International Economics Question
1 Economics 335- Industrial Cluster and the Disadvantages of World Production of Certain in Few Regions Apple’s iPhone Reliance on Computer Chips Made in Taiwan. Chit Seint Thu ECON 335 Professor Aaron Popp 05/17/2024 2 Economics 335- Industrial Cluster and the Disadvantages of World Production of Certain in Few Regions (Apple’s iPhone Reliance on Computer Chips Made in Taiwan. Krugman, Trade Theory and Apple’s Chip Problems with TSMC’s Earthquake Damage (Worstall, 2016) Introduction The specialized factor pattern explains the scenario in which countries specialize in producing goods and services that capitalize on their unique factor endowment. Trade encourages specialization; in this, countries focus on a specific input or a resource that is wellsuited or efficient in production (Johansson & Olaberria, 2014). Although, ideally, this pattern of specialization should lead to mutually beneficial trade relationships between countries, efficiency gains in specialization also carry risks concerning monopolistic practices. Via analysis of Apple’s Chip problems due to reliance on TSMC, a Taiwan semiconductor facility, this essay aims to demonstrate that the higher the specialization, the bigger the risks, and in the long run, depending on single supplies for critical supplies can backfire, as shown by energy crisis due to Russi-Ukrain conflict, hence the need to consider other factors such as security despite efficiency. Article Summary Worstall’s (2016) article on “Apple’s chips problems” due to TSMC earthquake damage focuses on implications on the supply chain of an earthquake in Taiwan on Apple iPhone production due to damages on the facility by drawing parallels between the event and the new trade theory by Paul Krugman, which emphasizes the importance of understanding global trade dynamics including factors such as monopolies, supply chain resilience, competition among others. Krugman’s theory focuses on the impact of economies of scale in production and the 3 concept of intra-trade industry, suggesting that specialization and trade produce efficiency gains but also raises concerns about monopolistic practices due to specialization and single source supply risks, resulting in challenges of balancing efficiency with the need for resilience (Worstall, 2016). The article begins by highlighting potential challenges in Apples iPhone manufacture due to supply chain interruptions in Taiwan, then goes ahead to explain the complexities of supply chain management and the tradeoffs factored in decision-making about outsourcing or production in terms of prioritizing efficiency or diversifying resources to conclude there is no one size fits all solution when it comes to specialization, hence the need to balance efficiency against resilience and security. Due to increased internationalization and globalization in production, value chains have transformed specialization with more focus on tasks and functions than on the manufacture of specific products. Depending on comparative advantage, countries specialize in different stages of production or functions within industries (Johansson & Olaberria, 2014). This specialization reveals the vulnerabilities of single-region reliance. Analysis The History of Taiwan Semiconductor Production (Formation of the Cluster). The history of semiconductor and Chip production reflects specialization, innovation, and internationalization due to trade. According to Crawford et al. (2021), Arcuri & Lu (2022), and Heilweil (2022), Taiwan’s involvement in Chip production began in the 1980s, when manufacturing was mainly in-house, with companies such as Texas Instruments doing almost everything in-house but as the process got more complex, the companies began outsourcing some functions and tasks. The engineering aspects became more specialized firms focused on producing specific parts, with the US focusing on the design of the chips, Japanese firms, 4 chemicals, and Taiwan, specifically in the chips manufacturing industry. Morris Chang, the TSMC, focused on contract manufacturing, a concept that led to Taiwan’s success in chip production along with research and development. Global dependence on Taiwan is significant due to the increased chip demand, but the stakes with specialization get higher as chip concentration in Taiwan poses geopolitical risks. Economic Analysis The HO economic theory trade model provides valuable insights into international trade patterns and specialization based on factor endowment differences among countries. Based on this model, countries have different productive factors regarding labor and capital (Johansson & Olaberria, 2014). This model suggests that countries export goods utilizing their abundant factor intensively and import those that utilize their scarce factor intensively. Taiwan’s dominance in Chip production can be attributed to technological infrastructure advances and the abundance of skilled labor forces. Based on the Business Times (2024), chip making is not only costly but also exclusive, and new companies need about USD 20 billion and years to make, but due to the government’s decision to promote the electronic industry and thanks to Morris Chang supply chain innovations and specialization leading to erosion of American companies and research and development, Taiwan and TSMC became an essential factor in semiconductor with significant market dominance (Arcuri & Lu,2022). Based on HO, the company’s comparative advantage stemmed from the efficient allocation of its abundant factors, such as production and skilled labor, to this high-tech industry. In the context of the specialized factor pattern, trade facilitated by imports and exports enables countries to specialize in the goods they produce most efficiently. This leads to increased efficiency globally and higher global output (Johansson & Olaberria, 2014). As mentioned above, Taiwan concentrated its resources and investment in areas that 5 promoted comparative advantage in chip production as the company heavily focused on research and development to improve its technological infrastructure. As such, by concentrating its resources on infrastructure development, Taiwan exhibits specialized factor patterns in production. Global tech farms depend on access to the best manufacturing, and most of this is in Taiwan as TCMC is a quality leader due to specialization and investment in the production infrastructure as it is one of the two companies globally that can manufacture the most advanced 5-nanometer semiconductors (Arcuri & Lu,2022). Regarding Ricardo’s comparative advantage concept, even when one country has an absolute advantage in producing all goods compared to another, both countries can benefit by focusing on goods they can make more efficiently, as specialization allows efficient resource allocation, leading to higher output. For example, in the case of the US and Taiwan, based on Ricardo’s theory and comparative advantage concepts, Taiwan specializes in the manufacture of semiconductors since they have a supportive semiconductor manufacturing infrastructure and advanced technologies that can produce semiconductors at a lower cost, compared to the US, which has less specialized infrastructure of the manufacture of semiconductors production, hence the reliance on China (Crawford et al., 2021, Arcuri & Lu, 2022). Thus, in chip production, Tiwan’s comparative advantage is demonstrated by low-cost production and high quality compared to other countries, and this advantage is linked to technological expertise, economies of scale, constant delivery, and cutting-edge semiconductor prices at competitive prices (Arcuri & Lu,2022). The specialized factor concept, comparative advantage, and HO model explain Taiwan’s dominance in semiconductors as the country specifically focused on manufacturing chips and heavy investment in R & D has made the company invaluable to Silicon Valley and even as 6 governments and companies in the US focus on in-house manufacturing, dependence on Taiwan will still be high due to demand. By allocating its abundant production factors, such as skilled labor and technological infrastructure and capability, Taiwan has become a global leader in chip production, and most of its success is linked to increased specialization and trade. The problems with resource concentration on one region, such as in Taiwan’s case, is the supply chain dependency and the associated geopolitical risks as any disruptions in the supply chain, such as due to the earthquake described in Worstall’s (2016) article, make supply chain disruptions vulnerable with far-reaching economic consequences. Conclusion This essay focuses on the specialized factor pattern by focusing on Apple’s reliance on Taiwan for semiconductors essential in iPhone manufacturing. Within the last decades, specialization has increased. Resource concentration in one region makes the production of goods even more vulnerable to geopolitical, technological, and environmental concerns. Therefore, it is not surprising that countries and multinationals such as the US are focusing on inhouse production to reduce reliance on Taiwan, as security and resilience are not guaranteed. The demand for chips will continue to increase. Unfortunately, Taiwan’s semiconductor dominance is not good, as its dominance coincides with escalations with mainland China. Generally, mitigating risks due to an uncertain geopolitical landscape is essential. 7 References Arcuri, G., & Lu, S. (2022). Taiwan’s Semiconductor Dominance: Implications for Cross-Strait Relations and the Prospect of Forceful Unification. Www.csis.org. https://www.csis.org/blogs/perspectives-innovation/taiwans-semiconductor-dominanceimplications-cross-strait-relations Crawford, A., Dillard, J., Fouquet, H., & Reynolds, I. (2021). The World Is Dangerously Dependent on Taiwan for Semiconductors. Bloomberg.com. https://www.bloomberg.com/news/features/2021-01-25/the-world-is-dangerouslydependent-on-taiwan-for-semiconductors Heilweil, R. (2022). Why computer chips are now at the center of global politics. Vox. https://www.vox.com/recode/2022/9/28/23375712/chips-semiconductors-china-taiwanconflict Johansson , Å., & Olaberría , E. (2014). OECD ECOnOmiC Policy Paper. https://www.oecd.org/economy/Trade-and-specialisation-patterns-for-the-next-fiftyyears.pdf The Business Times (2024). Why making computer chips has become a new global arms race. [online] The Business Times. Available at: https://www.businesstimes.com.sg/companies-markets/why-making-computer-chips-hasbecome-new-global-arms-race1 [Accessed 10 May 2024]. Worstall, T. (2016). Krugman, Trade Theory And Apple’s Chip Problems With TSMC’s Earthquake Damage. Forbes. https://www.forbes.com/sites/timworstall/2016/02/16/krugman-trade-theory-and-appleschip-problems-with-tsmcs-earthquake-damage/?sh=46d1683655e2
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