War With China? The Economic Factor That Could Trigger It
The Pentagon undoubtedly draws up various scenarios for how conflict between China and the U.S. might develop. Most of them would involve a Chinese move against Taiwan.
“Modern wars are fought with semiconductors.” – a U.S. Senator
Today, China’s tech economy runs on silicon – that is, semiconductors.
“In 2020 the Chinese economy spent $350 billion buying chips based largely on Western technology—more than it spent on oil.”
To satisfy this enormous appetite for silicon, China buys 60% of the world’s chip production. 90% of it is sourced from outside China or produced domestically by foreign manufacturers (e.g., Intel INTC +1%). In short, China is highly dependent on a resource that it does not control.
This problem (from the Chinese perspective) is huge and growing. China’s position in the global industry is small and stunted. The U.S accounts for nearly 50% market share of the global industry, and has maintained this dominant position for three decades. China is stuck at about 5% – and is not really a player outside its captive Chinese market.
In short, China is not investing in semiconductor technology at anywhere near the level of the U.S. or Europe, either in quantitative or qualitative terms. As a percentage of sales, the Americans invest twice as much as the Chinese companies do. In absolute dollar terms, the U.S. invested about 18 times more than China (2018).
Government Action Isn’t The Answer
Why can’t the Chinese government solve this through direct public investment — a moon-shot approach, the sort of thing that authoritarian regimes supposedly excel at?
“China’s history with chipmaking, which started more than 20 years ago, has been marked by unfulfilled promises, stillborn projects, and government waste. And though government initiatives have helped create some large companies, China hasn’t produced a single chipmaker on the world-beating scale of the major rivals outside its borders…. China has failed to keep pace.”
American Economic “Aggression”
The last few years have added new pressure, as the U.S. has slowly choked off the IC pipeline. American policies directed against unfair trade, technology theft, national security risks, and complicated by geopolitical rivalries and diplomatic conflicts, have tightened the noose. For example, Huawei – China’s champion in the telecommunications sector – has been crippled by the denial of access to American semiconductors.
The net-net: Like Japan in 1941, China now finds itself in a position of acute strategic vulnerability, intolerable in light of its geopolitical ambitions.