U.S. automaker Ford Motor Co. recently announced that it would be scaling back production at several plants amid the semiconductor chip shortage. Volkswagen is warning that the crisis is choking its manufacturing capabilities. Sony believes that falling PS5 products will continue heading into 2022, potentially hurting the Christmas rush. From washing machines to televisions to toasters, international commerce has been severely disrupted, and the marketplace may not return to pre-coronavirus times until late next year. Who or what is to blame for the mess? Perhaps the red dragon’s fire is flaming the worldwide chip shortage.
A Chip on China’s Shoulder
The global economy is going through a commodities supercycle right now. Simultaneous foreign demand for grains, energy, and raw materials is soaring. Supplies and output are lagging. This is a dangerous recipe for rampant price inflation that may not subside anytime soon.
It might be easy to surmise that semiconductors fall into this category, too: increased demand and inadequate supply in the post-COVID-19 economic recovery. However, as Liberty Nation’s Dave Patterson reported, the Department of Defense (DoD) has been sounding the alarm about today’s crisis for a few years, warning about the growing problems with the supply chain that would lead to demand outpacing stocks.
Financial markets are pointing to declining memory chip prices since 2019 and secular tailwinds for the ongoing mess in 2021. The new administration wants to toss $50 billion at the problem by increasing output capacity. Commerce Secretary Gina Raimondo told a virtual conference of the Council of the Americas:
“Right now, we make 0% of leading-edge chips in the United States. That’s a problem. We ought to be making 30%, because that matches our demand. So, we will promise to work hard every day, and in the short term also see if we can have more chips available so the automakers can reopen their factories.”
How long would it take for American companies to ramp up the production of these chips? Experts predict about a decade, even with sustained investment, to achieve the 30% threshold. In the meantime, President Joe Biden is in talks with Taiwan to prioritize U.S. firms to boost supply. This could amplify geopolitical tensions with Beijing, something that may exacerbate the divide between Taipei and the Chinese leadership.
China’s tech companies are aggressively stockpiling chips and chip-making equipment out of fear that Washington would slap sanctions on the country. In March, General Administration of Customs data highlight that China imported a record 58.9 billion semiconductor units, valued at nearly $36 billion. Overall, in the first quarter, the nation’s imports topped 155 billion units worth $93.6 billion. But the recent hoarding pales in comparison to the years-long shift in policy that has had allowed China to hold 80% of global reserves of rare-earth metals that are critical to manufacturing semiconductors in solar panels, batteries, and electronics.
“Although the Chinese government’s language is subtle, the message is clear: It is exploring the possibility of weaponizing its dominance in the rare-earth-mineral market in a potential trade war with America. Its proposal is perceived as a warning shot.
Biden’s announced plans to phase out fossil fuels will make the United States even more heavily reliant on China.”
Tesla CEO Elon Musk recently called the chip shortage a “huge problem.” But since the “Dogefather” is laying the foundation of an important presence in the world’s second-largest economy, Tesla could receive a portion of the chips at its Giga factory. For the rest of the U.S. economy, China holds the golden ticket for the average consumer to purchase a new smartphone, video game console, or toaster. How will America survive without toasters?
And For What?
Despite the U.S. being engaged in an 18-month trade war with China, what does America have to show for it? Washington’s trade deficit widened to a record high of $74.4 billion in March as imports surged 6.3% to an all-time high of $274.5 billion. Exports jumped 6.6% to their best level in 13 months to $200.3 billion. The significant revelation from the Bureau of Economic Analysis (BEA) report is that America’s trade gap with China increased 22% to $36.9 billion and 23.5% with Mexico. Was the U.S. not supposed to be exporting more than it was taking in from China at this point? And what about the USMCA?
The whiplash in the financial markets, agony for many families in the Midwest, and business journalists rewriting their news articles were all for naught as the U.S. continues to rely on China for personal protective equipment (PPE), consumer goods, and, yes, chips.
Read more from Andrew Moran.