Fresh US-China chip war: 'Connecting economies' like India, Vietnam may gain

• US and China have got into fresh tit-for-tat trade restrictions. After the US announced export restrictions on computer chip-making equipment, software and high-bandwidth memory chips, China on Tuesday retaliated by banning exports of gallium, germanium, antimony and other key high-tech materials to the US.

Highlights:

• The escalating trade restrictions between the US and China have introduced new complexities in global trade dynamics. The latest moves—the US imposing export restrictions on advanced chip-making equipment and China retaliating with bans on gallium, germanium, antimony, and other high-tech materials—signal intensifying economic rivalry. This development holds significant implications for non-aligned economies, including India, which stand to benefit and play a crucial role as geopolitical connectors.

Key Developments

US and China’s Recent Actions:

• The US expanded its list of export controls, targeting advanced technologies like chip-making equipment and high-bandwidth memory chips.
• In response, China banned exports of critical materials like gallium and germanium, essential for semiconductor production and defense technologies.

China’s Strategic Material Licensing:

• The export ban builds upon earlier restrictions requiring licenses for exporting strategically important materials. This move underscores China's leverage as a dominant supplier in the rare-earth materials market.

Non-Aligned Economies: The Role of Connectors

1. Historical Context and Current Trends:

• According to IMF’s Gita Gopinath, during the Cold War, non-aligned nations had limited economic influence and poorly developed supply chains, minimizing their role in connecting rival blocs.
• Today, these nations, particularly India, are much more integrated into the global economy, capable of moderating the costs of trade fragmentation.

2. Impact on India and Similar Economies:

• India, Vietnam, and Mexico have capitalized on declining US-China trade relations, enhancing their export shares to the US.
• With increased economic heft, these nations now serve as pivotal hubs in global supply chains, unlike the Cold War period.

India’s Semiconductor Push: A Strategic Pivot:

• India’s initiatives to expand its semiconductor manufacturing capacity are timely, given the global push for supply chain diversification.
• Chip Manufacturing Incentive Policy:
  • India plans to increase the policy funding from $10 billion to $15 billion, reflecting its commitment to self-reliance in the tech sector.

Ongoing Projects:

• Fabrication Plants: Tata, in partnership with Taiwan's PSMC, is setting up India's first commercial fab unit in Gujarat with an investment of over ₹91,000 crore.
• Assembly and Testing Plants: Three plants have been approved, including Micron Technology’s ATMP facility in Gujarat, Tata’s assembly unit in Assam, and a collaboration between CG Power and Japan’s Renesas Electronics.

Global Implications of Trade Fragmentation

1. Economic Fragmentation Costs:

• Gita Gopinath highlights that trade fragmentation today is significantly more costly than during the Cold War, with global trade-to-GDP ratios now at 45% compared to 16% then.

2. Growing Protectionism:

• Unlike the liberalizing trends within Cold War blocs, protectionist policies today amplify challenges, underscoring the need for strategic responses by neutral players.

Prelims Takeaways

• Powerchip Semiconductor Manufacturing Corporation (PSMC)
• International Monetary Fund (IMF)