Chip Diplomacy - Analysis of technology partnerships

What roles do governments play in the global semiconductor value chain? Because of the global chip shortages during the early 2020s, governments started to have second thoughts about their domestic industries’ dependence on chips from abroad. The answer was a flurry of subsidy packages in the European Union, the United States and by several others. But governments also realized that, after decades of specialization and transnational division of labor, one cannot simply re-shore the global semiconductor supply chain. The United States and the European Union recognized that their industries will continue to depend on foreign countries, such as Japan, Taiwan, the Republic of Korea and Singapore, for semiconductor production, chemicals, equipment and much more.

Thus, they increasingly turned their view outward – acknowledging the importance of strategic cooperation through technology partnerships to strengthen the resilience of this transnational value chain. In the EU, for example, this new form of chip diplomacy is operationalized via Digital Partnerships under the umbrella of the “Strategy for cooperation in the Indo-Pacific” with Japan, the Republic of Korea (ROK) and Singapore.

At first glance, all these forms of strategic cooperation between governments seem to be centered around very similar topics: supply chain resilience and diversification, crisis response, research and development, to name just a few. However, taking a closer look reveals clear differences in terms of scope, objectives and implementation strategies.

In preparation of this paper, we examined more than 150 public government documents – such as joint statements, speeches, readouts, MoUs and working group announcements – and concluded that the devil is in the details. Apart from the observation that governments seem to set different priorities when cooperating with different partners, our analysis results in three key take-aways:

1. Even though a shortage of skilled workers is one of the central challenges faced by the global semiconductor industry, most government partnerships do not even mention semiconductor workforce development, let alone provide concrete implementation strategies to achieve this objective. The US-India Initiative on Critical and Emerging Technology (iCET) and the Japan-US Commercial & Industrial Partnership (JUCIP) are one of the few that mention this, at least in vague terms.

2. The European Commission seems to focus on research cooperation, crisis preparedness and transparency about subsidies in the EU-US Trade and Technology Council (TTC) and its Digital Partnerships with Japan, the ROK and Singapore. These objectives are aligned with those of the EU Chips Act, especially as one out of the three pillars is dedicated solely to semiconductor supply chain monitoring and crisis response.

3. For the US, one key motivating factor for cooperation on the semiconductor value chain is geographic diversification away from China. As some of the labor-intensive process steps with relatively low profit margins, such as back-end manufacturing (assembly, testing and packaging) cannot be re-shored to the US in an economically viable way, one reoccurring objective is commercial cooperation to “friend-shore” this and other production steps.

It remains to be seen whether and in which areas the various partnerships will be fruitful. That said, it is also obvious that the semiconductor industry continuous to be at the center of policy makers’ attention – not just regarding geoeconomic measures, such as export and investment controls or subsidies, but also as a technology ecosystem that is relevant for foreign relations and trade: Dependence on foreign semiconductors technologies informs foreign and trade policy, and vice versa.