As the COVID-19 pandemic continues to disrupt production and distribution, Western countries must reassess the geostrategic risks of global supply chains. This is a prime opportunity for the United States to show leadership.

Supply chains are increasingly at the center of the technological cold war between the U.S. and China—none more so than the semiconductor supply chain. This trillion-dollar industry presents the U.S. with unique strategic challenges and national security risks, which illuminates both the importance and fragility of the semiconductor supply chain.

Semiconductors, typically called chips, are ubiquitous in modern life. They are found not only in critical defence systems but also in energy, finance, and communications products. The production of a single computer chip often requires more than a thousand steps, passing through numerous international borders. This complicates trust in the supply chain and increases opportunities for foul play by malicious insiders and foreign agents alike, who can exploit and steal sensitive technology.

William Evanina, former director of the National Counterintelligence and Security Center, explains, “Exploitation of our supply chains by foreign adversaries—especially when executed in concert with cyber intrusions and insider threat activities—represents a direct and growing threat to strategically important U.S. economic sectors and critical infrastructure.”

If economic espionage and supply chain security are not taken seriously, America’s long-term competitive economic advantage will be unfairly eroded, and its security compromised. This increases the need to develop U.S. supply chain resilience through a layered defense that addresses both cyber weaknesses and insider threats.

Currently, the U.S. semiconductor industry contributes 39% of the total value of the global semiconductor supply chain, with U.S.-allied nations contributing another 53%. Conversely, China contributes 6%, and is only advanced in the assembly, testing, and packaging stage of the supply chain. However, as part of the “Made in China 2025” and “Digital Skill Road” initiatives the Chinese Communist Party is intent on developing its semiconductor manufacturing.

According to the Pentagon’s Industrial Capabilities Report, China could dominate the semiconductor industry by as early as 2030. It’s a debatable conclusion. But what’s certain is that the more production facilities there are in China, the greater the risk to American supply.  

A further vulnerability lies in the fabrication aspect of the semiconductor sector as 75% of global manufacturing capacity is based in East Asia, with the Taiwan Semiconductor Manufacturing Co. being the dominant player. In contrast, the U.S. only possesses 11% of global semiconductor fabrication capacity. In a worse-case scenario in which Taiwan were unable to make chips, the “electronics supply chain would come to a halt.”

China’s enduring desire for reunification with Taiwan means that despite China’s current lack of competitive advantage in the manufacturing of semiconductors, its proximity to organizations that do presents a significant geo-strategic challenge.

For the above reasons there have been calls to “reshore” the chip industry. The Biden administration has addressed these concerns through the executive order on America’s supply chains and support for the U.S. Innovation and Competition Act. The act ring-fences $52 billion to building a domestic base for semiconductor fabrication.

Although the intention of these measures is to secure critical technology, developing competitive domestic fabrication is likely to require far more capital than $52 billion, and lead to further federal intervention and market-distorting subsidies. This strategy and risk are also reflective of the European Union’s recent 43 billion euro chip plan to counter supply chain issues.

Yet, to better serve U.S. economic and security interests, a more effective approach is to diversify the semiconductor supply chain. This would involve cooperation among trusted allies, including Taiwan, but others too, such as the Five Eyes partners and members of the Quadrilateral Security Dialogue, or “Quad.” The democratic nature of these allies ensures American security interests be taken into account.

In addition, semiconductor manufacturing companies can do more to monitor their own supply chains and enforce robust due diligence. A good starting point would be the creation of dedicated insider threat teams to develop an inventory of intellectual property, provide training around economic espionage, deploy access controls to monitor company networks, and facilitate collaboration with U.S. intelligence agencies in the event of a malicious supply chain attack.

Implementing these policy steps would enable the U.S. to project its soft power globally, better manage the risks of economic espionage, and limit excess state expansion.

In this era of great-power competition, securing semiconductor supply chains and their associated intellectual property is a significant part of the democratic push-back against an increasingly authoritarian and technology-focused China. Distributing semiconductor production among trusted allies will help to cement America as leading this push-back, whilst protecting national security.

The Daily Signal publishes a variety of perspectives. Nothing written here is to be construed as representing the views of The Heritage Foundation. 

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