Remember Pearl Harbor

Published on October 18, 2021, 11:35 pm
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In an earlier Dismal Optimist several months ago, I suggested that US tech embargoes might provoke a Chinese attempt to takeover Taiwan by force. I compared the current US tech embargoes with the US and British embargoes on oil exports to Japan before WWII. As a result of these oil embargoes, Japan made what turned out to be the disastrous decision to attack Pearl Harbor and the British Empire in Asia. The attack was a military victory for Japan but brought a war that was an incredible catastrophe for Japan. The US may be provoking China to attack Taiwan with its tech embargoes.

Although there were a few others saying similar things when I wrote about the US tech embargo, some readers might have thought it was wild eyed speculation. But now we have a Research Bulletin just put out by IC Insights. IC Insights is a sober and highly respected observer of the global semiconductor industry. (IC stands for Integrated Circuits which are mostly semiconductors.) The title of this latest bulletin says it all, IC Industry at Heart of Possible China Takeover of Taiwan.

I will follow with some choice quotes from this bulletin:

“In IC Insights’ (and mine) opinion, healthy future global economic growth is increasingly dependent on the continued introduction of advanced electronic systems. The critical components within these systems are integrated circuits (ICs), without which, advanced electronic systems cannot be produced…. Crippling trade sanctions, especially with regard to IC technology, that the US has imposed on Huawei, China’s largest electronics company, and to a lesser extent on SMIC, China’s largest indigenous IC foundry, has in IC Insight’s opinion, caused China to question how it will be able to compete in the future IC and electronics industries. It is increasingly apparent that China’s answer to that question centers on its reunification with Taiwan.”

Semiconductors are a global industry but in this most important of industries the small island of Taiwan is the most important venue. For example, based on IC Insights statistics, as of December, Taiwan held the largest share of IC capacity of any country or region in the world. 2020 Taiwan by far holds the largest share of leading-edge (i.e., <10nm semiconductors) of any country in the world. South Korea, led by Samsung, holds the remaining 37%. Taiwan Semiconductor and (maybe) Samsung are the only companies in the world that can manufacture 3 nm chips. Even mighty Intel cannot do this.

Were Taiwan to suddenly disappear, the world economy would come to a screeching halt. Taiwan is a technological prize that possibly China might conclude is worth starting a war over. Taiwan must be especially galling to the Chinese leadership. The United States is denying China semiconductor chips which are vital for the country’s economic development. And the US is enforcing an embargo on a territory that China thinks is its territory. One must ask. Is the US trying to provoke China to attack Taiwan?

China is way behind when it comes to semiconductors and their manufacture. China reportedly expects to be able to manufacture 14 nm chips in commercial quantities in 2022. This is light years behind the 3nm state of the art chips at Taiwan Semiconductor and Samsung. Manufacturing computer chips is incredibly hard. Anyone doubting this should just google “Manufacturing Computer Chips” on YouTube. Billions of transistors are somehow etched into tiny silicon substrates. In 1962 Sir Arthur Clarke wrote “Any sufficiently advanced technology is indistinguishable from magic.” A 3 nm semiconductor chip is a form of magic. 

And semiconductor manufacture is a magic that China has yet to master. Why is China behind? It is not for lack of trying. China has spent billions on creating a semiconductor manufacturing, aka foundry, industry. This money has mostly gone straight down the drain with a sad record of bankruptcies, false starts and the occasional scandal. Many observers have opined that China’s top-down communist system is ill suited to the task. Another explanation may simply be that manufacturing advanced computer chips was too difficult a task in the relatively short period that was available after relatively impoverished China rejoined the modern world under Deng Xiaoping in 1980. The Chinese economy has raised hundreds of millions from poverty in an amazingly short period of time. But the Chinese cannot do everything.

And it has not helped that the US has done its best to limit China’s development of its semiconductor industry. The semiconductor industry is a global affair and no one country can be expected to build this industry in isolation. The US dominates chip design with companies like Apple, Qualcomm, Nvidia, AMD, etc. But they do not make chips. Chip fabrication, along with testing and packaging, is done mostly in Asia. But the US treats the entire global production chain as if it were an American operation. If the US orders the chain not to export to a particular Chinese company, the chain obeys. Thus Taiwan Semiconductor has to cut off chip supply to Huawei, crippling the company’s cell phone sales. A Dutch company, ASML, has been prohibited from selling its EUV lithography machines to SMIC, China’s leading hope for chip fabrication. ASML is the only company in the world that makes these machines and they are a critical input for advanced chip manufacturing.

How does the US have the right to exercise extra-territoriality and command non-US companies not to export semiconductor technologies to China? There are two sources of this power, the US military and the almighty dollar. The US military dwarfs all of the world’s militaries combined. As Chairman Mao is supposed to have said, all power comes from the barrel of a gun. Regarding the almighty dollar, non-US companies know if they disobey the US they will be kicked out of the dollar system. This would be a death sentence.

China no doubt views these US embargoes as a form of economic aggression. The US may have the world’s largest military but China’s military has made huge strides. And with Taiwan just offshore China has the homecourt advantage. China does not need a global navy like the US. And China plays an integral part in the US economy. Consider all the goods from China currently tied up in US West Coast ports. Consider China holds trillions of dollars of US debt. China may call the US bluff on being kicked off the almighty dollar.

It is hard to believe the Chinese do not know all these things and are not tempted to invade Taiwan. They may yet put this off for some years but they will only get stronger over time. The US would be wise to remove the tech embargoes. It needs to get over its irrational fear of the yellow peril. And the Chinese would be wise to remember the ultimate catastrophe of Pearl Harbor.

Author, speaker, analyst and editor for The Dismal Optimist, a global macro economic blog.