People worry that the US China conflict could by accident turn into a shooting war. In this blog, I am going to show how a conflict could start that would not necessarily be an accident.

First some history.

In response to Japan’s invasion of Indochina and aggression in China, in 1941 President Franklin Roosevelt imposed a seizure of Japanese US financial assets and an embargo on the export of oil and other war materials to Japan. The Japanese military then calculated the country would run out of oil and be unable to carry out military activities within two years. Launching WWII, Japan then undertook the attack on Pearl Harbor and the Philippines and the British Empire in Singapore. WWII in the Pacific in hindsight was an incredible disaster for Japan in terms of loss of lives and the destruction of property. A catastrophic miscalculation but one for which Japan at the time thought it was a risk worth taking.

One could argue that Roosevelt and his British allies made their own miscalculation. Did they really want a war with Japan? Did they push Japan too far? Was there another way? Nothing like hindsight but history does offer lessons.

The potential for a similar miscalculation exists today. It involves the US embargoing computer chips to China. Computer chips are the new oil.  And it all centers on Taiwan. Taiwan is a manufacturing powerhouse for electronic products. Some 800 companies in the electronics business trade on the Taiwan Stock Exchange. And Taiwan is the home of Taiwan Semiconductor Corporation which has practically a monopoly on the manufacture of latest generation 7nm node processing chips (Samsung is a distant second on this). Huawei, some of the top cutting edge Chinese AI companies and all the top American companies including Qualcomm, Apple, Nvidia and AMD have their processor chips manufactured by TSMC. If an earthquake – or a few missiles—destroyed TSMC’s facilities, the global economy would come to a grinding halt. TSMC may just be the world’s most indispensable tech company.

The Trump Administration, by embargoing chip sales by TSMC to Huawei and other top Chinese companies, is putting extreme pressure on China. And China is not being given some exit route to relieve this pressure. Trump is not bargaining with China. Rather he is punishing China. He is not asking that Huawei change or do something differently. Huawei, China’s number one champion for China’s 5G program, is simply defined without proof as a security risk for America.

In its embargoes of chips to certain other Chinese high tech companies—not Huawei– the United States has cited the alleged use of their products in surveillance of Uighur minority camps. The Chinese deny this misuse and point to Uighur terrorist activity against the Han majority. Be that as it may, it is truly astounding that the United States sets itself up as judge of Chinese treatment of its minorities when the United States is wracked with racial turmoil. And when every inch of what is now the United States originally belonged to Native Peoples.

 Most people in Asia know the real reason for the embargoes—the US does not want a non-white China to supplant it as the global hegemon. Trump advisor Peter Navarro put things very bluntly one of his books where he advocated a strategy of making China poor. Academics politely refer to the US -China rivalry as an example of the Thucydides Trap, whereby a rising power inevitably challenges a dominant one. A less polite way of describing this Trap is simply as a global race war with the United States as the aggressor.

Huawei is TSMC’s second most important customer. You may ask how can the US tell a foreign company like TSMC to embargo its number two customer. It certainly helps that the US military dominates the globe. But in the case of semiconductors the US equipment manufacturers – Applied Materials, Lam Research, KLA Tencor ( you can add Dutch based ASML to this which is effectively under US control)—dominate the global production of semiconductor equipment. TSMC and every other foundry that uses these US companies’ equipment has to obey the US edicts or be cut off from buying their equipment.

You may ask why can’t China figure out how to manufacture its own chips. The answer is it can but this will take time.  China has stumbled in the past on this. In some American eyes China has replaced Japan as evil Asian superman but this is one area where superman fell on his face. Making semiconductor chips is incredibly difficult and complicated. It’s not as easy as making sneakers. Some industry experts believe it will take China ten years to catch up to where the US is now. Meanwhile if the US keeps extending its embargoes China will be put in an ever more difficult position. Rumors are that Huawei rival ZTE—another Chinese tech champion– will be next on the embargo list. Maybe the US should study some history.

China considers Taiwan as part of China. This sentiment is not shared by a majority of Taiwanese. This has long been a problem. Since the renewal of relations with China the US has wisely avoided recognizing an independent Taiwan. But Taiwan is a Chinese hot button. Under the US embargoes China has to resent that it cannot import vital equipment from a company located in what it considers its own country. 

The danger is that the US may push China into launching an invasion of Taiwan. Until recently that might have been unthinkable. The US navy with its carrier groups girding the world has been regarded as invincible. At least two of these carrier groups patrol the South China Sea and have occasionally cruised through the Taiwan Straits. The unwritten assumption has been that the mighty US Seventh Fleet would be at the ready to assist Taiwan in the event of a Chinese invasion.  But China has new toys, i.e., two aircraft carriers and missiles that supposedly can take out offshore American carriers. Do these missiles work? THE WORLD DOES NOT WANT TO FIND OUT!

Intel Has Made Reshoring a Joke

A major part of Trump’s protectionist Make America Great Again has been the idea of bringing American owned factories which are abroad back to the US. The buzzword for this is “reshoring” and it holds great appeal for many Americans who by nature are protectionist.

 But I am not. As a free market advocate and a globalist, I have always felt that reshoring was nonsensical and flew in the face of economic logic. And I hold firm to the view that technological advancement will lead to a more liberalized China, even if it takes another fifty years.

The great American semiconductor champion and pioneer Intel just announced it was –“horrors!” –outsourcing at least some of its chip production to Asia. To Taiwan Semiconductor to be exact. Intel it seems had trouble producing 10nm node chips inhouse while TSMC is now at 7nm. The smaller the node the more advanced the chip.

The semiconductor industry in recent years has evolved into two models, i.e., the fabless model and the so-called Integrated Device Manufacturer model. Most of the industry including Huawei but also Apple, Qualcomm, Nvidia and AMD design their own processing chips but offshore the manufacturing, testing and packaging. Typically to TSMC or another Taiwanese facility. They have adopted the fabless model. As of the beginning of 2020, there were only two major Integrated Device Manufacturers which produced processing chips, Intel and Samsung. Now it looks like Intel has thrown in the towel and is moving to the fabless model. Bad day for reshoring. Embarrassing for the US champion Intel with whom such legendary names like Andy Grove, Gordon Moore and Robert Noyce are associated.

It’s not all gravy for TSMC. Besides under US pressure having to give up its second best customer, Huawei (which probably would have achieved the number one customer status in future years), the US is urging TSMC to build a foundry in the US. That’s a ten billion dollar + item. No doubt substantial subsidies are being offered by the US. Still, I think it’s a bad deal for TSMC and its shareholders. If it ever happens, I think it will be a 10 billion + white elephant. The same white elephant forecast goes for Foxconn, another Taiwanese firm which assembles Apple phones in China.  Foxconn has been leaned on by Trump to build a multibillion dollar plant in the US.

A Politically Incorrect Note on Ethnicity

 We see a lot of Chinese names in the semiconductor space. For example: Morris Chang founder and (now retired) CEO of TSMC. Jensen Huang co-founder and CEO of Nvidia. Lisa Su CEO of AMD. Victor Peng co- founder and CEO of Xilinx. Hong Tan Eng, CEO of Broadcom. Only Morris Chang is from Mainland China. But all these persons are naturalized Americans and educated in engineering in American universities. The best and the brightest have come to America and have made major contributions to America on a par with Grove, Moore and Noyce.

Hmn. Immigration to the US has now come to a virtual halt. Senator Rick Scott has said Chinese students are all potential spies. Senator Tom Cotton has said Chinese students in America should only be allowed to study Thomas Jefferson. Now Jefferson and the other Founding Fathers were brilliant intellectuals but what did they know about 5G?

If America wants to remain number one in semiconductors—the new oil — it will need brains, not missiles.