Silicon Triangle: Semiconductors And Seminal Moments Across The Pacific

>> Bill Whalen: It's Wednesday, August 30th, 2023 and welcome back to Matters of Policy and Politics. A Hoover Institution podcast devoted to governance and balance of power here in America and around the globe. I'm Bill Whalen, I'm the Hoover Institution's Virginia Hobbes Carpenter distinguished policy fellow in journalism, but I'm not the only Hoover fellow dabbling in podcasting.

In the spirit of trust, but verify, I recommend you go to the Hoover Institution's website which is hoover.org. Click on the tab at the top of the home page, it says commentary, then head over to where it says multimedia and up will top audio podcast, a dozen plus and all.

This humble little podcast is at the top of the list, and that's because I endeavor to get the best of the brightest of the Hoover Institution, this podcast being no exception. My guests today are Glenn Tiffert and Admiral James Ellis. Glenn Tiffert is a Hoover Institution distinguished research fellow and a historian of modern China.

He co-chairs Hoover's project on China's global sharp power and directs its research portfolio. Admiral James Ellis, United States Navy retired is the Hoover Institution's Annenberg distinguished visiting fellow. Over the course of his distinguished 39-year Navy career, he served as commander of the United States Strategic Command, was a naval aviator, skippered an aircraft carrier.

And in 1996 served as a carrier battle group commander, leading contingency response operations in the Taiwan Straits. Both gentlemen took part in a recent Hoover institution report on the topic of the US, Taiwan, China, and semiconductors. They're here today to talk about that report and other strategic questions regarding Taiwan's future, what role America will play.

Glenn and Jim, welcome to the podcast.

>> James Ellis: Thanks Bill, delighted to be here.

>> Glenn Tiffert: Likewise, Bill, thank you.

>> Bill Whalen: So let's begin actually with a little domestic politics here in the US and that is one Vivek Ramaswamy, who was a republican presidential candidate. He recently went on Hugh Hewitt's radio talk show, and he said the following with regard to China, and I quote, do not mess with Taiwan before 2028, before the end of my first term, after 2028, which Mister Ramaswamy believes is the point at which the United States will have achieved semiconductor independence.

He then believes that the US, quote, will not take the risk of war that risked American lives for some nationalistic dispute between China and Taiwan. His interim solution moved destroyers and submarines to the Taiwan Strait, form a military alliance with India. And, quote, put a gun in every Taiwanese household.

Now I can safely say, as somebody who follows American politics, Mr. Ramaswamy will not be our next president. But I mention this, because he is striking a distinctly populist chord here which is twofold. Number one, we don't wanna get involved in foreign entanglements. And secondly, once semiconductors are out of Taiwan, once we have semiconductors in the United States, we don't care about the island.

Glenn, what do you think about that?

>> Glenn Tiffert: Well, I mean, where to start with that statement? I think it just illustrates how out of touch and disconnected Ramaswamy is with the situation in the Taiwan Strait. Let's unpack some of the points that he made. The idea of giving Taiwanese a gun that is appealing in its own way.

In fact, many people who believe that Taiwan needs to do more to prepare for itself to defense would point to Israel, Switzerland, Sweden, Finland as models. The problem with that, though is that Taiwan has extremely strict gun control laws. So the idea of taiwanese keeping rifles in their closets as swiss males do is right now a bit far fetched.

So we can just tick that one off the the box there. The second issue with regard to India, it's not clear at all that India has any appetite for a us alliance to preserve Taiwan. India has joined the Quad, which is a loose grouping of nations very much oriented towards China, but not explicitly mentioning China that cooperates across a range of issues.

The US sees it as in many ways a strategic security alliance, but India sees it much more broadly than that and is tempering the extent to which it cooperates on security affairs. So India is also, I think out of the equation. But the most serious point here is there are so many more reasons why the US and Taiwan are bound tightly together than just the semiconductors piece.

Taiwan in many ways is a model case for a nation that was once a one party authoritarian state, making the transition to a pluralistic democracy. A democracy that in many ways is extremely admirable and a leader in the region. That is something that's worth nurturing, cultivating, preserving, and protecting just for its own value and to preserve the human rights and achievements of 24 million Taiwanese citizens who have been tied to the United States for decades, even generations.

And so we, I think for a lot of reasons, very humane reasons, have very strong interest in preserving Taiwan's autonomy and helping them resist China's advances in that part of the world, but over to Jim now.

>> Bill Whalen: So I was going to say, Jim, back in 1992, Ross Perot used to like to say, it's that simple.

That's what we have promised, it's that simple.

>> James Ellis: If only it were that simple and there's in addition to the points Glenn raised. I mean, there's a lot of rather pragmatic pieces. We've been talking for a decade and a half about a pivot to the Pacific. And quite frankly from a practical and military standpoint, it's been spelled with a very small p and the resources that he talks about would have to come from somewhere else.

We have shortfalls as you know in deployment capabilities and the like. And so we're in the process of addressing those things, but we're not ready yet for something of that stripe, the support that we might expect from allies in the Indo-Pacific. Glenn alluded to the relationship with India.

Even Japan and South Korea and Australia are looking very, very closely about the situation. And not just on their relationship with the United States, but also in the Taiwan domestic political scene. They're quite content to talk and support us in preserving the status quo across the Taiwan Straits.

What they're not ready to do is to support a dramatic change in either direction. Whether Taiwan declares independence, whether we decide we wanna sign a treaty with Taiwan or if we were to withdraw altogether, there's going to be second and third order consequences that I don't think the presidential candidate has even begun to address.

Or as Glenn says, unpacked.

>> Glenn Tiffert: Bill, there's one other point too that your listeners may be interested in. The Hoover institution in July released a major report on semiconductors and that was the product of an 18-month deep dive by a working group of about 2 dozen people drawn from the tech industry, the national security industry, China watchers, a very distinguished working group.

And Ramaswamy's argument that the United States might in any near term establish self sufficiency in semiconductors is fanciful. The United States is working very hard to get back into the game, but the global market for semiconductors is simply so large that there is no hope of the United States being able to go to an autarchic self sufficiency position or even a dominant position that the sort of position it held decades ago.

You just think pretty much any device that runs on electricity has semiconductors in it. What the United States certainly needs to do is reduce its vulnerabilities, particularly in parts of the market that are security sensitive. But the solution here is not just taking it all within our borders, but rather working with our allies and partners to ensure that all of us are secure.

 

>> James Ellis: Yeah, and from a practical standpoint, the supply chains go are multi-layered in all of this. And we talk about the semiconductor, the fab capabilities that are resident in Taiwan and all of that. That doesn't even begin to address the component elements, the rare earths and the things that are necessary to create this on which we're still hugely reliant on China.

The US is up to now 15 to 16% of production capability, but China dominates the market in seven of the nine critical production areas, both with intellectual property and, quite frankly, lacks environmental regulations. And so thats all been shipped to China as well. And while were there, too, as Glenn noted, were trying to reverse that process, thats going to be a very slow process.

And so were going to be reliant on China for not just the semiconductor piece that these railroads contribute to, but the whole energy transition that's underway with magnets and the like, that power electric vehicles, make wind turbines work, all of those things. We've got real interlocking relationship with China that even as we might wish to, we just simply cannot sever dramatically or in a draconic fashion.

 

>> Bill Whalen: Yeah, I want to dig deeper into the report, which really was a fascinating read, by the way. Well done, gentlemen. First, I'd like to get a couple more thoughts on Taiwanese politics. Most Americans may not be aware, but in addition to the United States having a presidential election in 2024, Taiwan goes to the polls in January, I think January 13, I believe, in 2024.

A Washington Post column August 20th by Josh Rogin, he's a foreign affairs columnist for the Post. The headline, Why is China so afraid of Taiwan's vice president? This would be Lai Ching-te, I hope I didn't butcher the name, when Lei was in New York and San Francisco this month, I guess these are called transit stops because you can't actually travel.

You have to. Some come by the United States and try to stop. They call it. He's running for president. He is a front runner in some polls, and he was elected. One opposition leader says, and I quoted, opens the doors to hell, which sounds to me like just kind of election year rhetoric, if you will.

But clearly the government in Beijing does not fancy Lai. What is the problem here? Why does China not like Lai?

>> Glenn Tiffert: Let's call him William Lai, I think that's a little bit easier for all of us.

>> Bill Whalen: And it's Lai, not lay, Lai.

>> Glenn Tiffert: Correct. Right.

>> James Ellis: Correct.

 

>> Glenn Tiffert: Yeah. So he comes from a wing of the Democratic Progressive Party, the DPP, which is currently the ruling party in Taiwan, that is more independence minded historically. And so over the years, he's made some fairly strong statements in that direction about Taiwan being an autonomous nation and country, exactly the sorts of language that pushes the buttons of the PRC, which, of course, asserts that Taiwan is an integral part of China, that does not represent the full spectrum of opinion even within his own political party.

And the current president, who comes from that party, has staked out a much more diplomatic and moderate tone on that partly not to inflame tensions with China, because the United States also has a lot of skin in that game. During his transit stop to the United States, William Lai was at pains to indicate a more moderate vision that's consistent with the current president's vision.

That is, he's not going to rock the boat. But it is in China's interests and it's in the interests of the candidates from the other political parties in Taiwan to paint Lai as sort of a radical independence minded politician who is simply going to provoke China to do something rash and destabilize the region.

And so it is in part election year politics. Lai hopefully understands the importance that the United States attaches to maintaining stability in the region and not needlessly provoking China. And so we see him moderating and tacking into the winds there.

>> Bill Whalen: Jim, the race got a new candidate this week, Terry Gou, who is the founder of Foxconn, which happens to be the world's largest producer of electronics, including iPhones.

He is running against the status quo in the DPP. He is an outsider. He sounds a little trumpy from what I read about him. Two questions for you, Jim. I want you to take on, number one, he's referred to as a populist in stories. He's a populist candidate.

I know what populist means in american politics. That's Trump. That's Bernie Sanders. I'm curious of what a Taiwanese populist is. And then secondly, if he wants to run against the establishment, what is he trying to tap into? Is there an audience for this in Taiwan?

>> James Ellis: Well, I think, A, yes, he is a populist.

And Glenn's far more able than I to define that in Taiwan, it's much more complex than perhaps it is here in many ways. But what he's trying to tap into is, in the final analysis, I think everyone would like the issue across the Taiwan Straits to be resolved peacefully.

And so he's trying to take that message back, that somehow he has the magic touch because of his demonstrated abilities to craft massive industrial complexes in China, negotiate deals, have Foxconn manufacturing succeed there, all of those things. That, that gives him some magic touch with the People's Republic of China.

Unfortunately, I think he's a little late to need. Glenn can jump in on this, but I think we moved on beyond that point. That might have worked a decade or so ago, but given where China is now, the statements coming out of the PRC and the like, I just don't think that he can't deliver on those promises and those commitments.

And so I think that's going to be the challenge program. And of course, as was always the case with extra candidates that jump in. And the conventional wisdom, which may proved to be too conventional and not nearly wise enough, is that this virtually ensures that Lai will become the president because it further divides the opposition parties that the KMT and the other independent parties that are competing for the presidential slots.

So I think it's interesting. I think it's complicating. I'm not sure that there's enough detail there, as we often see with Ramaswamy and others in the US political spectrum. How are you going to get this done? And why do you think that they're going to be attuned to this without some massive concessions on the part of Taiwan and the people of Taiwan, which I don't think they're ready to do?

Things have changed dramatically since the Hong Kong transition that was forcibly imposed on them by the PRC. The old mythology of one China, two systems has kind of come apart in the eyes of the Taiwanese people. The public sentiment has shifted. It hasn't brought to your earlier point, necessarily the rabid nationalism that may be evolving, but it has shifted public opinion in ways that are important in how the Taiwanese see themselves.

And they're no longer identifying the bulk of them as, as Chinese or even Taiwanese Chinese. They increasingly see themselves as Taiwanese, as a separate entity. And it's that, I think, is going to make his conversation a bit more difficult. Ultimately, the US policy for decades has been, hey, we want this to be resolved peacefully with the agreement of the Taiwanese people and that kind of a consensus.

And so that's what we're trying to do. He seems to be holding out a, I have a secret plan to end the conflict kind of thing. We've heard those kinds of things before in our own history, but he's not very clear on the specifics. Glenn, do you have any further details on that?

 

>> Glenn Tiffert: Well, you know, the presidential election is interesting because with him joining the race now, there are now four major candidates. I think Jim's absolutely right. The smart money is on him dividing the vote among the three opposition candidates, and that would work to William Lai and the DPP's advantage.

But one of the things about the Taiwanese electorate that makes elections so interesting is that there's a significantly large proportion of the electorate that's kind of a swing vote and undecided going into any election. And it is very prone to leaning one way or the other, depending on what the climate on election day is.

And so that creates a certain amount of uncertainty in what the outcome actually will be. This played out in the last presidential election very clearly, when, when the president, Tsai Ing-wen, who was running, was relatively weak in the polls and it looked like she was not a shoo-in to be elected.

But then events in Hong Kong turned south, and the PRC really began to crack down hard. And that played very much to her advantage and gave her a big boost going into the election that put her over the top, and it was a very big win for her.

So a lot will depend on where things stand in the days leading up to the election. But I think it's likely that Terry Gou entry into the race will work to the advantage of the ruling party.

>> Bill Whalen: And final political question, Glenn, is there a candidate that Beijing prefers?

 

>> Glenn Tiffert: Anyone but the ruling party. The other three candidates are staking out different flavors of the same position, which is, we know how to get along with China, we know how to build bridges with China, we know how to lower the temperature and establish a more cooperative arrangement with China.

And in particular, there's a business and economic growth angle to that as well. The better we get along with China, the more we can sell goods to China, the more jobs will be created. All of this antagonism with China is actually hurting the Taiwanese economy. And as with most elections, the average voter casting their ballot on election day in Taiwan will, yes, be thinking about the larger geopolitical context.

But for them, it's local bread and butter issues. It's the economy, it's inequality, it's inflation, it's the higher cost of living, the fact that young people are finding it difficult to buy apartments, the same sorts of issues we face in California in many ways.

>> Bill Whalen: Right.

>> James Ellis: But, in a real sense, though, Bill, from my perspective, and I defer to Glenn as the real China hand here, Glenn is answering the wrong question.

In other words, he's talking a policy that was applicable a decade and a half ago when the concerns that the PRC had was about deterring Taiwanese independence. That's not the issue anymore. And I think most of us now believe that the PRC has shifted its policy. It's no longer wanting to prevent Taiwan from declaring independence.

It wants to compel reunification or reassimilation. That's a completely different issue. And so it's almost as though what he's saying would have been applicable to a previous scenario when that was the issue on the minds of the People's Republic of China and their leadership, that how do we keep them from declaring independence?

But now, they've made compulsory reunification or reassimilation or whatever the appropriate verb is a part of China's inevitable future. And so that's a different question. And it's not clear that what Gou and others are proposing is going to address that as effectively as it needs to.

>> Glenn Tiffert: Jim's right.

There's a sense in which the other candidates really wanna turn back the clock. And the vast majority of the Taiwanese public feels deep in their hearts that Taiwan is an autonomous, self-ruled nation. And really where the division is is about how hard they wanna press that and how vocal they wanna be and the vocabulary that they would use to describe that.

Most Taiwanese are very happy to continue the status quo, which allows them to be de facto independent without shouting it from the rooftops that they're de jure independent. But the window is closing on that. The PRC is really tightening the noose around the island, and there may be a reckoning in years ahead.

We'll just have to see.

>> Bill Whalen: Let's shift to the semiconductor report. The former title of it is Silicon Triangle: The United States, Taiwan, China, and Global Semiconductor Security. I would note it's a joint report of the Hoover Institution and the Asia Society Center on US-China Relations. Admiral Ellis, the point of this, you wanna focus on incentives, tax policy, collaborative.

You don't wanna get into subsidies here.

>> James Ellis: No, ultimately, we've got to deal with the problem, and there's a couple of levels in which you do that. And we made some initial moves, as we've discussed in earlier comments here, Bill, that, hey, we've got a problem. We've got to begin to address it.

But over the long term, this has to be sustainable. This has to work economically, it has to work effectively. Glenn has already highlighted some of the challenges we have with onshoring in terms of labor and costs. I mean, TSMC, when we visited them last August, very candid, it's gonna cost you 40% more to manufacture these chips in Arizona than it does in Taiwan.

And so how does that play into your profitability and the like going forward? And so at the end of the day, this has to be a business, and not in a pejorative sense, but we have to incentivize the flow of private capital into this. And one of the messages that we tried to convey in the report is, we can't subsidize our way out of this.

We put $52 billion in the CHIPS Act. $39 billion of that, I think, was in the form of subsidies of one form or another. We can't continue that. We've got to incentivize an economic and a business model that encourages the investment of private capital in terms of research and development, in terms of readiness, and they have a right and it's appropriate to get a return on investment.

So we need to think about it in those terms. While we acknowledge the importance of a short term, get the thing started, there is a role for government in that over the long term, we don't see that as the successful outcome. This is, as I used to say in talking about nuclear technologies, hey, at the end of the day, this has to be a business, not a religion.

And we have to find a way to make this self-sustaining, and that's part of the conclusions and findings of the report.

>> Glenn Tiffert: Yeah, I mean, I would absolutely agree with that. Part of the solution, of course, is working with allies and partners that have lower costs to ensure that we can spread some of the supply chain and semiconductors to countries that are friendlier to the United States and more reliable partners.

And there, there's a convergence of interest. Countries like Malaysia, Brazil, Mexico all want to climb the value chain and do more advanced manufacturing. There's strong obstacles in those countries, rule of law, IP protections, business climate that have prevented them from occupying that position now. And so this is a very long-term play that will take sustained support and working with the United States.

But really, the way out of this problem is to work with those nations. The US needs them. They need the US. I think it's critical for us to ensure that we have a reliable supply and maybe some domestic production on those parts of the market that are critical for national security.

And there, maybe you have guaranteed contracts with DoD. Whether that amounts to subsidies or not, we can sort of be semantic about it. But there is a risk premium attached to making sure that your planes and tanks and missiles have the chips that they need. And so we may be willing, and it might be smart to pay a slightly higher price to guarantee onshore production of that.

But with regard to the larger semiconductor market, there's really no economic case. And getting semiconductors right here is critical, because in some ways, it's a microcosm for, or a pilot case, for a lot of other technologies of tomorrow where we face similar problems, whether it's batteries, alternative energy, nuclear.

Figuring out how do we de-risk from China applies across the board.

>> James Ellis: Great, and this has evolved over years, Bill, as you know. In 1999, for example, we produced 37% of the world's semiconductors in the US domestically, and we're now down to 12%, and we wanna back that off.

And as Glenn noted, this is a bigger issue. This is the canary in the coal mine, so to speak. And I don't care whether you call it deglobalization or reglobalization without China. But there's a movement afoot here that we have to get right for the long term, and we can't do it alone.

And his statements not withstanding, I mean, hey, we just don't have the labor force. We don't have the the capital to put towards it. We don't have the raw materials, the processing capabilities. All of these supply chains have nodes in potential allies and partners that we need to much more effectively capitalize on than we've been in the past.

And so I'm not an anti-globalization person, but I think we've learned that there are risks to that. And in that context, I do like the term de-risking. We're trying to back our way out of those risks in an appropriate way. But the simple solution that you talked about earlier, the hand wave, is that we'll just bring it all to the US and do it all here is simply impossible.

And so what does the construct look like? How do we get into it in a measured fashion? How do we include people and our allies and partners in the organizations that we're assembling to address these issues technologically? Look at it from a global perspective, address trade policies. I mean, this is a very complex, Gordian knot here that we're trying to untangle, and it's gonna take some time and some patience and some real diplomacy.

As George Shultz would have reminded us years ago, if you want everybody aboard at the landing, you gotta have them aboard at the takeoff. And so some kind of a conversation that brings them into the policy shaping is as absolutely essential, as painful as that may be, to some of a certain political stride.

 

>> Bill Whalen: Interesting that you mentioned the word globalization, because in reading the report, that word comes up in a quote from Morris Chang, who is the founder and chairman of the Taiwan semiconductor manufacturing company. Two things he said in this report, gentlemen, caught my attention. His first quote, he calls the current situation, quote, the end of the beginning.

He is paraphrasing, I think, what Churchill said at the end of the desert war in World War Two. But then later he says, and I quote, globalization is almost dead. He emphasizes almost, globalization is almost dead, free trade is almost dead, so let's unpack those. First of all, what does he mean, Jim, by the end of the beginning?

 

>> James Ellis: Well, I think he couched it in really appropriate terms. And I don't think that was an accident that he went back to Churchill in that context, but I think it's because it's that significant, quite frankly. I mean, you could expand that where he focused on the semiconductor piece, but it's bigger than that.

It's our relationship with China and now China and Russia, and what are we going to be shaping in this so called new world order that we've been talking about for a couple of decades. And so I think it is just the beginning, we're beginning to see what those opportunities could look like.

We have to find a way, and I think where the administration is pursuing that, to at least have a conversation. I mean, to quote Churchill again, wasn't he that said, jaw, jaw is better than war, war. And so you have to have some kind of a conversation to see what's in the realm of the possible, and hence Raimundo and others travels to Beijing.

But on the other hand, we have to have the courage to begin to shape this in a new direction. And I think what Morris is cautioning us about is that, hey, this is a long road, a row to hoe, as my South Carolina grandfather used to say. And I think it's the point that Glenn raised, we're just beginning this process.

It's going to be, this is not a one and done. The chips act didn't solve it. This is going to be an iterative process over the long term with as much and economic as national security implications. And so I think that's what he was trying to allude to.

 

>> Bill Whalen: And then the second quote, globalization is almost dead. Free trade is almost dead.

>> James Ellis: Well, how do you define globalization? I guess? Does it have to include everyone? You could argue that it never really has. And though we encourage Russia to be a part of it now, I think that's done for the foreseeable future.

And we talked about the difficulties, the practicalities of, of decoupling from China. The fact is that we can't effectively do it without some pretty dramatic impacts on the US and indeed the global economy, and in ways that I'm not sure that everyone is willing to tolerate. And also that kind of an approach risks the allies and partners that so far have managed to be with us on this.

We've done some amazing things, to be fair, in terms of the semiconductor manufacturing capabilities, the tools necessary to do this, we brought people on side. The Dutch, for example, from ASML have aligned with many of our policies, as have the South Koreans and the Japanese, in terms of provision of the high end capabilities to China.

That's a very sensitive issue for them and has to be worked very, very gingerly and very, very gradually. So I'm not sure I coined it, but I heard the term reglobalization without China some time ago, and it kinda resonates with me. And it doesn't mean completely without China.

It means without China having a dominant position, having the ability to shape and influence the future to our detriment over the long term. And so it doesn't mean that they're out and they're excluded. It means that their role has to be adjusted and examined very, very carefully as we decide how to restructure this global trade and economic environment going forward.

 

>> Bill Whalen: The report points out something that I was not aware of, that the Chinese government at one point made $180 billion available to PRC companies, and in the report's words had produced mixed results. Is there a teachable moment here out of China?

>> James Ellis: Well, that's one specialty, and he can say that there certainly is.

 

>> Glenn Tiffert: There is, and I think it's a wonderful case for how you get policy levers wrong. China has spent hundreds of billions of dollars trying to jumpstart a semiconductor industry and onshore as much as possible of world production for its own economic development imperatives, but also for national security imperatives.

And really, the results have been extremely disappointing, even by our standards. Much has been made of the made in China Plan 2025, in which China set out targets and priorities for a host of critical technologies, semiconductors being one of them. And just to give you a sort of snapshot of how disappointing the results have been, their target was that they would meet 40% of their needs in semiconductors by 2020 and 70% by 2025.

So how have they done in terms of production by indigenous firms? The best estimate suggests that instead of 40%, they achieved just under 6% by 2020. And the projections for 2025 suggest instead of 70%, they will maybe achieve about 7.5% to 8%, in spite of hundreds of billions of dollars of subsidies, investment, concessional loans.

Why has that happened? Partly because the state controlled economy is inefficient, it is not exposed to market pressures. It's not nimble, it's risk averse. And so the firms that dominate that sector are not really innovating to their full potential. There's phenomenal- That's corrupt. Yeah, right, there's phenomenal corruption, just eye-popping stories that are coming out to the tune of tens of billions of dollars being spent with barely a building to show for it.

There's a lot of political sort of factionalism within China that steers money to one patronage network or another. And then they have tremendous shortfalls in human talent, in human capital that they've been trying to plug by paying whatever it takes to lure the best Korean and Taiwanese engineers to China.

But Korea, Taiwan and the United States most recently have adopted policies that make it very, very hard, if not illegal, for their home talent to go to China to play those roles. And so you've got the corruption, you've got the inefficiency, and you've got the political patronage networks and the kind of top down management that are all inhibiting progress there.

And it's simply a function of the way China works. China does really well at mobilizing capital and people, but semiconductors doesn't work that way. Semiconductors needs tremendous innovation, nimbleness. You need market signaling. And this is an industry that changes year to year. So you need constant innovation as well.

It's not like, say, building steel plants, which China has done at tremendous capacity.

>> Bill Whalen: So we are in the middle of an election year here in the United States. The president of the United States is gonna go around and tout the Chips and Science Act, which he signed a year ago, as Jim mentioned, $53 billion with semiconductor manufacturing and R& D plus, I believe, a 25% tax credit for capital investments in semiconductor manufacturing.

I would wager dollars to donuts he will go to Arizona, which is a critical state where this is happening. Here's a question, though, gentlemen. This is not a partisan question. It's really one of policy advancement and success. I believe that right now we have something like 50 new facility projects announced here in the US.

Private companies have pledged more than $210 billion in investments. A simple question to you, is this getting it done?

>> James Ellis: Well, not at the pace and the effectiveness that was originally envisioned. I think it's no secret that the TSMC effort in Arizona is way over budget and behind schedule.

They've had to bring in additional labor skill sets from Taiwan in order to try and rectify that. They're gonna eat a lot of losses or excess costs over and above what was projected. And I think it just shows the degree of difficulty here in onshoring it to some degree.

There's labor issues that are in play here. I don't need to get into the pros and cons of those things. And so now there's a local labor, not confrontation, but certainly disagreement with the approach that the Taiwanese are taking. And so it just shows the difficulty of creating these capabilities domestically.

And so I think there is an advantage. The money is flowing. There are jobs there. There are things that the president can legitimately point to, I think, that are better success. But the other takeaway degree of difficulty in all of this, and it's not magic. At some point you have to have the ability to.

I mean, these are not just steel buildings and concrete pads. They have to be done to precise levels. They have to. They have a level of sophistication that is beyond the normal construction. And it's much the same as building a nuclear reactor. It's not the same. You've got to have the right kind of concrete.

It's got to have the right level of stability. And again, I'm not making excuses, but I'm just highlighting the fact that these are skills that aren't as readily available or as widely available in the United States as they once were. And so that becomes the challenge in rectifying all of this.

So I think there are some legitimate successes. It's going to arrive at some point. Certainly, TSMC is committed to that, and indeed, as you know, they've committed to a second facility with even more advanced capabilities. So those are all coming, but they're not going to be here on the timeline that was originally projected.

Glenn, do you have any more current information?

>> Glenn Tiffert: No, I think Jim's absolutely right. I think we didn't lose our position in semiconductors overnight, and we're not gonna restore it overnight either. I think the lesson here is that we need patience, and we also need to have some appetite for failure here.

If we're afraid to fail, we'll never make any progress in any of the industries in which we need to restore or preserve our position. There has to be a certain, and these are risky ventures. If part of the problem here, of course, is that it's been cheaper and safer to do it in East Asia, to bring that capacity back into the United States has required government incentives to, to create the conditions at which private capital will take the risk.

So let's just make sure that we don't run away from it at the first sign of failure. I mean, part of that is the market driven mechanisms that we hope will be operative and dominant here. The key thing, too, is that we need to maintain or onshore a certain amount of manufacturing capacity to ensure that we're still doing the fundamental research that's necessary for our own security and for our own economic competitiveness.

One of the challenges is that by outsourcing so much of the manufacturing that used to be done in the United States to places like East Asia, we're losing an entire generation of workforce and the understanding of how you take sort of textbook knowledge and turn it into product on an assembly line, which resides in people's heads, and that takes time to develop.

We've lost that. It used to be that America's universities, Taiwan semiconductor industry was built by graduates of Stanford and Berkeley, and there are other universities, too, that have phenomenal talent in semiconductor fundamental research. But as we've lost manufacturing, that research has sort of pivoted away from the applied domain into really theoretical domains, and that's not gonna help us either.

We need manufacturing to ensure that we're focused on the knowledge that's required to actually build products.

>> James Ellis: Yeah, the labor capability, the knowledge, wasn't resident in Arizona behind a sign that said break glass in case of emergency, so that when they set up the plan, there was an immediate labor force.

To the extent that there are skilled folks, they come from other industries. I mean, we have production lines for military equipment to missiles and the like in Arizona, and some of these people will draw from that. So to Glenn's point, over the long term, we have to find a way to build that capacity as well, and not just the high end PhD type skill levels, but the skilled craftsmen that are so essential to these manufacturing capabilities.

We don't have a surfeit of that capability yet, and that begets a conversation that we probably don't have time for, certainly in my lifetime. Which is, what do you do about the educational systems, the things that foment that, the apprenticeships, the other options that are gonna be necessary to revitalize or expand at least the skilled workforce in America to address these now extant requirements that could be filled by American workers, but right now they're struggling to do so.

 

>> Bill Whalen: It seems to me that theres a larger story here, and thats one the United States playing catch up. Catch up in terms of supply chain resilience, industrial capacity. Glenn, what other strategic industry should we be looking at in terms of the narrative of the United States playing catch up, not just semiconductors, what else would you point attention to?

 

>> Glenn Tiffert: Well, at the risk of self promotion, were doing a baby version of the report that we did on semiconductors, on battery technology. That should be out sometime next year on battery technology and the energy transition, but particularly in the EV space is one to watch. I don't think it's quite captured the consciousness of the American public yet, but over the last two, three years, again, the way China operates, through massive subsidization and mobilization of China's domestic production capability.

It's built a very, very competitive electric vehicle industry that is making beautiful-looking cars decked out with all the latest gadgets and technologies and not bad mileage specs at half the price of the global competition. And they're turning these things out at a volume that will soon hit the shores of the United States and Europe like a tidal wave.

And it might be the biggest shock to Detroit since the oil crisis of the 1970s, when Japan first established a position in the market. And so we really need to be thinking very hard and very quickly about how we get competitive in that space because right now the world's leading battery technology companies and manufacturers are all out of China and to a lesser extent, Korea and Japan.

But I think Jim can also speak to the nuclear space as well.

>> James Ellis: Right, yeah, the nuclear piece is hugely important, but China is the only country that's really building nuclear reactors at scale and the like. We have a nascent industry that with small module reactors and even the new gen four, and four plus, and we're doing some work in fusion.

So there are some technologies there that have real potential to begin to address finally and safely the energy demands of the world, but every technology is important. It could be quantum computing, for example. Hypersonics, artificial intelligence, these are all areas where China has invested hundreds of billions of dollars.

Quite frankly, they co-opted international research to have it brought to China at duplicate labs and the like as some of these things have been revealed in recent years, perhaps illegalities in the classic sense of attracting US and other researchers to duplicate their efforts in China. So they can stand on somebody's shoulders rather than have to create this out of whole cloth.

So we're in a competition and a race here. We're going to have to be very selective about how we do this because we can't do it all. We can't do what China has done, which is throw hundreds of billions of dollars at this and hope that, you know, something comes from it.

But I think we're smarter now than we used to be. I think we see opportunities. The real question that we also had to address in the report is how much do you do in a pure race with China, and how much do you do in an effort to slow down their efforts by denying them, as we talked earlier, the manufacturing capabilities, the tools necessary, but also the access to intellectual property.

I mean, there's been a number huge inroads over decades, even here in the Silicon Valley with Chinese investment in venture capital firms in order to get access to nascent technologies. And that's now moving down the value chain to more basic research and it's not just the high-end final research that's on the cusp of being put into production or viable products.

So how do you think about that? What does things like the CFIUS Act process and other things have to do with this? How we get that balance right is going to be hugely important? And as we said earlier, it's a rheostat. It constantly has to be adjusted. It's not a one and done.

And that's where you have to wonder if, again, looking at the domestic political situation, how much consistency is the US going to have going forward, giving the vagaries of our own domestic politics in all of this. Because if we're going to keep our allies and partners on board and actively involved, they have to have some sense of consistency in this, that it's not going to be a 180 turn overnight should the election go one way or the other, because that doesn't engender confidence in their ability to forge lasting partnerships with us going forward, which is exactly what it's going to take.

 

>> Glenn Tiffert: Bill, you mentioned free trade a few moments ago. And to Jim's point, if we're asking our allies and partners to some sense de risk from the China market, that's going to cost them dollars and cents. They're selling products into China right now, some of which pose economic or national security threats to us.

And if we're asking them to stop, we need to provide them with an alternative market. And the free trade piece really has not been popular for quite some time in Washington. You'll recall that in the 2016 election, the candidates of both parties walked away from TPP and TPP's been dead in the water since then.

And the United States has been unable to move free trade agreements through the Congress for a number of years, it's simply not popular. If we're gonna be asking nations around the world to kind of abstain from trading and critical technologies to China, we've got to provide them with a carrot, not just a stick, to ensure that they do this willingly and that we give them something in return.

 

>> James Ellis: And Bill, the other piece to this that we talked about is we tend to portray this as a battle of the Titans, the dragon versus the eagle or whatever stimuli you want to use. That's not what our allies and partners in the region are interested in. I mean, we had a major conference not long ago with Sunnyland's.

Jim Madison and I ran it. We had a lot of senior leadership from the national security dimension, allies and partners in the region present. And one of them relayed a conversation he had with the leader of one of the Pacific island nations, and he asked the rather plaintive question, we see what kind of war you're offering us, what kind of peace are you offering us going forward?

And so to Glenn's point, how we do this that doesn't engender an inevitable conflict. It doesn't lead to or imply that this is inevitably going to come to blows is hugely important, not to be Pollyannish. We've got to be realistic in all of this. But on the other hand, we have to find a way that offers a future that they can sign up to willingly, that they think best serves the interests of their nation and their people.

 

>> Bill Whalen: You just wonderfully set me up for the final question of this podcast, which is this. For all the uncertainty with regard to Taiwan and China, a few things we do know. We do know that Taiwan will have a new president by the end of 2024. I can't tell you how the american election will turn out.

If I did know, I'd be taking all our money and making a big bet offshore right now. But here's the question. Come 2025, forget about 2024. Let's look at 2025. And Glenn, I want you to take the diplomatic side and, Jim, maybe take the military side in terms of carrots and sticks.

What role does diplomacy play here, Glenn, in terms of what you talked about, in terms of partnerships, alliances, diplomatic approaches, and then, Jim, there has to be a military component as well. So Jim, maybe you should start the military side, then we'll let Glenn close out with the diplomatic side.

 

>> James Ellis: Well, I think I mentioned it earlier that there are things we can do and we must do to help Taiwan prepare to defend itself should that become necessary and we've talked about that. I've written papers with Jim Timmy on it and large numbers of small things, the porcupine strategy, the lessons we can take from Ukraine which are many about the importance of concealment and resilient communications and real-time targeting.

Things like the reality is right now and I'm not getting in anything classified, we can't provide to Taiwan today a fraction of what we're providing to Ukraine on a daily basis. In other words, real time targeting. The common operating picture. If we were to decide to come to their assistance, and I'm not preordaining that outcome, how would we deconflict that?

How would we know friend from foe? How would they know who we are and they are and where our forces are? Those kinds of things can be put in place now and would act as an additional deterrent. We need to dramatically speed up the procurement and delivery process Taiwan, to my amazement has ordered and paid for five years ago things that have yet to be delivered.

Stinger missiles and things of that ilk. We need to explore co production arrangements with them. They have a very robust and capable military technology industry. They could license and produce some of these things on the island, and that might provide a little bit of that economic benefit that Glenn was talking about.

We need to realize the essential character of allies and partners in this. This is a home game for China should it ever come to conflict. It's not a home game for us and we've got neighbors that are peering into the stadium that are gonna make a decision on whether they help or not and to what level they do in terms of basing opportunities, the critical logistics, the things that really would be essential to this.

So we shouldn't assume that this would be an easy situation, but we have to work harder to help Taiwan and then to create ourselves a capability that's more realistic and more viable should that escalatory scenario unfold.

>> Bill Whalen: And Glenn, the non military side of the equation.

>> Glenn Tiffert: Right, I mean, I think the key lesson here is that regardless of which party wins the presidential election and which party prevails in the congress, that we remain, I think, committed to working with allies and partners and putting the America first and America only language off to the side.

We prevail here as a team. And if America is first, then the Germans have every right to be first for themselves as well, and the French and the British and the Japanese and the Indians. And then the team crumbles, right? And so I think what has been most heartening about the last few years is that I think we've rediscovered the importance of doing that.

There's a lot more work we can do. You know, the relationship with China is playing out across the globe. It's not just in East Asia. It's also in Africa with regard to critical resources, especially minerals. It's in Latin America. It's everywhere. And, you know, the US is a victim of its own success in some ways.

We won the Super Bowl of the Cold War, and then off while we were celebrating, China came up fast. Well, it's a new season. We're going to need new tax. We need to reinvent our playbook. We're going to need to get back into the game. And in order to win, we have to show up year after year, administration after administration.

We have found that it takes way too long to even install ambassadors in many foreign capitals simply because the process of confirmation in the senate for domestic political reasons gets bogged down. If you don't have an ambassador in a country, we can't work with that country at our full potential.

And so this is a really simple thing which we need to be able to solve to ensure that we're building the best team that we can to win this competition and ensure that it serves all of our interests. So the diplomacy side is huge, and we've made a lot of progress in the last several years.

Part of it is also getting out of Xi Jinping's way rhetorically. If you've just been paying attention for the last two or three years, hand this guy a microphone, let him talk, he'll alienate the world. That plays to our advantage as well. The US won the Cold War not just with the military piece, but also having the better proposition.

 

>> Bill Whalen: Gentlemen, let's leave it there. I really enjoyed the conversation. I learned very much. I'd like to thank both of you for the wonderful work you do for the Hoover Institution. It's greatly appreciated.

>> James Ellis: Thanks, Bill. Great to be with you.

>> Glenn Tiffert: Thank you, Bill. A pleasure.

>> Bill Whalen: You've been listening to matters of policy and politics the Hoover Institution podcast devoted to governance and balance of power here in America and around the globe.

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I mentioned our website at the beginning of the show, that's hoover.or. That's where you'll find the report we've been discussing. It's titled once again, Silicon Triangle, the United States, Taiwan, China, and global semiconductor security. It's a joint report of the Hoover Institution and the Asia Society Center on US China Relations.

Also, while you're at the Hoover website, make sure to check out all the great work Glenn is doing with Hoover's China Global Sharp Power project. You can also sign up for the Hoover Daily Report, which keeps you updated on what Glenn Tiffert and Admiral James Ellis and their Hoover colleagues are up to.

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