The Chips Cold War: The New Frontier of Conflict

The technological rivalry between China and the West, led by the United States, has intensified to the point of becoming a new Cold War. This conflict is fundamentally driven by competition for dominance in the global semiconductor industry, an area vital for everything from artificial intelligence, supercomputing, and energy to national defense and communications.

It has profound economic and social implications globally, including for Mexico. This confrontation, far from being merely an economic conflict, has the potential to profoundly and durably reshape the current global order.

Semiconductors are fundamental in the digital era because these tiny chips are the heart of both our modern life and national defense. However, the chips landscape is dominated by a few key players and its production is highly concentrated.

Asia: The Chip Manufacturing Giant

• Taiwan: It is the global leader in the manufacturing of advanced semiconductors. Taiwan Semiconductor Manufacturing Company (TSMC) produces more than 60% of the world's chips and 90% of the most advanced semiconductors. 

• China: Although highly dependent on imports, it has invested more than US$1.4 trillion in its technology industry since 2015. Its growth has been remarkable, and it is expected to continue expanding in the coming years.

• South Korea: Samsung and other South Korean companies are major players in the industry, especially in memory and display production.

• Japan: With a long history in electronics, Japan remains a significant player, although its market share has declined compared to previous years.

North America: A Technological Renaissance

• United States: It controls approximately 12% of global production but dominates the technology needed to design and manufacture advanced chips. Companies like Intel and NVIDIA are leaders in technological innovation.

• Mexico and the USMCA

Mexico, as part of the United States-Mexico-Canada Agreement (USMCA), is well-positioned to benefit from this reconfiguration. 

Integration with the United States and Canada: Mexico could become a key node for semiconductor and advanced technology manufacturing due to its geographical proximity, trade agreements, and competitive costs.

Potential social impact: The development of the technology industry in Mexico could generate more than 500,000 direct jobs in the next five years. However, the country faces challenges, including the need for infrastructure, technical education, and political stability to attract more investment.

Europe: Key Player in the Value Chain 

• The Netherlands: The Netherlands is home to ASML, the world's leading supplier of lithography equipment used in chip manufacturing. This technology is essential for producing the most advanced chips.

• Germany: With a strong industrial base, Germany is a major player in the production of equipment and materials for semiconductor manufacturing.

Regulations to Boost National Security

• In 2022, the US government approved the CHIPS and Science Act, which provides a US$52.7 billion package of subsidies for semiconductor manufacturing and a 25% tax credit to actively promote domestic semiconductor manufacturing. However, constructing a state-of-the-art semiconductor plant is a costly endeavor, ranging from US$10 billion to US$40 billion, and labor costs are significantly higher in the United States compared to Taiwan or South Korea. According to prominent think tanks, such as the Brookings Institution, the United States faces a challenge in reconfiguring chip production outside of Asia, a process that could cost more than US$350 billion over the next decade – certainly, a strategic move in light of rising geopolitical tensions in the Taiwan Strait. 

• China, on the other hand, has been aggressively ramping up its semiconductor capabilities. Its "Made in China 2025" plan aims to achieve semiconductor self-sufficiency, manufacturing 70% of its domestic demand locally by 2025. However, US restrictions have limited its access to critical technology, hindering its progress.

Why This Competition Could Reshape the Global Order

• Technological and geopolitical dominance: The nation that dominates the production and development of advanced semiconductors will gain a significant competitive advantage in multiple sectors, from economics to defense. This will grant it greater geopolitical influence and the ability to set global technology and innovation standards.

• Supply chain fragmentation: The global nature of the semiconductor supply chain means that disruptions in one region can ripple through others, affecting global trade flows and manufacturing capabilities. This fragmentation could lead to greater economic instability and hinder international cooperation on issues such as climate change and global health.

• New alliances and blocs: The competition between the United States and China is leading to the formation of new alliances and economic blocs. Countries like South Korea, Taiwan, Japan, and Mexico are being forced to take sides in this dispute, which could reshape international relations in Asia and around the world.

• Risk of a new Cold War: The intensification of technological competition between the world's two largest economies increases the risk of a New Cold War dynamics, marked by trade conflicts, escalating tariffs, and economic sanctions, with unpredictable consequences for global stability.

• Implications for national security: Semiconductors are critical for national security, as they are used in weapons systems, communications, and surveillance. Reliance on a handful of countries for the production of these components makes nations vulnerable to blackmail and sabotage.

What Are the Potential Consequences for the End Consumer?

• Price increases: Semiconductor shortages and geopolitical tensions could lead to higher prices for electronic products and other goods.

• Decreased innovation: Supply chain fragmentation and export restrictions could slow the pace of technological innovation.

• Greater reliance on domestic suppliers: Countries will seek to reduce their dependence on foreign suppliers and promote domestic semiconductor production, which could limit competition and increase costs.

The ongoing “Cold War” in technology is a complex phenomenon with profound implications for the future of the global economy, geopolitics, and society as a whole. It is reshaping global economic and geopolitical dynamics, with semiconductors as a central battleground.  

As the United States and China continue to compete for dominance in this vital sector, countries like Mexico, which are heavily integrated into the US supply chain, must navigate both the opportunities and risks posed by these shifts. Understanding the semiconductor landscape and the associated laws and policies will be crucial for assessing the broader economic and social consequences of this technological rivalry.