Supply chain regulation in the service of geopolitics: What's happening in semiconductors?

Ernst, Dieter Working Paper Supply chain regulation in the service of geopolitics: What's happening in semiconductors? CIGI Papers, No. 256 Provided in Cooperation with: Centre for International Governance Innovation (CIGI), Waterloo, Ontario Suggested Citation: Ernst, Dieter (2021) : Supply chain regulation in the service of geopolitics: What's happening in semiconductors?, CIGI Papers, No. 256, Centre for International Governance Innovation (CIGI), Waterloo (Ontario) This Version is available at: https://hdl.handle.net/10419/299728 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Dieter Ernst CIGI Papers No. 256 — August 2021 Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? Dieter Ernst Copyright © 2021 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fibre. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org About CIGI The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank whose peer-reviewed research and trusted analysis influence policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital era with one goal: to improve people’s lives everywhere. Headquartered in Waterloo, Canada, CIGI has received support from the Government of Canada, the Government of Ontario and founder Jim Balsillie. À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches évaluées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie. Credits Managing Director of Digital Economy Robert Fay Program Manager Aya Al Kabarity Senior Publications Editor Jennifer Goyder Publications Editor Susan Bubak Graphic Designer Sami Chouhdary Table of Contents vi About the Author vii Acronyms and Abbreviations 1 Executive Summary 1 Introduction 3 Conflicting Perceptions of Asymmetric Supply Chain Interdependence 14 Blocking Supply Chain Chokepoints Faces Serious Implementation Problems 20 Collateral Damage, Trust and Innovation 23 Conclusions 27 Works Cited vi CIGI Papers No. 256 — August 2021 • Dieter Ernst About the Author Senior Fellow Dieter Ernst joined CIGI in May 2016. At CIGI, Dieter’s research explores unresolved challenges for the global governance of trade, intellectual property (IP) and innovation, addressing three issues in particular: finding out what adjustments are needed in the development and use of IP, especially patents and trade secrets, to cope with the requirements of increasingly complex and diverse global corporate networks of production and innovation; dealing with the effects of the proliferation of strategic patenting behaviour on the organization and governance of these global networks; and assessing US-China technology competition in information technology. Based in Hawaii, Dieter is an adjunct senior fellow at the East-West Center. He has served as a member of the US National Academies’ Committee on Global Approaches to Advanced Computing, as a senior adviser to the Organisation for Economic Co-operation and Development in Paris and as a research director of the Berkeley Roundtable on the International Economy at the University of California, Berkeley. Previously, Dieter was a professor of international business at the Copenhagen Business School and served as a scientific adviser to governments, private companies and international institutions, including the World Bank, the UN Conference on Trade and Development and the UN Industrial Development Organization. He holds a Ph.D. in economics from the University of Bremen. viiSupply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? Acronyms and Abbreviations 5G fifth-generation AI artificial intelligence BCG Boston Consulting Group BIS Bureau of Industry and Security, US Department of Commerce CCP Chinese Communist Party CESI China Electronics Standardization Institute CHIPS Creating Helpful Incentives to Produce Semiconductors CNAS Center for a New American Security CRS Congressional Research Service CSET Center for Security and Emerging Technology CTA Communications Technology Association DoD Department of Defense EDA electronic design automation GAO Government Accountability Office ICT information and communications technology ICTS information and communications technology and services IP intellectual property IPR intellectual property rights IT information technology MIIT Ministry of Industry and Information Technology MOFCOM Ministry of Commerce NICSTC National Integrated Circuit Standardization Technical Committee nm nanometre NPC National People’s Congress NSC National Security Council NSCAI National Security Commission on Artificial Intelligence NSF National Science Foundation R&D research and development SAMR State Administration for Market Regulation SIA Semiconductor Industry Association SIAC Semiconductors in America Coalition SiP system-in-package SME semiconductor manufacturing equipment SMIC Semiconductor Manufacturing International Corporation TSMC Taiwan Semiconductor Manufacturing Co. USTR United States Trade Representative WTO World Trade Organization 7Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? to the chaotic expansion of China’s semiconductor industry caused by the rampant growth of investment. In addition, an important motivation is to win more influence over international standards by strengthening domestic capacity. In addition, specialized AI chips, which are quoted in the CESI application, are developed today without common standards. This is anathema to the controlled top-down approach favoured by Beijing. It will take time to define and implement a focused Chinese strategy for semiconductor standardization. A major drawback, of course, is that US and most European companies are unlikely to offer their input to the Chinese committee, as the United States has sanctioned many of the expected Chinese participants. It is somewhat ironic that US regulatory supply chain controls may push China to strengthen its innovation capabilities and technological competitiveness. It was only after US export controls revealed China’s potentially devastating dependence on imports of US chips and semiconductor equipment that Chinese technology firms began aligning with their government’s desire for chip self-sufficiency (Wang 2021). Reacting to US technology restrictions provides greater focus to China’s technology investment and development. China’s leaders are taking cues from American technology restrictions to guide the country’s technology indigenization strategy (Tang 2020). Chinese leaders, for example, point to US policies toward Huawei as the impetus for doubling down on the country’s technology indigenization goals (Ting-Fang and Li 2020). Under pressure from US export restrictions, the powerful State-owned Assets Supervision and Administration Commission of the State Council is now searching for ways to strengthen China’s innovation system in semiconductors and advanced computing. US technology export restrictions may thus accelerate an overdue reform of China’s innovation policy. It remains to be seen, however, whether these efforts will be sufficient to reduce the huge technology gap that continues to separate China’s semiconductor industry from the still-dominant US semiconductor industry. US fears that China could overtake the United States any time soon in semiconductors are clearly overblown.13 As the author’s CIGI colleague Alex He has demonstrated, the top-down 13 See Ernst (2020). approach to policy making in China may well stifle China’s ambitions to become a technology leader in advanced semiconductors (He 2021). Conflicting Perceptions in the United States In the United States, policy debates about asymmetric semiconductor supply chain interdependence with China are divided into two camps. On the one side are those who argue that China threatens US leadership in semiconductors, and that this threat will materialize sooner rather than later. On the other side are proponents of a more pragmatic approach, emphasizing that the main concern is the unequal geographic distribution of semiconductor manufacturing, which could easily disrupt the supply of critical chips. The first position is driven by stakeholders in the defence and security community around the Department of Defense, the intelligence agencies and the Department of Homeland Security. It also draws persistent support from large global US information technology players that are suppliers to these agencies. The overriding concern is security, which is broadly defined in terms of America’s geopolitical grand strategy.14 This requires expanding the exterritorial reach of US law — a long-established US policy of pursuing certain foreign policy goals through export restrictions and of related sanctions (Editors 1984). The second position represents stakeholders in the US semiconductor and information technology industries that depend on continuous access to the huge China market. Playing the Fear Card: China Threatens US Leadership in Semiconductors In its 2021 Interim National Security Strategic Guidance, the White House emphasizes the increasing technological and geopolitical threat from China: [China] is the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system. 14 As laid out in O’Hanlon (2021). See also Art (2009). 8CIGI Papers No. 256 — August 2021 • Dieter Ernst We will ensure that America, not China, sets the international agenda, working alongside others to shape new global norms and agreements that advance our interests and reflect our values. When the Chinese government’s behavior directly threatens our interests and values, we will answer Beijing’s challenge. We will confront unfair and illegal trade practices, cyber theft, and coercive economic practices that hurt American workers, undercut our advanced and emerging technologies, and seek to erode our strategic advantage and national competitiveness. We will ensure that our supply chains for critical national security technologies and medical supplies are secure. (The White House 2021b, 8, 20; emphasis added) In its extreme form, this position gives rise to a “China regime change” doctrine. A typical example is Senator Tom Cotton (R), who refers to US businesses that profit from economic integration with Beijing as “the China lobby” and openly questions their political allegiance (quoted in Inside U.S. Trade’s World Trade Online 2021f). Such language may tempt the reader to recall the “political vindictiveness” during the McCarthy period (as described in Kennan [2020, 115])15 — creating such reminiscences may not be unintended. America’s new industrial policy doctrine is focused primarily on strengthening the US defence innovation system (Atkinson 2021b).16 According to Robert D. Atkinson, “the new innovation system needs to be focused on making U.S. advanced technology leadership — in both innovation and production — the central organizing principle of U.S. economic and national security policy while embracing an all-of-government approach to achieve that. Unparalleled U.S. leadership in advanced technology innovation and production — commercial and defense — is the best insurance against Chinese aggression….The key question [is]: does the Chinese system enable it to progress in ways that hurt U.S. national security and global techno-economic leadership?” (ibid., 59, 61). 15 See also www.senate.gov/about/powers-procedures/investigations/ mccarthy-hearings/have-you-no-sense-of-decency.htm. 16 See also Segal (2019). To cope with the threat from China, incrementalism is no longer acceptable: It is time to think big, establishing a new system grounded in two principles. First, policymakers can no longer be indifferent to U.S. industrial structure. They need to articulate that there is a set of industries “too critical to fail” — such as aerospace, biopharmaceuticals, sophisticated computers and semiconductors, advanced machinery and equipment, software, and artificial intelligence. Second, while business must lead, government has to play a strong supporting role. The most important step to get to a new innovation system is for elites and policymakers to agree to this new national mission and then ensure an all-of-government approach to implementing it. (ibid., 69) Along similar lines, the National Security Commission on Artificial Intelligence (NSCAI) argues that “bold action” is needed to re-establish America’s supply chain resilience in semiconductors: “We do not want to overstate the precariousness of our position, but given that the vast majority of cutting-edge chips are produced at a single plant separated by just 110 miles of water from our principal strategic competitor, we must reevaluate the meaning of supply chain resilience and security,” the report states, in a clear reference to Taiwan Semiconductor Manufacturing Co. (TSMC) (NSCAI 2021, 3).17 Semiconductors are the key bottleneck. According to the NSCAI report, bold action is needed to ensure access to state-of-the-art semiconductors. “Without several U.S.-based fabrication facilities, both U.S. industry and U.S. national security face risks from competitive pressures and supply chain shortages” (ibid., 218). According to the CRS, the United States should counter China’s state-led industrial policies by expanding the exterritorial reach of US trade law, “including potentially sharpening U.S. authorities and strengthening the U.S. role 17 Created by the 2019 National Defense Authorization Act, the NSCAI is composed of commissioners from Oracle, Microsoft, Amazon Web Services, Google, academia and other tech-focused companies. See also the presentations during NSCAI’s Global Emerging Technology Summit on July 13, 2021 (www.nscai.gov/all-events/summit/). 9Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? in global technical bodies to counter China’s policies” (CRS 2021). Supply chain regulation needs to be strengthened to enhance supply chain security and trade and technology collaboration among US allies and partners. In addition, the US government should extend supply chain controls to block “China’s access to U.S. opensource technology and basic research” (ibid.). In addition, the CRS recommends US Congress “examine China’s complex structuring of government industrial subsidies that make it difficult to determine the state’s role and subsidization under global rules; respond to China’s unconventional use of antitrust, IP, and standards tools, including potentially sharpening U.S. authorities and strengthening the U.S. role in global technical bodies to counter China’s policies; examine the implications of China’s access to U.S. open source technology and basic research and whether export controls should be tightened; and consider how trade policy might enhance supply chain security and trade and technology collaboration among U.S. allies and partners” (ibid.). A Pragmatic Approach: Expand US Semiconductor Manufacturing to Reduce Heavy Regional Concentration An alternative US perception on asymmetric interdependence is less concerned with China’s threat to US technology leadership. The main concern is the unequal geographic distribution of semiconductor manufacturing, which could easily disrupt the supply of critical chips. While the United States dominates R&D-intensive layers of the semiconductor supply chain, it is heavily dependent on East Asia for semiconductor manufacturing. In fact, the US share of global chip production drastically declined from 37percent in 1990 to 12 percent today (SIA 2021a). The proposed CHIPS for America legislation frames US chip manufacturing as an issue of US national security (Moore 2021). A Boston Consulting Group (BCG) report, Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, commissioned by the SIA, provides the following data points: → Currently almost 75 percent of the global installed capacity is concentrated in East Asia (Japan, South Korea and Taiwan) and mainland China, “a region significantly exposed to high seismic activity and geopolitical tensions” (Varas et al. 2021, 5). → “East Asia is at the forefront in wafer fabrication, which requires massive capital investments supported by government incentives as well as access to robust infrastructure and highly skilled production engineers with a long experience in leading-edge process technology” (ibid., 4). → The geographic concentration is even higher for advanced technologies: “100% of the global capacity in the leading 7and 5-nanometer nodes is currently in East Asia” (ibid., 40), with 92 percent in Taiwan (primarily TSMC), and eight percent in South Korea (i.e., Samsung) (ibid., 29, 47). “Taiwan has 40% of the world’s logic chip production capacity and leads in the most advanced nodes at 10 nanometers or below that are required to manufacture chips such as application processors, CPUs [central processing units], GPUs [graphics processing units] and FPGAs [field-programmable gate arrays] for smartphones, PCs, data center servers, and autonomous vehicles” (ibid., 40). Advanced semiconductor production facilities thus are critical supply chain chokepoints that could be disrupted by natural disasters, infrastructure shutdowns or international conflicts, and may cause severe interruptions in the supply of chips. As semiconductors are of critical importance for all industries, such an extreme geographic concentration of advanced semiconductor fabrication is a major headache not just for the United States, but for all countries, including Canada. → “A high degree of geographic concentration of supply also exists for critically important semiconductor materials, such as silicon wafers, photoresist, some chemicals such as packaging substrates, or specialty gases. While each specialty material accounts for only a tiny portion of the industry’s total value added, semiconductors cannot be fabricated without them” (ibid., 41). To illustrate how vulnerable semiconductor value chains are to secure access to materials, the BCG report highlights the example of C4F6, “a critical process gas used to make 3D NAND memory and some advanced logic chips. It is essential for the etching process during chip fabrication, allowing etching to be completed 30% faster than the nearest alternative. Furthermore, 10 CIGI Papers No. 256 — August 2021 • Dieter Ernst once a manufacturing plant is calibrated to use C4F6, it cannot be substituted” (ibid.).18 According to the BCG report, the solution to these challenges is not the pursuit of complete selfsufficiency, which would come at a staggering cost and questionable execution feasibility. Instead, the US semiconductor industry “needs nuanced targeted policies that strengthen supply chain resilience and expand open trade, while balancing the needs of national security. To address the risk of major global supply disruptions, governments should enact market-driven incentive programs to achieve a more diversified geographical footprint, which should include building additional manufacturing capacity in the US, as well as expanding the production sites and sources of supply for some critical materials” (ibid., 6). Specifically, the BCG report recommends that the United States should invest in a “minimum viable capacity” strategy for semiconductors that are essential for national security and critical infrastructure. Defence and aerospace together account for about three percent of US semiconductor consumption. This would clearly be insufficient to justify a cost-effective big push into domestic semiconductor manufacturing. However, by adding critical infrastructure to defence and aerospace, the total would add up to around 27 percent of US semiconductor consumption, which might be considered to be a more realistic minimum viable capacity metrics in terms of demand justification.19 Critical infrastructure covers a broad range of semiconductor-consuming products and services, such as medical equipment, health care, energy, transportation, carrier core networks and wireless infrastructure, government data centres, and servers and storage and networking equipment for essential industries, such as telecommunications, energy, transport and banking. 18 “Sales of C4F6 gas were approximately $250 million in 2019, with the top three suppliers located in Japan (40% of global supply), Russia (25%), and South Korea (23%). If any of these top three producers were severely disrupted, the loss of $60–100 million in C4F6 supplies, could lead to about $10 to $18 billion of lost revenue for NAND alone downstream in the semiconductor chain — almost 175 times higher than the direct impact. If such disruption in a portion of C4F6 supply were to become permanent, NAND production levels would potentially be constrained for two to three years until alternative locations could introduce new capacity ready for mass production” (Varas et al. 2021, 41). 19 Email from Jimmy Goodrich, vice president of global policy, SIA, April 9, 2021. In order to ensure a resilient supply of leadingedge semiconductors, SIA has further narrowed down its minimum viable capacity strategy to advanced logic chips at or below 7 nanometres (nm). This would account for around nine percent of total US semiconductor consumption. On the demand side, this raises an important question: Is nine percent of US semiconductor consumption sufficient to provide the minimum economies of scale necessary for a cost-effective big push into domestic semiconductor manufacturing? On the supply side, keeping up with producing leading-edge integrated circuit technology has become increasingly expensive. The numbers are massive (more than $15 billion for initial investment), and huge additional investments are needed to stay at the leading edge (multiples of up to $20 billion).20 These high investment thresholds have now driven out all but three companies — Samsung, TSMC and Intel — from the leading-edge portion of the market. Moreover, of these three manufacturers, only two can truly be considered to be at the leading edge (Samsung and TSMC), both with in volume production of 7nm and 5nm integrated circuits. The SIA calculates that a $20 billion incentive program over 10 years would yield 14 new fabs in the United States for logic, memory and analog semiconductors and attract $174billion in investment versus nine fabs and $69 billion without the federal incentives (Varas et al. 2020, 26). A $50billion program would yield 19 fabs and attract $279 billion.21 It is argued that this new capacity would be instrumental to address major vulnerabilities in the US semiconductor supply chain. An expansion of US semiconductor production thus faces challenges from both the demand and the supply side. Relying on government procurement to ensure demand has its drawbacks, according to Commerce Department Senior Policy Adviser Sree Ramaswamy (2021): “There are some concerns here in some parts of the semiconductor value chain about [whether] we have enough defense demand to be able to sustain those investments.” However, 20 Peter Hanbury of Bain & Company (quoted in Hille 2021) said: “If you want 3nm, that is going to cost you $15bn, and then two years later, you are going to have to spend another $18bn, and after that, another $20bn.” 21 See www.semiconductors.org/wp-content/uploads/2020/10/IncentivesInfographic-2020.pdf. 11Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? as the United States accounts for 25 percent of global ICT end product demand, SIA expects this to provide the minimum economies of scale necessary for domestic production supported by the incentive program described in the BCG study.22 On the supply side, there are signs that the race is on for lavish subsidies — all three global players in advanced semiconductor production are seeking huge taxpayer-subsidized incentive packages.23 Opposition to such subsidies, perceived to be “corporate welfare,” has emerged in the US Congress across party lines (Inside U.S. Trade’s World Trade Online 2021g). To overcome such resistance, a cross-sector alliance of semiconductor companies and downstream users of semiconductors announced on May 11, 2021, the formation of the Semiconductors in America Coalition (SIAC)24 and called on Congress to appropriate $50 billion for the bipartisan CHIPS for America Act. The focus is on domestic chipmanufacturing incentives and research initiatives, but no operational definition is provided on how to enhance the resilience of the semiconductor supply chain. In addition to SIA member companies,25 SIAC members include Amazon Web Services, Apple, AT&T, Cisco Systems, General Electric, Google, Hewlett Packard Enterprise, Microsoft and Verizon.26 However, in light of the current shortage of car semiconductors, it is noteworthy that no car companies have joined SIAC. In the end, the US move to incentivize the construction of semiconductor fabs is just one among a series of manoeuvres taking place globally as countries and regions seek to build up or regain chip-making capabilities. China has led the way through its Made in China 2025 plan.27 In December 2020, Belgium, France, Germany and 15 other EU nations agreed to jointly bolster 22 Email from Jimmy Goodrich, vice president of global policy, SIA, June 21, 2021. 23 For instance, Samsung is seeking a taxpayer-subsidized incentives package worth more than $1 billion to choose Austin, Texas, for its next big facility — a 7 million sq. ft. next-generation chip fabrication plant that would be valued at more than $17 billion and create 1,800 jobs, according to documents filed with the state (see https://assets. comptroller.texas.gov/ch313/1554/1554-manor-samsung-app.pdf) (Carlson and Sechler 2021). 24 See www.chipsinamerica.org/. 25 See www.semiconductors.org/about/members/. 26 See www.chipsinamerica.org/about/#members. 27 See https://en.wikipedia.org/wiki/Made_in_China_2025. Europe’s semiconductor industry, including moving toward 2nm node production.28 The money would come from the €145 billion portion of the European Union’s pandemic recovery fund set aside for “digital transition.” And in March 2021, the Japanese industry ministry proposed to boost semiconductor production in the country as part of efforts to address a shortage of chips (Nippon.com 2021). The proposals call for joint chip development and production in Japan with Taiwan’s TSMC and other foreign companies to improve the country’s status as a maker of advanced semiconductors. As all of these initiatives are motivated primarily by geopolitical concerns, it is unclear how economically viable the resultant expansion of semiconductor production will be. The United States, China, Taiwan, South Korea, Japan and Europe are all pursuing a massive expansion of semiconductor production on national security grounds. At some stage, the current chip shortage may well give way to disruptive and extremely costly overcapacity. After all, the semiconductor industry has been famous for its cyclical nature since its early days (Ernst 1983). US Congress Deliberations These policy debates have set in motion the wheels of legislative action in the US Congress. As always, the pathways to law and regulations have been twisted. Much of the effort initially has been focused on the Endless Frontier Act, which has experienced a difficult birth. The Endless Frontier Act bill, introduced in the Senate on May 21, 2021, redesignates the National Science Foundation (NSF) as the National Science and Technology Foundation and establishes a Directorate for Technology within the foundation.29 Specifically, the act seeks to create a supply chain resiliency program and expand the Commerce Department’s Manufacturing USA program. Initially, the legislation was aimed to fund the NSF Technology Directorate with $100 billion over five years to strengthen US leadership in critical technologies through fundamental research in technology focus areas, such as AI, high-performance computing and advanced manufacturing; enhance US competitiveness 28 See https://digital-strategy.ec.europa.eu/en/library/joint-declarationprocessors-and-semiconductor-technologies. 29 US, Bill S, Endless Frontier Act, 116th Cong, 2020, online: <www.congress.gov/bill/116th-congress/senate-bill/3832>. 12 CIGI Papers No. 256 — August 2021 • Dieter Ernst in the focus areas by improving education in such areas and attracting more students to such areas; and foster the impact of federally funded R&D through accelerated translation of advances in the focus areas into processes and products that help achieve national goals. The act is defined by a strong focus on geopolitics. The Office of Science and Technology Policy, Commerce, the National Security Council and other relevant federal agencies shall review the national security strategy and programs and resources pertaining to US national competitiveness in science, research and innovation to support such strategy; and develop a strategy for the federal government to improve such competitiveness to support the national security strategy.30 For quite some time, funding for the act was left hanging in the air. As summarized in the newsletter China Trade & Tech of May 14, 2021, “The Endless Frontier Act is coming. We just don’t know what it will look like, or where it’s headed” (Inside U.S. Trade’s World Trade Online 2021h). In the Senate, the Commerce, Science and Transportation Committee drastically cut the proposed funding for a new technology directorate within the NSF, arguing that it might duplicate efforts led by the Energy Department’s National Laboratories (Inside U.S. Trade’s World Trade Online 2021i). In addition, IT and auto companies have been at odds over the potential funding of the CHIPS for America Act, with auto groups urging the administration to give mature semiconductor manufacturing preference for funding in response to the current shortage of car semiconductors. Ironically, the Endless Frontier Act faces opposition in the House from Republicans who claim that it copies China’s industrial strategy. On May21, 2021, Congress.gov showed that more than 400 amendments have been submitted to the Endless Frontier Act, including Senate Majority Leader Chuck Schumer’s (D-NY) own substitute amendment bringing together legislation from Senate committees and renaming the endeavour the American Innovation and Competitiveness Act.31 On June 8, 2021, the Senate passed (68–32) the American Innovation and Competition Act, a 30 Ibid. 31 See www.congress.gov/bill/117th-congress/senate-bill/1260/ amendments?searchResultViewType=expanded&pageSize=100&page=5. wide-ranging China-focused legislative package that includes various trade provisions, such as the renewal of the Generalized System of Preferences and a new Miscellaneous Tariff Bill, as well as funding for domestic semiconductor manufacturing incentive programs with labour-wage provisions (Inside U.S. Trade’s World Trade Online 2021j).32 Cooperation with allies also plays an important role — the Foreign Relations Committee’s Strategic Competition Act bill33 offers the administration a host of recommendations for how to work with the European Union on trade, technology, export controls, investment screening and more. Senator Schumer, in remarks immediately before the final vote on the bill, said the passage of the American Innovation and Competition Act was “the moment when the Senate lays the foundation for another century of American leadership,” and added that it “could be the turning point for American leadership in the 21st century” (ibid.). In contrast to such grandiose declarations, the bill still faces an uncertain path, as the House is considering several bills that differ widely from their Senate-passed counterparts. For instance, the House bill does not include the Endless Frontier Act’s $10billion regional technology hub program, nor does it include the Senate’s $1.2 billion authorization of annual funding for Commerce’s Manufacturing USA program. The House bill also lacks authorization for funding the National Institute of Standards and Technology’s Hollings Manufacturing Extension Partnership, which is included in the Senate legislation (Inside U.S. Trade’s World Trade Online 2021l). In short, deep partisan divisions persist over how Congress should craft its approach to China’s rise; there is also a considerable chasm between the House and the Senate’s legislative approaches. Again, this underlines the huge implementation barriers that the United States is facing, as it seeks to come up with its own version of a Chinese-style semiconductor industrial policy. After all, the decentralized, market-driven US government policy making is worlds apart from the top-down Chinese approach. For the United States, moving toward a more government-driven industrial policy will therefore not be easy. 32 The bill is a compendium of legislation from a variety of Senate committees. 33 See Inside U.S. Trade’s World Trade Online (2021k). 13Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? China’s response to the American Innovation and Competition Act followed immediately, which indicates how much US-China relations have further deteriorated under the Biden administration. The Foreign Affairs Committee of China’s National People’s Congress (NPC) issued a statement on June 9, 2021, claiming the Senate bill “attempts to exaggerate the so-called ‘China threat’ to maintain the U.S. global hegemony” (informal translation quoted in Inside U.S. Trade’s World Trade Online 2021m). On June 10, a new “Anti-Foreign Sanctions” law was passed by the NPC and approved by President Xi.34 This new law permits Chinese agencies to impose countermeasures on persons or organizations directly or indirectly involved with sanctions levied on China. It is unclear whether and for how long the United States can win this vicious circle of US sanctions followed by Chinese retaliation. The White House Supply Chain Review Report As a culmination of all these activities, June 8, 2021, saw the release of the White House 100-day supply chain review report that lays out America’s supply chain regulation strategy against China (The White House 2021a). Semiconductors receive by far the most detailed discussion. The report highlights the fragility of America’s semiconductor supply chain and the resultant threat of unpredictable disruptions. This is in line with the aforementioned pragmatic US approach to asymmetric interdependence, which focuses on the unequal geographic distribution of semiconductor manufacturing. The report states: “U.S. companies, including major fabless semiconductor companies, depend on foreign sources for semiconductors, especially in Asia, creating a supply chain risk. Many of the materials, tools, and equipment used in the manufacture of semiconductors are available from limited sources, semiconductor manufacturing is geographically concentrated, and the production of leading-edge semiconductors requires multi-billion-dollar investments” (ibid., 22). Overall, however, the White House report codifies a techno-nationalist strategy shaped by security 34 For a detailed analysis, see Lovely and Schott (2021). These rules supplement a string of actions taken by the Chinese government to deter compliance with foreign governments’ extraterritorial measures deemed to harm Chinese interests. Related actions are China’s unreliable entity regulations, issued in October 2020, and laws implemented in March 2020 prohibiting parties in China from unilateral cooperation with foreign civil and criminal investigations. and defence concerns. In contrast to the Trump era, the Biden administration seeks to engage with allies and partners on semiconductor supply chain resilience, “by encouraging foreign foundries and materials suppliers to invest in the United States and other allied and partner regions to provide a diverse supplier base, pursuing R&D partnerships, and harmonizing policies to address market imbalances and non-market actors” (ibid., 23). The report culminates in a laundry list of “Opportunities & Challenges” (ibid., 66–74) that, however, fails to provide an analysis of feasibility. At the top of the list of opportunities is public investment in support of domestic semiconductor manufacturing. Little attention is focused on the threat of a subsidy race that may result from attracting TSMC, Samsung, Intel and GlobalFoundries to invest in US chip production (ibid., 66). As for critical challenges, the report identifies high labour cost (relative to Taiwan and other Asian competitors) together with insufficient tax incentives. In line with suggestions from the SIA, the report assumes that “the 10-year cost of a new fab in the United States may be 30percent — $6 billion on average — higher than building the same fab in Taiwan, South Korea or Singapore, and up to 50 percent higher than in China. Much of the cost differential (estimated 40–70 percent) is specifically due to government incentives” (Varas et al. 2020, quoted in ibid., 68). As for domestic implementation constraints, the report points to interagency rivalries as a major challenge, emphasizing the need to “ensure coordination among the various federal players (and private sector participants) to minimize duplication of effort and maximize potential return on investments” (ibid., 69). The report also contains well-intentioned suggestions to “Support Domestic Semiconductor Jobs along the Supply Chain,” but fails to address head-on the disruptive effects of US visa restrictions on the recruitment and retainment of foreign talent. Finally, the report emphasizes the importance of critical infrastructure projects, such as highspeed broadband, that are needed to “provide an “‘anchor’” for leading edge semiconductor technology and production” (ibid., 73). According to the report, “this will be beneficial for the DoD and national security, as defense needs alone are small compared with commercial markets” (ibid.). 14 CIGI Papers No. 256 — August 2021 • Dieter Ernst Arguably, an important weakness of the report is its neglect of the considerable implementation constraints that America’s supply chain controls against China are facing (as discussed in the following part of the paper). An equally important shortcoming is that the report fails to address head-on the collateral damage caused by these supply chain regulations against companies and research institutions, both in the United States and in partner countries (as discussed in the final part of the paper).35 Blocking Supply Chain Chokepoints Faces Serious Implementation Problems We saw that in the United States, it is widely assumed that asymmetric interdependence allows the US government to impose stifling technology restrictions against China. The prevailing policy doctrine is to expand such supply chain controls. In principle, China’s weaknesses in semiconductors are robust supply chain chokepoints because these technologies are tangible and difficult to steal or copy; expensive; dependent on scarce talent requiring tacit knowledge and experience; and produced by a small number of suppliers, in particular because of high barriers to entry and economies of scale (Khan 2021, 48, note 4). The reality, however, is a bit different. Attempts to block supply chain chokepoints face serious implementation problems, both internationally and at home. In the short term, US supply chain regulations no doubt are hurting China’s semiconductor industry. The quite substantial implementation constraints, however, are raising doubts on how effective such policies will be over the longer term. 35 What matters for the United States is that US semiconductor sales to China in 2019 were valued at $70.5 billion, about 36 percent of all US chip sales. See data in Goodrich and Su (2020). International Constraints Global semiconductor supply chains have become longer and deeper, involving a greater diversity of stakeholders on multiple supply chain layers.36 Over time, an increasing diversity of global semiconductor supply chains has emerged, bringing together companies that differ drastically in size, business model, market power, location and nationality. Participants also differ in their capacity to bypass the extraterritorial reach of US technology restrictions (Ernst 2020, 27 ff.). With rising complexity, it becomes more difficult and costly to implement effective regulatory supply chain controls against China. The semiconductor equipment industry chain provides an illustrative example (see Figure1). Focusing on the 10 stages of semiconductor fabrication, the industry association SEMI37 identifies 48 leading companies from the United States, Japan, Europe and China. These companies differ in their exposure to US supply chain controls. They also differ in their resources and capabilities, and therefore will respond quite differently to those controls. Due to the proliferation of machine learning/ AI technologies, the complexity of global semiconductor supply chains has surged substantially.38 The architecture and the governance of these new supply chains are still emerging, little is fixed and there is a lot of experimentation. As a result, supply chain vulnerability to external disruptions has further increased, and stakeholders are facing conflicting interests. Limits to US-Allied Cooperation against China America’s China policy creates dilemmas for its allies. US allies welcome the return of the United States to multilateralism, but most of them are not interested in an intensified technology war between the United States and China. According to David Dollar (2021) at the Brookings Institution, “this was evident in Blinken’s visit to South Korea, initial discussions with European allies, and the visit of Japanese Prime Minister Suga to Washington. Our allies have deeper trade and investment relations with China than we do; and, in fact, since Biden’s 36 For an early analysis of this process, see Ernst (2009). 37 See www.semi.org/en. 38 As demonstrated in Ernst (2020). See also Ciuriak (2020). 15Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? election, the EU, Japan, South Korea, Australia, New Zealand, and ASEAN [Association of Southeast Asian Nations] have all signed new economic agreements with China….[In short]…there is some contradiction between the U.S. confronting China and working multilaterally, so it is likely that over time Biden’s China policy will have to become either less confrontational or more unilateral.” Take the challenges faced by Taiwan and South Korea, which are among the closest geopolitical allies of the United States. Both countries are also by far America’s main suppliers of advanced semiconductors. Partnering with the United States is thus a high priority for Taiwan’s TSMC and South Korea’s Samsung. At the same time, however, both companies heavily depend on the China market, and their governments can ill afford to openly provoke China. As Taiwan will be at the centre of US-China technology competition, it is especially vulnerable to Chinese retaliation: “China will likely leverage its economic influence through trade restrictions, talent recruitment, and cyber to attack key companies in order to obtain core semiconductor intellectual property (IP) needed to bolster its domestic industry” (FP Analytics 2021). In fact, Taiwanese suppliers to Apple are starting to lose out against Chinese competitors, as Apple is adjusting its list of suppliers in response to pressure from China (Ting-Fang and Li 2021a). As for South Korea, while Samsung is a powerful leader in semiconductors, the Korean government critically depends on friendly relations with China in order to contain the North Korea threat. In short, these two close US allies are caught in the middle of the US-China technology war. They are thus unlikely to embrace without reservations joint supply chain controls directed against China. Limits to US-EU Cooperation against China The idea that the Biden administration will be able to create a unified bloc of allies to counter China may face headwinds, because some allies are more heavily reliant on trade with China than others. According to the University of California, San Diego’s Susan Shirk, commercial considerations dominate Europe’s thinking in crafting a China policy much more than they Figure 1: Semiconductor Equipment Industry Chain Logic design Oxidation Oxidation furnace Gluing developing equipment Lithography machine Etcher Ion implanter Cleaning equipment Quality inspection equipment Electrical testing equipment CMP equipment CVD equipment PVD equipment Applied Materials Hitachi Tokyo Electron NAURA Technology Tokyo Electron SCREEN SPE SUSS MicroTec Kingsemi ASML Canon Nikon Shanghai Micro Electronics Equipment Lam Research Tokyo Electron Nikon Applied Materials Advanced MicroFabrication Equipment Applied Materials Axcelies Kingstone Semiconductor SCREEN SPE Tokyo Electron Lam Research NAURA Technology ACM Research Applied Materials KLA Corporation Hitachi Raintree Scientific Instrument Shanghai Micro Electronics Equipment Teradyne Tokyo Electron Huafeng Test & Control Hangzhou Changchuan Technology Applied Materials Evatec, Japan Hwatsing China Electronics Applied Materials Lam Research Tokyo Electron NAURA Technology Piotech Applied Materials Evatec, Japan Ulvac, Japan NAURA Technology Multiple cleaning Wafer inspection Polishing Chemical vapour deposition Physical vapour deposition GelatinizePhotolithographyEtching Ion implantation Cutting Film loading Welding wireEncapsulation Finished product inspection IC design IC fabrication IC sealing test Circuit design Graphic design Design verification Sources: SEMI, company websites and Ping An Securities Research Institute. Note: CMP = chemical-mechanical polishing; CVD = chemical vapour deposition; PVD = physical vapour deposition. 16 CIGI Papers No. 256 — August 2021 • Dieter Ernst do in the United States. For that reason, the prospect of working with Europe on China has probably been exaggerated (Shirk, quoted in Inside U.S. Trade’s World Trade Online 2020).39 In 2020, China was the main external trade partner for the European Union. This explains why Europe is reluctant to link arms with the United States against China. In fact, on December 30, 2020, the European Union and China concluded in principle the negotiations for a Comprehensive Agreement on Investment. This deal followed a call between Chinese President Xi and European Commission President Ursula von der Leyen, European Council President Charles Michel and German Chancellor Angela Merkel on behalf of the presidency of the EU Council, as well as French President Emmanuel Macron. The US government clearly expressed displeasure. In the meantime, European Parliament ratification talks for the EUChina Comprehensive Agreement on Investment (CAI) are frozen while sanctions imposed by Chinese authorities on European individuals and entities remain in place (Emmott 2021). The most recent EU-US summit, held on June 15, 2021, has launched a Trade and Technology Council to boost coordination on fifth-generation (5G) semiconductors, supply chains, export controls and technology rules and standards.40 Yet, given the complexity of the relevant supply chains, it would seem unrealistic to expect tangible results any time soon.41 Nevertheless, the overwhelming interest of Germany and France in expanding their access to the China market through an investment pact is likely to prevail (Thomas, quoted in Lee 2021). In any case, “Europeans want a more balanced relationship, with more dialogue and less diktat.... If by ‘leadership’ Mr. Biden means a return to the traditional American assumption — we decide and you follow — many Europeans feel that that world is gone, and that Europe must not behave like America’s junior wingman in fights defined by Washington.…China may be a peer rival for the United States, but it has long been a vital trade partner for Europe. And while European leaders see Beijing as a systemic rival and competitor, 39 Susan Shirk is research professor and chair of the 21st Century China Center at the University of California, San Diego. 40 See www.consilium.europa.eu/en/meetings/ international-summit/2021/06/15/. 41 See also Sevastopulo, Fleming and Peel (2021). they also see it as a partner, and hardly view it as an enemy” (Crowley and Erlanger 2021). According to former US Trade Representative Charlene Barshefsky, the European Union may “fall short” in cooperating with the United States to counter China (Inside World Trade’s World Trade Online 2021n). During a US Chamber of Commerce event, Barshefsky argued that the United States might not always be able to count on the European Union in efforts to combat China due to political pressures and priorities within the bloc. The United States thus needs a “plan B” in working with allies such as the European Union to counter China (US Chamber of Commerce 2021). “Europe does not feel a security risk from China,” she said. “Europe is not positioned in the Pacific the way the United States is. And the result is that Europe does not feel a sense of imminent threat as the United States might feel and indeed many Europeans believe indirectly there is no threat from China.” Most importantly, “Europe is not going to fight with China in order to preserve America’s unique role in the world,” she said. “That’s a US interest” (ibid.). In light of these fundamental dilemmas, it is hardly surprising that the global technology industry is hedging its bets. A recent Brookings Institution survey polled 158 senior business executives working for American, Chinese, European, Japanese, Taiwanese and Korean global high-tech firms about the impact of US-China tensions on their industry (Thomas and Wu 2021). Its main finding is that global high-tech companies do not plan to pick sides. Rather, they pragmatically aim to compete in both Chinese and US ecosystems regardless of the extra cost and complexity involved. While these executives regard as inevitable that American and Chinese technological spheres of influence will to some extent separate, they also expect Chinese systems and solutions suppliers to continue to rely on globally sourced (rather than Chinese-developed) technologies. In addition, these executives expect multinational companies of all stripes to double down on their efforts to keep competing in the Chinese market. The Chip Shortage Global semiconductor supply chains are strained by multiple bottlenecks, giving rise to severe chip shortages. Supply chain controls against China are likely to add further to these 23Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? and design rules, the division of labour was reasonably simple during much of the 1990s. Engineers designed chips and handed the definition to the mask makers, who then sent the masks to the semiconductor manufacturers (the silicon foundries such as TSMC). And (most of the time, at least) the result of having this modular division of labour was a chip that could be manufactured at an acceptable yield. However, this easy phase of knowledge exchange between integrated circuit design and fabrication has vanished permanently. As process technology has dramatically increased in complexity, intense interactions are required across all stages of the semiconductor value chain, and it is no longer possible to work with standard interfaces and design rules. Chip design teams now must share data and exchange knowledge with mask makers and wafer fabricators, i.e., foundries.59 But implementing such knowledge exchange across multi-layered supply chains is a tortuous process, due to rising uncertainty and dwindling trust. Discriminatory supply chain controls against China have been an important impediment, as they disrupt long-established ways of person-to-person knowledge exchange. 59 As a result, knowledge sharing across global supply chains has raised new challenges for the management of IP, in particular standard-essential patents. These issues will be discussed in a separate paper. In the end, without trust, knowledge sharing and innovation within global supply chains will suffocate. As a result, discriminatory supply chain controls may fundamentally distort the semiconductor innovation system. The aforementioned Brookings Institution survey of global technology executives concludes that technology competition is an “ecosystem game,” which critically constrains the scope for innovation policy shaped by geopolitics (Thomas and Wu 2021). Under such conditions, “U.S. policies will be unlikely to convince the CCP not to pursue building a Chinese-dominated tech ecosystem and will be unlikely to convince multinational companies to avoid investing in such a Chinese ecosystem” (ibid.). Conclusions This paper has examined implementation problems and unintended consequences of a new supply chain doctrine in the service of geopolitics. The analysis is focused on President Biden’s Executive Order on America’s Supply Chains to protect US technological leadership and national security against China. With semiconductors as a primary target, America’s supply chain controls are designed to exploit China’s most glaring weaknesses as supply chain chokepoints that Figure 2: Integrated Circuit Development Cycle Stages Tech R&D EDA tech kit IP / library Chip design Tapeout and mask Bumping colour filter Wafer sort Assembly Final test Drop shipping Wafer FAB / WAT Design service Design for test Concurrent package design Package modelling Substrate design Component manufacturing service Capacity and logistic management Failure analysis Package development and qualification Test program development Mask service Wafer FAB service Assembly and test service Source: Ernst and Naughton (2012). Note: FAB = fabrication; WAT = wafer acceptance testing. 24 CIGI Papers No. 256 — August 2021 • Dieter Ernst the US Commerce Department can block, thus impeding timely and cost-effective access to essential products, services and technologies. The paper also highlights a second defining characteristic of America’s supply chain doctrine — regulatory supply chain controls are combined with a big push in domestic semiconductor manufacturing. Supply chain regulation thus is complemented by US Congress legislation, such as the CHIPS for America Act, the Endless Frontier Act and other related laws. Three propositions are presented as guideposts for further research. First Proposition The concept of asymmetric interdependence can help to cut through the maze of conflicting perceptions of US-China semiconductor supply chain linkages and its impacts. There is ample evidence that the United States continues to hold a substantial overall lead across all R&Dintensive stages of the semiconductor supply chain. Despite all its efforts, China has not significantly reduced the technology gap in semiconductors between itself and the United States. The idea that the United States could lose its edge in advanced semiconductors is simply not supported by evidence. It is time to acknowledge that the United States and China differ in how they perceive policy implications from asymmetric supply chain interdependence in semiconductors. For China, US dominance provides a powerful signal that both the government and industry now need to strengthen the country’s own innovation capabilities in semiconductors. Attracting foreign technology and talent continues to matter. Increasingly, however, standards development, as well as IPR and antitrust enforcement, will need to move to the centre of China’s industrial policy for semiconductors. In the United States, policy debates about asymmetric semiconductor supply chain interdependence with China are divided into two camps. On the one side are those in the defence and security apparatus who argue that China threatens US leadership in semiconductors, and that this threat will materialize sooner rather than later. The overriding concern is security, which is broadly defined in terms of America’s geopolitical grand strategy. On the other side are proponents of a more pragmatic approach, emphasizing that the unequal geographic distribution of semiconductor manufacturing focused on East Asia could easily disrupt the supply of critical chips. The main proponents are US semiconductor and IT firms that need continuous access to the huge China market. In short, while a broad consensus exists across US policy elites that China poses a threat to US leadership, the implementation of US supply chain controls against China is hampered by conflicting interests between the government’s focus on geopolitics and industry’s commercial interests. This raises an important question for further research: Is supply chain regulation in the service of geopolitics creating frictions within America’s “iron triangle” that used to unite business, government and large sections of academia in the pursuit of IP protection?60 An important finding is that the fragmented policy setting in US supply chain controls constrains America’s response to China’s semiconductor industrial policy. Simply copying China’s reliance on subsidies will not pass the checks and balances imposed by the US Congress, especially in the Senate. This is highlighted by the difficult birth of the American Innovation and Competition Act, which — after months of haggling — is still searching for ways to bring together the Endless Frontier Act, the CHIPS for America Act and several other pieces of China legislation. In addition, the suggested “minimum viable capacity” strategy for expanding US semiconductor production is facing considerable problems from both the demand and the supply side. On the demand side, it is unclear whether nine percent of US semiconductor consumption is sufficient to provide the minimum economies of scale needed for cost-effective production. On the supply side, there are signs that the race is on for lavish subsidies. Opposition to such subsidies, perceived to be “corporate welfare,” has emerged in the US Congress across party lines. A global race to expand domestic semiconductor production on national security grounds is rapidly gaining momentum among the United States, China, Taiwan, South Korea, Japan and Europe. While much of these investments are focused on 60 On America’s “iron triangle” see Balsillie (2020). 25Supply Chain Regulation in the Service of Geopolitics: What’s Happening in Semiconductors? leading-edge devices, investments in trailing-node chips are also increasing, driven by the needs of the car industry. It is unclear how economically viable the resulting capacity expansion will be. At some stage, the current chip shortage may well give way to disruptive and extremely costly overcapacity. Second Proposition The paper has explored in quite some detail implementation problems for US efforts to block supply chain chokepoints, both internationally and at home. As global supply chains in semiconductors have become longer and deeper, this involves a greater diversity of stakeholders at multiple supply chain layers. An important finding is that with rising supply chain complexity, it becomes more difficult and costly to implement effective regulatory supply chain controls against China. Domestically, the US government will need to create new processes to improve the transparency of regulatory processes, strengthen interagency coordination and address legal enforcement loopholes, recruitment problems and budgetary requirements. US supply chain regulations no doubt are restraining China’s semiconductor industry. Nevertheless, the above implementation constraints are raising doubts about the effectiveness of US supply chain regulation against China. America’s strategy to block supply chain chokepoints against China are constrained by persistent limitations to cooperation between the United States and its allies. There is little evidence, however, that this has changed US policy. The deeply entrenched fear of China’s threat to US technology leadership continues to place geopolitics at the centre of America’s supply chain controls against China. In addition, as semiconductor supply chains are strained by multiple bottlenecks, giving rise to severe chip shortages, this is arguably the worst time to experiment with discriminatory supply chain controls against a geopolitical rival. As chip demand exceeds supply, this has prompted stunning levels of investment in new supply. The United States, China, Europe and Japan are all pursuing self-sufficiency in IC on national security grounds. This significantly increases the risk of excess chip factory capacity. Third Proposition Supply chain regulation can be a formidable tool to protect a country’s resilience against unexpected disruptions of trade, investment and the supply of skilled labour. It could help to correct the heavy regional concentration of semiconductor manufacturing. However, the utility of supply chain regulation is eroded when geopolitics rather than economics become the primary objective. While the United States is still the world’s technology leader in semiconductors, it is now facing new predicaments. To the degree that China is gradually catching up in important technologies, America will face fewer opportunities for imposing supply chain controls against that country. Once new additional capacity comes on stream outside the United States, China can access critical technologies from other nonAmerican sources in Japan and Europe. America’s regulatory supply chain controls against China are thus imposing collateral damage on its own industry, public research labs and universities. Small and medium-sized US suppliers will suffer, in particular, as compliance with complex administrative procedures is costly and time-consuming. Business will be lost to foreign competitors. Most importantly, US supply chain controls against China have eroded trust across multiple layers of the semiconductor supply chain. Without trust, knowledge sharing and innovation will suffocate, distorting the global semiconductor innovation system. In light of the findings of this paper, how will this affect future US policy on the control of semiconductor supply chains against China? Will the logic of geopolitics continue to dominate, resulting in a big push to obstruct China’s capacity to import advanced semiconductor technology? Or are we going to see a gradual mellowing of such policies, as the attention begins to shift to the real issue — the unequal geographic distribution of advanced semiconductor manufacturing that may easily disrupt global semiconductor supply chains? All we can say at this stage is that the current widespread shortage of semiconductors may act as a catalyst for change. Companies and governments around the world face increasing pressure to improve the resilience of global semiconductor supply chains. Practically every industry today 26 CIGI Papers No. 256 — August 2021 • Dieter Ernst depends on secure access to semiconductors. Reducing the heavy regional concentration of chip manufacturing is of critical importance for many countries, not just for the United States. This raises an important issue. Instead of each country trying to become self-sufficient, a better way to deal with supply chain vulnerabilities caused by geographic concentration would be to negotiate (for instance within the World Trade Organization [WTO]) a plurilateral trade agreement similar to the Information Technology Agreement (Ernst 2018b) that would help to stabilize access to semiconductors for member countries. In today’s world of rising economic nationalism, it may take quite a while to work out such a solution. But other second-best solutions might exist that could help to facilitate progress to such a WTO trade agreement. For instance, an industry-led approach to increase diversification could be implemented through the World Semiconductor Council. This organization has a proven record in bringing together industry leaders from the United States, Korea, Japan, Europe, China and Taiwan to address issues of global concern to the semiconductor industry.61 In the end, however, it is unclear whether the quest for improved supply chain resilience will mobilize enough forces to shift the focus of US policy away from supply chain regulation in the service of geopolitics. Too powerful is the crossparty consensus in US Congress that China now poses an existential threat to US leadership in advanced technology, and that this will erode America’s security and military strength. 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