As the world entered its unipolar moment with the end of the Cold War, it operated on a set of elegant axioms: trade made conflict irrational and impossible; supply chains could stretch across borders, pushing economic statecraft into the shadows; and the exigencies of the market could predominate over the imperatives of the state. Yet history did not "end" as Fukuyam would have it: a World-Without-The-West seeks to rise, with revisionist powers such as China, Russia, and Iran attempting to upend the ascendancy of the United States and its allies. Great power competition has returned before its seat got cold.
With the velvet gloves coming off, states have begun to assert themselves in more pronounced ways in the market. Industrial policy is back on the agenda more intensely than ever before; economic statecraft is economic policy, and comparative advantage must bow to grand strategy. The world is entering a period of global fragmentation and macroeconomic reorganization that is both structural and enduring, yet concentrated in supply chains most pertinent to national security. And no supply chain draws this fault line more starkly, or consequentially, than that of semiconductors and chips.
The market logic of comparative advantage globalized the supply chain — the exacting nature of the industry made it so that no single country could efficiently master every step.
According to Chris Miller, “chips are the most complex goods in human history": EUV machines carving silicon wafers at the atomic level, glass lenses concentrating lasers down to a single nanometer, copper circuits of identical dimensions, and clean rooms so sensitive that a single mote of dust could compromise the entire wafer. The market logic of comparative advantage globalized the supply chain — the exacting nature of the industry made it so that no single country could efficiently master every step.
Enter Taiwan. A threatened island, perpetually shadowed by mainland China's territorial claim, created the Taiwan Semiconductor Manufacturing Company (TSMC) with an aim to specialize in chip manufacturing. The idea was to be a vital part of the semiconductor supply chain, cementing TSMC as an essential player within a delicate web of relationships between firms pursuing ruthless cost efficiency. Since then, TSMC has come to be known as Taiwan’s “silicon shield”, producing over 90% of the world’s most advanced chips and with virtually every major technology firm on earth depending on its output. This represents a masterclass in industrial policy that is not merely economic, but also suited to the ends of national security. By becoming irreplaceable, Taipei became sovereign.
Yet, as great power competition ramps up, it has become increasingly clear that if it was industrial policy that could offer Taiwan sovereignty, it is also industrial policy that can undermine it. Signs of a fracture arrived early — in 2010, China imposed export controls on refined rare earths to Japan (which was over 80% import-reliant for rare earths from China), after Tokyo asserted its sovereignty over the Senkaku Islands. During the COVID-19 pandemic, production delays at TSMC put the entire world economy at a standstill, with manufacturers unable to produce cars, domestic appliances, and other essential goods. After the crisis, experts acknowledged that the problem was not just the lack of multiple producers, but widespread Chinese investments in the semiconductor supply chain. Washington and Brussels recognized that China’s investments in strategic supply chains were tacitly linked to the Chinese Communist Party, especially those made by Huawei and ZTE. This was a cold water plunge for governments, which began entertaining the idea that these investments were not a coincidence, but a concerted effort to control strategic supply chains through the market. The elegant fiction that trade and statecraft could be neatly separated had not merely been wrong: it had been exploited.
What followed was the beginning of a structural change in the world economy – regional fragmentation and macroeconomic reorganization along national security lines. The US and Brussels began to fly in the face of their own once-touted notions of market-allocation and globalisation, dusting off their industrial policy toolkits. Their response had two tracks: capital deployment and fence-building.
On the capital side, the US CHIPS & Science Act and the European Chips Act mobilized $53bn and $47bn, respectively, to double domestic semiconductor production, deploying grants, loans, and tax incentives to attract global chip producers to either move their operations to local constituencies or to start new ventures altogether. Importantly, there was a large focus on the design stage of the supply chain, the most value-added and knowledge-intensive stage of the supply chain, and also the quickest to build up.
On the fence-building side, the EU, US, and India also imposed a series of export restrictions on their advanced semiconductors to slow China’s AI progress. Western and allied governments like India and Japan began to review Chinese firms’ investments in the supply chain as a matter of national security, and pushed to restrict the ability of Chinese firms to hold equity or sit on the boards of strategically relevant firms. CFIUS and FDI screening bodies undertook massive efforts to assess just how exposed their countries’ critical infrastructures were to Chinese interests. India has been leading these trends — their intensely conflict-heavy relationship with Beijing has led them to purposefully cut them out of every stage in their supply chain, whether that meant requiring export licenses for advanced goods or limiting just how present Chinese companies can be in India’s semiconductor sector.
These moves, when taken alone, do not mean much, but when taken together, are representative of the zero-trust environment within which geopolitical rivals now operate. Under the current status quo, governments do not merely limit high-level engagement, but actively pursue de-risking strategies to cut each other out of strategic growth opportunities. And while there remains space for cooperation amongst allies on chips, we are increasingly observing the fragmentation of the global supply chain on the basis of geopolitical risk. As great power competition intensifies, so will the fragmentation of other national security-related supply chains.
