Semiconductors and rare earth metals, almost like nothing else on the planet, act as mirrors to the global geopolitical situation. The decisions made by sovereign states in regard to protecting and maintaining the resilience of their supply chains of these vital raw materials give a clear indication of what to expect in terms of political tensions. They are at the forefront of the soft and bizarre confrontation we are witnessing between China and the US — and consequently the divide between a Western-led world and its challenge by a rising East.
Semiconductors are a necessary component for devices used in communications, computing, healthcare, military systems, transportation, clean energy and countless other applications. Rare earth metals, meanwhile, play a vital role in the fabrication of various systems and devices, especially within the renewable energy sector and green economy, such as solar photovoltaic plants, wind farms, electric vehicles and battery storage.
Consequently, to quote famed investor Warren Buffett: “It’s only when the tide goes out that you learn who has been swimming naked.” Any shortage or disruption in the supply of either semiconductors or rare earth metals could leave any great power naked. One of the main factors is that semiconductors are not only essential to the development of the new digital economy, but also for defense and security purposes. And to a certain extent, the same applies to rare earth metals.
Taiwan is the dominant semiconductor-producing nation today. And a total of more than 80 percent is produced in Asia. And so, as tensions between the West and China rise, the prospect of a disruption in Taiwanese chip production or a supply chain disruption like we witnessed during the COVID-19 pandemic poses significant economic and military risks. Any disturbance in Taiwan’s chip production could reverberate across various industries, affecting not only the technology sector but also global manufacturing.
Any shortage or disruption in the supply of either semiconductors or rare earth metals could leave any great power naked
Moreover, a shift in demand for semiconductors has moved toward what are called graphics processing units, known as GPUs. In short, these units have the necessary specifications for the training of artificial intelligence systems, which are a strategic technology whose use can give superiority on both the military and economic levels. One company has asserted its dominance in the GPU market. This again underscores a concentration, both commercially and geographically, which adds to the disruption risks.
As for rare earth metals, concentration is also the rule, with China being the dominant force. It is the primary supplier to the global market, consistently representing 85 percent to 95 percent of the total supply over recent decades. This supremacy has raised apprehensions in the US and Europe regarding the possibility of Beijing withholding access to these crucial materials as a geopolitical tool should political tensions increase.
Hence, governments — recognizing the strategic importance of semiconductors and rare earth metals — are proactively looking for substitutes, or at least a way to diversify and mitigate their risks. Western governments are attempting to boost domestic chip production, as evidenced by initiatives like the US Chips and Science Act. This 2022 law includes $39 billion in subsidies for chip manufacturing on US soil, along with 25 percent investment tax credits for the costs of manufacturing equipment and $13 billion for semiconductor research and workforce training, with the dual aim of strengthening America’s supply chain resilience and countering China.
As the Biden administration was gearing up for this legislation, it took other measures to block China’s access to microchips. Beijing answered by last year increasing its oversight on the export of two crucial rare earth materials that are essential for the production of computer chips necessary for — among other things — quantum computing. It instituted mandatory special licenses for the export of gallium and germanium. This blocking of rare earth metals had not been seen since 2010, when China and Japan were involved in a heated territorial dispute. For Japan, diversification of its supply with the help of Australia was the answer.
Whether on semiconductors or rare earth metals, governments cannot depend on anyone — not even their friends
This reflects a new broader and dynamic situation in which nations vie for semiconductor dominance, acknowledging these technologies as crucial to economic strength and national security. This is especially true and clear within the competition in AI systems. In essence, semiconductors and rare earth metals have transcended their technological role, becoming pivotal instruments in shaping the world’s geopolitical landscape and great power competition. This means that, whether on semiconductors or rare earth metals, governments cannot depend on anyone — not even their friends.
Indeed, the European Commission in November officially inaugurated the Chips Joint Undertaking to bolster the European semiconductor ecosystem and enhance technological leadership. This initiative aims to bridge the gap between research, innovation and production, facilitating the commercialization of groundbreaking ideas. With an anticipated budget of nearly €11 billion ($11.9 billion) by 2030 from the EU and participating states, the Chips Joint Undertaking will manage the Chips for Europe Initiative, supporting pre-commercial pilot lines, a cloud-based design platform, quantum chip technology development and competence center networks to promote skills development.
We live in a complex and quite bizarre situation of both ongoing collaboration and increased confrontational posturing. As a result, we may notice that, beyond a few exceptions, geopolitical incidents have not impacted decision-making within the scope of microchips and rare earth metals. Decisions made in Beijing, Washington or Brussels are mostly about asserting technological and economic dominance or might versus the competitor.
Thus, the key consideration is the pursuit of advanced technology to outpace the adversary, coupled with a strategic emphasis on diversifying the supply chain. This approach also clearly aims to avoid dependency in the event of a genuine confrontation. Yet, this also means that all powers are now putting the risk of such a confrontation at a much higher level.
Khaled Abou Zahr is the founder of SpaceQuest Ventures, a space-focused investment platform. He is chief executive of EurabiaMedia and editor of Al-Watan Al-Arabi.
Source: Arab News