A sense of general equilibrium

By Weisi Xie, Shanghai Director

One of the benefits of my role is that I get to learn tremendously from our members. In early February, a client invited me to share Economist Intelligence’s macro-outlook at one of their internal meetings. After my presentation, I stayed for the rest of the session which featured an in-depth analysis by an expert with extensive industrial experience in tech management on the challenges to China’s semiconductor industry posed by the US exports controls. I was impressed to learn about the detailed segmentation of the semiconductor global value chain, and that, at the current status, there is a three to seven year gap between leading Chinese players and the world technology frontiers across different stages of chip production, from design to manufacturing. This discrepancy weighs on the development prospects of high-tech sectors that rely heavily on advanced chips.

The next question that arises is whether China’s push towards achieving self-sufficiency in advanced chip manufacturing will be successful, as suggested by ASML CEO Peter Wennink, or whether China will continue to lag behind without access to superior technologies. Answering this question is not easy. On the one hand, it will take time to evaluate the effectiveness of the joint party-state governance approach that was deployed for science and technology affairs after China’s recent government overhaul during the “two sessions.” On the other hand, it remains to be seen if the semiconductor industry will continue to upgrade according to Moore’s Law without the world’s largest market. This is a factor that analysts may easily overlook.

During a recent conversation with Chris Miller, the author of “Chip War,” TSMC founder Morris Chang, stated explicitly that “globalization is dead in the chip sector.” Access to larger markets and lower production costs have been the two most significant benefits of globalization for the semiconductor industry, supporting its rapid advancement and upgrades over the past few decades. China, being the largest buyer and the main contributor of many manufacturing tasks for chips, has played a critical role in this sector. Excluding China from the community may push up semiconductor prices by up to 60%, resulting in lower global demand, as well as the loss of steam for continuous technological breakthroughs in advanced chipmaking activities. This may eventually lead to the industry losing momentum.

This is a classic example of the so-called “general equilibrium” in economic theory, where various components of the global market are interdependent and collectively determine the outcomes for the global economy.Ignoring the general equilibrium effect of a business strategy or economic policy can lead to unintended consequences that may turn potential benefits into losses.

I would also like to update you with the EIU’s most recent global outlook, where our forecast for global growth stands at 2% (up from 1.9% last month). This upward revision reflects an improvement to our US growth outlook, which we now forecast at 0.7% for 2023 (up from 0.3% previously). In addition, the Eurozone has avoided recession in the winter of 2022/23, owing to lower than expected energy demand due to mild temperatures. However, high inflation continues to weigh on spending—we forecast GDP growth of just 0.7% in the bloc.

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