Investing in US Semiconductor Manufacturing is our Best Weapon for Maintaining Geopolitical Leverage Over China

Peter Connolly (PPS ‘23)

Peter Connolly (PPS ‘23)

Semiconductors chips are the linchpin of the global economy. These chips are not just in your iPhone and car but also operate the robotics machines and assembly lines that manufacture and distribute our everyday goods. What most Americans do not know though is how difficult and expensive they are to manufacture and how globalized the supply chain is. Most chips start their life in the lab of a U.S. tech company. The blueprints are then sent to foundries, specialized factories for semiconductor chips, before being integrated into the devices and systems that power our economy.

China is determined to play a role in their production and has aggressively pursued a top down industrial policy to develop its semiconductor manufacturing capabilities using government subsidies, tax incentives and cheap labor to attract Western companies and position themselves as a key player in the global semiconductor supply chain. As a result, many Western ‘fabless’ companies, companies that design their own chips but contract out the manufacturing to foundries, utilize China’s 20,000 foundries and 1.2 million person semiconductor labor force.

The Biden Administration must pursue policies that remove China from the global semiconductor manufacturing supply chain and bolster U.S. semiconductor manufacturing capabilities before it is too late.

Currently, two pieces of legislation are languishing in Congress that address these issues. The CHIPS and FABS Acts. Both pieces of legislation would unlock nearly 50 billion dollars in funding through generous tax incentives for U.S. semiconductor companies to develop and expand their domestic manufacturing capabilities. The average semiconductor foundry costs 15 billion dollars to build so U.S. companies need the financial incentives in this legislation to lower the barriers of entry and bring semiconductor manufacturing back home. Moreover, these foundries take up to 3 years to build so it is crucial Congress sends the legislation to President Biden.

The Biden Administration must introduce a plan that cuts China out of the global semiconductor manufacturing supply chain. Implementing import tariffs within 5 years on Chinese manufactured semiconductor chips is imperative. Such a policy would disincentivize U.S. companies from using Chinese foundries and initiate a pull-out from the Chinese chip manufacturing market. The implementation of a tax incentive structure, similar to the one laid out in the CHIPS Act, would allow those same companies to easily pivot to U.S. based foundries. Such a policy would have the added benefit of increasing the demand for U.S. manufactured semiconductors and providing additional revenues for domestic foundries. For those who worry that it will antagonize China, China has already announced similar plans, calling for Chinese companies to reduce their reliance on American suppliers as part of its strategic autonomy plan.

Another issue holding back U.S. semiconductor companies from constructing new manufacturing plants in the U.S. is the tough calculus behind predicting demand. Companies need to sell at least 90% of the semiconductor chips made from a given foundry to make up costs and turn a profit. The Pentagon makes up 10% of the domestic market for semiconductor chips and has already committed 2.3 billion dollars to bolster the domestic semiconductor manufacturing industry.

The Department of Defense should agree to buy half of the unsold semiconductors from domestic manufacturers. This offers the U.S. a two-fold advantage. It provides a form of financial security for U.S. semiconductor companies and gives the government an emergency stockpile of semiconductor chips, like the U.S. oil reserve, that it can tap into during crises. As COVID-19 illustrated, disruptions to the global semiconductor supply chain hurts U.S. industry. Finally, Taiwan supplies 63% of the world’s semiconductors. If China were to invade, regardless of U.S. intervention, the U.S. and the world would need an emergency supply of semiconductors to mitigate the short-term economic pain.

Two months ago, these policies may have been deemed contrary to the interest of U.S. consumers. However, as Russia’s brutal invasion of Ukraine has shown, and the pain Americans are feeling at the gas pump, our economy is not immune to geopolitical conflict.

These policies will insulate the U.S. economy from future shocks to the semiconductor supply chain, shore up American global influence, and increase U.S. leverage over China. As we have seen, constraining authoritarian regimes on the international stage through means other than direct military conflict is crucial for maintaining global security. Without economic leverage, the U.S. faces a tough choice between military conflict or ceding influence to authoritarian regimes.



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