Robin Pagnamenta Tariffs see China chip away at US tech power

From smartphones to soya beans and toys to microchips, more than $300bn (£246bn) of tariffs are due to come into effect starting tomorrow on a dizzying variety of US and Chinese goods. An 18-month trade battle between Donald Trump and president Xi Jinping is convulsing the global technology industry, sending shockwaves through complex supply chains that have grown up over decades – and creating a giant headache for some of the world’s biggest companies.

In a fortnight, when Tim Cook ascends a stage to unveil Apple’s newest iphone, behind the scenes of a glitzy launch some of the company’s biggest brains will be puzzling over how and where the devices will be made to minimise the impact of tariffs.

But the US and China are not the only countries squabbling over trade terms – a separate dispute between Japan and South Korea could have big implications too.

Japan’s decision last month to slap new controls on exports to South Korea of three rare chemicals vital for the production of semiconductors and flat panel screens represents a direct challenge for Seoul’s tech-fuelled economy.

The move is already hurting Samsung and SK Hynix, two of its leading semiconductor makers, and prompted warnings of a knock-on impact on hundreds of other firms.

But bellicose action by Washington and Tokyo is a dangerous game that threatens to backfire badly. Chinese and South Korean technology companies could be the long-term winners, while golfing buddies Donald Trump and Japan’s Shinzo Abe could yet live to regret their recklessness.

Nowhere is the impact being felt more keenly than in the $412bn global

semiconductor market, the backbone for the technology industry.

Around the world, the threat of tariffs is fuelling a flood of investment into alternative supplies of components and finished chipsets.

South Korea has announced plans to plough $6.5bn into research and development to trim its reliance on Japanese imports – an understandable step as it has plenty to lose. Japan produces about 70pc of the world’s affected chemicals – fluorinated polyimide, photoresists and hydrogen fluoride – which are used in the manufacture of billions of smartphones and computers.

Oxford Economics estimates a 10pc fall in semiconductor production would trigger a drop in South Korea’s GDP growth to 1.6pc per year in 2019-20 down from forecasts of 2.1pc.

“We want to turn the crisis into an opportunity for the materials, parts and equipment industry,” Sung Yun-mo, South Korea’s industry minister, said of the dispute, which arose last month after Japan’s prime minister Abe cited security concerns.

Its origins lie in a Korean court claim last year that Japan should pay compensation for forced wartime labour between 1910 and 1945.

Meanwhile US action has prompted China to fast-track plans to be a world leader in semiconductors. Its hefty reliance on the import of chips – especially from the US – has been a sore point among its leaders for years.

Despite China’s dominance as an electronics manufacturer, only 16pc of the semiconductors it uses are made domestically – and only half of those by Chinese firms. “We cannot be reliant on foreign chips,” Ma Kai, a Chinese vice premier, said last year.

But spurred on by US trade tariffs, China’s new-found determination to build its own manufacturing expertise in advanced chipsets is already yielding results. It aims to produce 40pc of the semiconductors it uses by 2020 and 70pc by 2025.

This year, China surpassed North America’s 12.5pc share of global silicon wafer production capacity, while IC Insights, a research firm, forecasts the country is poised to double production capacity to $47bn in five years.

Firms such as Huawei are accelerating plans to develop and build chips while Beijing offers juicy subsidies and tax breaks to tempt both domestic and foreign players to develop semiconductor foundries in the country.

It won’t happen overnight. The investment required is vast; building state of the art semiconductor plants is neither cheap nor easy. America’s Intel, for example, spends more than $13bn a year on R&D.

Nevertheless, there is no doubt China has the determination and the financial muscle to make its plans fly.

If Beijing succeeds, Trump’s trade war against China could end up having a perverse effect – shoring up Chinese economic independence while undermining America’s technological supremacy in a key industry on that the modern world depends.

‘US action prompted China to fast-track plans to be a world leader’