaliatory tariffs on nearly $100 billion on US exports in 2018 and 2019, in February 2020, the US and China implemented the Phase One agreement. Seen as a temporary truce, although this agreement did not lift the tariffs imposed on both sides, it did include structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property and technology transfer. Along with this, the most significant detail in this deal was China’s commitment to purchase an additional $200 billion of US goods and services of 2020 and 2021-- including semiconductors and semiconductor manufacturing equipment (USDA, 2020).

As the competition between the United States and China advanced throughout 2020, the Trump administration announced expanded restrictions on the Chinese telecommunications company Huawei from obtaining semiconductor chips for their electronics. In 2019, Huawei was TSMC’s second largest customer-- accounting for 14 percent of its revenue (Shattuck, 2021). These new restrictions imposed by the US requires TSMC to acquire a licensing waiver from the United States to continue to work with Huawei since TMSC uses American made technology to manufacture their chips. While there is no proof of Beijing actively spying on the US through Huawei technology, the Trump administration claimed that Huawei’s telecom equipment could be a national security threat (Strmpf and Ferek, 2020).

These restrictions place Taiwan in a tough situation because while they attempt to work within the legal framework posed by the US, it is difficult to ignore that a large portion of their customers are based in China. As Taiwan is stuck in the middle of the feud between the United States and China, they are careful to not anger either side. For a long time, the Taiwanese people have seen TMSC’s relationship with China as a barrier against Chinese military aggression; so if China is successful in developing their chip manufacturing industry and suddenly stops relying on Taiwan, the larger geopolitical ramifications of losing this relationship may put the island in a dangerous situation.

Ultimately, Taiwan and South Korea’s semiconductor industries continue to benefit from American aid and technologies that keep them ahead of China. When Taiwan and South Korea first entered the market, China had just emerged from a decades long Cultural Revolution. This was a huge disadvantage for them since it had delayed any scientific breakthroughs and inhibited Chinese people from becoming the skilled engineers required to develop this technology. Furthermore, the sanctions imposed by the United States on TSMC and Huawei have proved some effectiveness in the short run as Huawei announced they will sell off their budget smartphone brand Honor to a new company (Strumpf, 2020). It is questionable whether semiconductor manufacturers in Taiwan and South Korean would move on from US manufacturing equipment in order to continue working with Huawei, but in the face of ongoing geopolitical conflict in the region, it is crucial for the United States that they retain the upper hand.

As the demand for semiconductor chips soars, the suppliers of these chips cannot keep up. Since the chips are the foundation of all of our electronics, including cars and computers, it is essential that they can be manufactured as fast as these products are consumed. Right now, the car industry is especially suffering from this deficit. Chips are used to power features of the car including control steering, entertainment systems, brake sensors, and parking cameras. As cars get smarter and more automated, more chips are required to control it. As the prices of semiconductor chips skyrocket, the prices of automobiles rise in response-- which unfortunately disappoints consumers. Along with this, customers who do purchase cars have to wait months for their car to arrive (Colias, 2021). As consumer demand for technologies increase, according to IBM President Jim Whitehurst, this global semiconductor shortage could last until 2023.

In response to this shortage, the US Senate has proposed the United States Innovation and Competition Act of 2021. With both democrats and republicans backing this bill, it proposes ways to advance American research and technology manufacturing that are critical to US economic and national security interests. A part of this legislation would provide $52 billion to support domestic production of semiconductor chips. Semiconductors are a strategic industry that the entire world relies on from everything to military equipment to cell phones-- and the United States is seeking to domesticate this crucial industry. It is imperative for the United States to have the capabilities to produce these essential technologies without trading with China. By moving production of semiconductor chips from Taiwan and South Korea to the United States, the US would no longer need to be concerned with cross-strait trade relations and the security of US chips in the hands of Chinese companies like Huawei. As the global shortage of semiconductor chips devastates automobile and technology industries across the world, both the United States and China are competing for self-sufficiency in producing these chips, while Taiwan is fighting to keep the industry on the island so they can remain relevant among the superpowers.


Chad P. Bown. “How the United States Marched the Semiconductor Industry into Its Trade War with China.” East Asian Economic Review 24, no. 4 (December 2020): 349–88.

Dan Strumpf. “Huawei Sells of Honor Phone Business as U.S. Sanctions Bite.” Wall Street Journal, November 17, 2020.

Dan Strumpf and Katy Stech Ferek. “U.S. Tightens Restrictions on Huawei’s Access to Chips.” Wall Street Journal, August 17, 2020.

Douglas A. Irwin. “The U.S.-Japan Semiconductor Trade Conflict.” The National Bureau of Economic Research The Political Economy of Trade Protection (January 1996): 5–14.


“Findings of the Investigation Into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Underr Section 301 of the Trade Act of 1974.” US Trade Representative, March 22, 2018.

“How TSMC Has Masterred the Geopolitics of Chipmaking.” The Economist, April 29, 2021.

John Ruwitch. “Senate Is Poised To Approve a Major Science Funding Bill to Compete With China.” National Public Radio, May 27, 2021.

Karen M. Sutter. “China’s New Semiconductor Policies: Issues for Congress.” Congressional Research Service, April 20, 2021.

Marshall Auerback. “Why Taiwan Is at the Heart of a Microchip Struggle.” Asia Times, August 8, 2020.

Michael Martina and Karen Freifeld. “Biden Order Bans Investment In Dozens of Chinese Defense, Tech Firms.” Reuters, June 4, 2021.

Mike Colias, Ben Foldy, and Nora Naughton. “Empty Lots, Angry Customers: Chip Crisis Throws Wrench Into Car Business.” Wall Street Journal, May 13, 2021.

Thomas Franck. “Democrats, GOP Team up on Bill Targeting China as U.S. Suffers Microchip Shortage.” CNBC, May 25, 2021.

Thomas J. Shattuck. “Stuck in the Middle: Taiwan’s Semiconductor Industry, the U.S.-China Tech Fight, and Cross-Strait Stability.” Orbis 65, no. 1 (2021): 101–17.

Walter Lohman. “The United States Innovartion and Competition Act.” The Heritage Foundation, May 19, 2021.

Yvette To. “China Chases Semiconductor Self-Sufficiency.” East Asia Forum, February 22, 2021.

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