The Leverage Games: Strategic Network Formation in US-China Chip Wars

• In Event: Global Supply Chains

Abstract

Semiconductor Chips have been the most critical technology for great powers to lead the technological competition. It has one of the world's most complex, globalized and interdependent supply chains. In recent years, there has been a realization among the leading chip-manufacturing states that interdependent supply chains were efficient but not stable to geopolitical tensions and exogenous shocks. As a result, states are seeing an incentive to defect from a globalized chip industry and maximize self-sufficiency on national security grounds. Both US and China are making huge investments to achieve self-reliance in semiconductor manufacturing.

However, the interdependent nature of the chip industry is hard for countries to defect and indigenize production without incurring high costs. In this light, it is pertinent to explore how states could leverage their niche in the supply chain to resist potential adversary coercion. The paper applies a strategic network formation approach to conceptualize a game that explains various supply chain resilience mechanisms like horizontal and vertical integration, re-shoring, and friend/ally-shoring as strategic choices. Using a firm-level dataset of over 250 industry firms and their competitive advantage, we identify the supply chain vulnerabilities of the US and China and explore their optimal strategies for developing resilience.

Authors

• Ambuj Sahu, Indiana University Bloomington

• Shubham Dwivedi, Georgetown University