Semiconductors as the New Oil: Geopolitics, Subsidies, and Market Dynamics

Security exceptions to free trade can spiral into global subsidy races.

Retaliatory subsidies and tariffs replace comparative-advantage-based trade with politically driven allocation, lowering overall efficiency.

Why: Each government’s attempt to ‘level the playing field’ creates new distortions, inviting further retaliation.

"It becomes a bit of a race to the bottom if every government focuses on subsidizing chosen businesses."

Private firms diversify geography before subsidies arrive.

Intel, TSMC, and Samsung announced ~$70 B in US fab investments prior to the CHIPS Act, driven by risk management, not handouts.

Why: Fabs face direct losses from regional shocks; internal risk models already justify geographic dispersion.

"Intel, TSMC and Samsung had all announced investments in US facilities worth almost $70 billion, so more than the Chips Act, and had begun construction before the Chips Act was passed by Congress."

Concentration of advanced chip production in Taiwan creates systemic global risk.

TSMC produces ~90% of the world’s most advanced chips in a region threatened by potential Chinese invasion, making supply disruption a critical economic-security issue.

Why: A single regional conflict could cripple global tech supply chains, as chips are embedded in everything from consumer electronics to military systems.

"During the pandemic chip shortage, no company came under greater scrutiny than Taiwan Semiconductor Manufacturing Company, or TSMC, which not only produces around 90% of the world's most advanced chips, but they manufacture these chips in a country, Taiwan, that has increasingly been threatened with invasion by China."

Semiconductors are now framed as national-security assets rather than mere commercial goods.

Governments restrict exports and subsidize domestic fabs because chips underpin military weapons, cyber warfare, and AI development.

Why: Control over chip supply equals leverage in both kinetic and digital conflict; denial of access can slow adversaries’ weapons programs.

"It's not just the key role they play in consumer products that makes them important, it's their uses in military weapons and cyber warfare."

Asian governments attracted chip fabs with massive subsidies, not just cheap labor.

Free land, subsidized construction, tax holidays, and less regulation outweighed higher logistics costs and geopolitical risk.

Why: Capital-intensive fabs require billions in upfront investment; subsidies shift the risk-return profile decisively.

"Often the land for a factory in China is provided for free. The factory construction and manufacturing equipment are partially paid for too. On top of that, there are significant corporate tax reductions given to these factories."

Subsidies create malinvestment and long-term economic fragility.

When governments pick winners, capital flows to subsidy-maximizers rather than the most efficient producers, leading to overcapacity and hidden losses.

Why: Profit-and-loss signals are muted; firms optimize for handouts instead of consumer demand, echoing China’s real-estate bubble.

"The state interference in markets through subsidies is another example of the malinvestment problems that have been happening in China over the last 20 years."

Technology denial may accelerate indigenous innovation in target countries.

Historical precedent (Soviet nuclear program) shows that determined states eventually replicate restricted technologies, sometimes surpassing the original.

Why: Blocking access raises the perceived strategic value, justifying domestic R&D spending and talent mobilization.

"Preventing access to advanced chips might just drive China to develop their own alternatives, and eventually have companies making chips that out-compete Western companies."

US retains highest-value segments (design & software) despite offshore manufacturing.

American firms capture 39% of global value-add through IP, EDA tools, and chip architecture, even when wafers are fabricated abroad.

Why: Manufacturing is capital-intensive and commoditizing; design and software enjoy network effects and higher margins.

"the US still accounts for 39% of global value added, within the industry. This is the largest share of any country."