A Renaissance in US Semiconductor Manufacturing

Photo via Georgetown SFS

ASHER MAXWELL: Speaking in the Lohrfink Auditorium at an event sponsored by Georgetown University’s School of Foreign Service, Secretary of Commerce Gina Raimondo praised the “incredible opportunity we have as a nation to unleash the next generation of American innovation, protect our national security, and preserve our global economic competitiveness.” She was, of course, speaking of the recent, under-the-radar passage of the CHIPS and Science Act, along with new Biden administration trade rules. 

The two policies are designed to facilitate a renaissance in American semiconductor innovation and manufacturing. These computer chips form the backbone of all electronic products and, thus, are crucial to any semblance of a modern economy.

To illustrate their importance, Secretary Raimondo spoke of how a shortage of these small devices slowed the production of Ford cars such that their manufacturing employees only worked a full week three times in all of 2022. She also spoke of the vital role these chips play in our defense weapons systems and our life-saving medical devices. 

Needless to say, modern American society cannot do without a strong supply of semiconductors, which is why the Biden administration and a coalition of their allies and detractors in Congress have dedicated themselves to invigorating this American industry. The CHIPS and Science Act dedicates $39 billion to subsidize domestic manufacturing and $11 billion to finance research and development of new chips. 

So far, the promise of funding has brought significant private-sector interest. As of February 2, semiconductor manufacturers have announced $200 billion in new investment. Micron, Intel, TSMC, Samsung, and a few other manufacturers have already committed to opening fabrication plants or fabs in New York, Arizona, North Carolina, Texas, and Colorado. Additionally, General Motors, Apple, and Tesla have already committed to purchasing chips from some of these fabs. 

To complement this new funding, the Biden administration has also instituted new trade restrictions by modifying the Export Administration Regulations to include the factors of production for semiconductors. This prevents any company that sells to China from using U.S. computer code, personnel, or equipment. 

Just as with the new subsidies, these trade restrictions are making an impact. Many chipmakers have already stopped selling to China, indicating that this policy will have the exact effect that was intended. Depriving China of these chips helps the United States maintain a technological advantage in everything from artificial intelligence to advanced missile systems. 

One of the advantages of the investments and promised fab openings is the many new jobs that they will provide. Fabs require employees of every education level from high school graduates to Ph.D. holders. They are also generally good-paying jobs that will bolster the local economies where they are located.

Developing a stronger domestic semiconductor industry will also be vitally important for the safety of the American economy in the event of a geopolitical disaster. A large chunk of our semiconductors come from Taiwan and China, which we would likely lose access to in the event of a Chinese blockade or invasion of Taiwan. Thus, it has become imperative for the sake of national security to develop alternative sources of these chips.

Fortunately for the Biden administration, more semiconductors should also mean cheaper prices for just about everything. In fact, Raimondo observed, “in 2021, car prices increased nearly 30% and were responsible for a third of core inflation—all because we didn’t have enough chips.” Most goods either require semiconductors or are reliant on semiconductors in some part of the manufacturing process, which means a shortage of semiconductors (as occurred in 2021) can be a major contributor to inflation. 

But, the Biden administration might end up making the perfect the enemy of the good. There are  several conditions for any company to receive funding. The rules require that companies prioritize R&D funding instead of stock buybacks and that companies purchase American-made products. Additionally, companies must provide affordable childcare, share profits with the federal government, and meet several other criteria. The Commerce Department will prioritize companies that open fabs in areas most affected by the decline of manufacturing and fossil fuel production. 

Each of these provisions will increase the financial burden of accepting these subsidies for the semiconductor companies, undermining how far the investments will go and how many companies will qualify for them. Despite these concerns, companies have been proactive about getting subsidies. 

There’s reason to believe that the CHIPS and Science Act will target the wrong part of the semiconductor fabrication process. While we should expect an increase in the capacity of the United States to design chips, we still are far behind in the assembly, testing, and raw materials portions of the supply chain. The CHIPS and Science Act fails to address these deficiencies and, thus, will continue to leave us dependent on China and other foreign suppliers.

Perhaps the most immediate concern over the CHIPS and Science Act is the blowback from some of our most important East Asian allies. Japan, South Korea, and Taiwan all have some of the largest semiconductor sectors globally and are worried that American investments and trade restrictions will undermine their economies. In response, they are each implementing their own subsidies, deregulations, and industry-boosting policies, which could ultimately just result in a global oversupply of semiconductor chips than any meaningful benefit to the American economy. 

The nation with the most cause for concern is Taiwan, which manufactures more than 60% of semiconductors sold globally and an even higher proportion of the more sophisticated chips. Furthermore, this vital industry helps create a “silicon shield” to deter a possible Chinese invasion or blockade. If China were to do so, it would face an almost immediate shortage of semiconductors, which are vitally important for its economy and, ironically, its military. But, if the U.S. were to reduce Taiwan’s uniquely large presence in the semiconductor market, it might reduce the cost of invasion to China. 

These concerns are mere speculation, and there are plenty of reasons to be optimistic about the coming renaissance in such an important economic sector in the United States. For all its shortcomings, the CHIPS and Science Act is a monumental accomplishment for the Biden Administration and Congress that could prove to be pivotal for the administration’s most important priorities: combating inflation, deterring the rise of China, and sustaining U.S. economic competitiveness.

Asher Maxwell is one of the Executive Editors of On the Record. He is currently a freshman in the College studying government from Nashville, Tennessee. Asher is particularly interested in elections, economics, and environmental policy.