At a recent International Forum on Supply Chain Resilience, scholars raised urgent concerns about China's strategy of increasing global dependence on its economy while simultaneously reducing its reliance on the world through self-sufficiency. The theme of "trust" emerged repeatedly as a crucial element in countering China's tactics, yet the proposed approaches predominantly focused on supply-side solutions.
The event, held on October 12, convened notable think tanks and policy researchers from Taiwan, the US, Japan, South Korea, and Europe to engage in discussions about global supply chain resilience.
"We are very concerned about the US regulations regarding connected cars and the decoupling strategies originating from China," noted Won-ho Yeon, Director and Professor at the Center for Economic and Technology Security Studies at the Korea National Diplomatic Academy (KNDA). He explained that while China aims to strengthen its technologies through reduced dependency on other nations, it concurrently seeks to make the global community more reliant on China, effectively weaponizing interdependence.
China has also increased global reliance by imposing export restrictions on its strategic materials including rare earth, germanium, gallium, and antimony for national security reasons. Although multinational enterprises are relocating their production lines to other countries, China remains the largest hub for electronic manufacturing capacities and has increased competitiveness through overseas mergers and acquisitions over the past decade.
Despite widespread acknowledgment of this issue, many proposed responses remain focused on enhancing supply through strategies such as onshoring and friend-shoring or employing unilateral export controls on advanced semiconductor technologies.
The export controls proved to be a double-edged sword. A recent Center for Strategic and International Studies (CSIS) report pointed out that Chinese policymakers and businesses have employed various methods to circumvent US export controls, including importing controlled US technologies from third countries via overseas shell companies, redirecting semiconductor technologies to prohibited entities via domestic technology trading networks, misleading foreign suppliers about the end uses of imported technologies, and stockpiling equipment before regulations take effect.
"Silicon Shield 2.0"
In an article titled "Silicon Shield 2.0: A Taiwan Perspective," DSET CEO Jerry Chang and Academia Sinica scholar Wu Jieh-min discussed the severe repercussions of disrupting global semiconductor supply chains, highlighting that such disruption would inflict greater damage on the US and its allies than on China. Wu's narrative stressed the importance of Taiwan's role in bolstering economic security within the global democratic community and securing the Taiwan Strait, particularly as onshoring and friend-shoring may not sufficiently address potential supply chain disruptions caused by Chinese military actions or grey-zone warfare.
While some geopolitical experts have dismissed the "Silicon Shield" theory as a rationale for Taiwan to control the supply chain, Wu argues for prioritizing the protection of Taiwan's semiconductor supply chains over the hope that onshoring and friend-shoring will suffice in meeting global demand during crises.
"The true power of the Silicon Shield isn't just in Taiwan's semiconductor capabilities. It lies in the global consequences of any disruption to the chip supply chain resulting from a conflict over Taiwan or the region," Wu stated. "Any attack on Taiwan would threaten more than just its security— it would jeopardize global economic stability."
The urgency of this situation was underscored by China's announcement of military exercises in the Taiwan Strait on October 14.
"This is unfortunate, as Taiwan's President Lai downplayed his recent '10/10' speech from his inaugural address. Instead of reciprocating restraint, Beijing appears to be escalating tensions. The risk is that they reinforce the belief that no matter what Taiwan or Lai does, they will pursue escalation," Rush Doshi, Director of the China Strategy Initiative at the Council on Foreign Relations, reflected in a recent LinkedIn post.
Thinking outside the box
While governments have generously provided subsidies to support the establishment of new semiconductor fabs, experts agree that finding a qualified and motivated workforce remains a significant challenge. Even industry leader Taiwan Semiconductor Manufacturing Company (TSMC) struggles to find enough skilled workers to operate its production lines in Taiwan, a country already known for its high supply of semiconductor engineers.
So, how can democratic allies effectively counter China's asymmetric strategy? The solution might lie in focusing on the demand side rather than solely on the supply side.
A retired senior consultant with decades of experience in the electronics supply chain remarked that while many countries are eager to subsidize semiconductor production to ensure chip resilience, they must also create demand for chips manufactured within their own borders. "Who will invest in building expensive factories without having enough skilled workers to run production lines and secure markets for their products?"
The US strategy of adhering to a "small yard, high fence" approach may inadvertently restrict the capabilities of its allies more than those of China. A senior expert from the European semiconductor industry commented that the West must adopt more innovative strategies. "You can slow China down, but you cannot stop them through containment. Beyond China's domestic market, countries like Russia, North Korea, many in Southeast Asia, Latin America, and Africa are open to purchasing chips from China."
Chinese companies are also relocating their factories to third countries to avoid US tariffs and export restrictions. This raises questions about how trust mechanisms can effectively prevent loopholes. If China is allowed to continue establishing its tech standards and expanding influence through unfair competition, there may be limited options remaining for the West other than to impose increasingly stringent restrictions on their own allies.
Lessons from history
History provides valuable lessons. G. Dan Hutcheson, vice chair of Tech Insights and an industry veteran since the 1970s, quoted economist Ross Roberts, saying, "Self-sufficiency is the road to poverty," to illustrate his point that the pursuit of national silicon self-sufficiency is misguided.
Hutcheson cited the development trajectories of the semiconductor industries in China and Russia, noting that while China trailed the US by only four years in semiconductor technology during the 1970s, it subsequently fell further behind due to the choice to align with Russia. However, China regained momentum in the 1990s when it chose to abandon that alliance and embrace the global market. This pivot allowed China to thrive economically while the Soviet Union faltered and ultimately collapsed.
However, this time China is not just aiming for self-sufficiency. It is increasing the world's dependence on it by subsidizing exports and unfair competition to drive foreign competitors out of the markets, as we have seen in flat panel displays, solar cells, and ship manufacturing. Legacy chip manufacturers outside China have been under tremendous pressure with profitability as legacy chips are not restricted by any trade restriction. However, an executive from Taiwan's PSMC said they have seen increasing orders for automotive chips and consumer electronics chips since the Biden Administration announced the ban on Chinese hardware and software for connected cars.
A more strategic focus should also be directed toward preventing China from expanding its influence over international organizations responsible for technology standards as a defensive measure.
Given China's employment of asymmetric strategies and the ongoing trend of mutual decoupling, democratic allies need to formulate robust strategies that address this asymmetry from the demand side. By encouraging trade with the Global South, fostering collaboration with trusted allies, and creating robust channels of demand for chips produced within allied nations, they can effectively counterbalance China's tactical maneuvering.
The path forward requires innovative thinking and collaboration among allies to establish a resilient supply chain ecosystem. This involves not just enhancing production capabilities but also cultivating a vibrant market for semiconductor products that align with the interests of democratic nations. Only by addressing the complexities of both supply and demand can the democratic allies effectively respond to the challenges posed by China's weaponization of interdependence and ensure a stable and secure technological landscape for the future.
