Close up technologies
Closeup of an electronic device. (Image: Chris Ried via Unsplash)

Made in America or making America pay?

Alternatives to industrial policy for semiconductor supply chain resilience.

By Sarah Kreps, Richard Clark and Adi Rao

When the COVID-19 pandemic struck, American businesses and consumers were left without needed inputs and supplies as a result of pervasive supply chain constraints, especially in semiconductor manufacturing. Two years on, these supply chains remain at risk since core nodes are in locations with high geopolitical uncertainty, including China, Taiwan Province.

Such supply chain vulnerabilities—alongside the recognition that semiconductors represent a strategic resource—have inspired a push in Washington to rebuild American chip manufacturing. In June 2021, the U.S. Senate, in a rare act of bipartisan consensus, passed the U.S. Innovation and Competition Act (USICA), which includes USD 52 billion in federal investments to bolster the American semiconductor industry. In February of this year, the House of Representatives passed similar legislation—the America COMPETES Act—mostly along party lines. House and Senate negotiators reconciled those bills into the CHIPS Plus Act, which passed in late July with a bipartisan vote of 64-33 and that President Biden signed into law on 9 August 2022.  

While Chips Plus purports to resolve the supply chain shortages through building semiconductor chip manufacturing plants in the United States, reshoring the semiconductor supply chain may create other problems. The construction of fabrication plants requires substantial up-front costs. Moreover, because inputs and labour are relatively expensive in the U.S. compared to leading chip-producing countries such as the Republic of Korea and China, Taiwan Province, domestic producers require a steady stream of government assistance to maintain competitiveness. As lawmakers on Capitol Hill iron out how to maintain access to a key technology, we advance a more holistic strategy for semiconductor resilience, which includes a two-pronged approach of high-tech collaborations and immigration policies that promote a more high-tech workforce.

Semiconductors and supply chains

Although offshoring semiconductor manufacturing made sense in pre-pandemic times, turning back the tide would be costly. Full-scale self-sufficiency by region, according to a Boston Consulting Group report, would require “$1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices.”

The production of chips, furthermore, requires much more than simply setting up a factory or two: it involves an intricate set of steps from design to front-end fabrication to back-end assembly, testing and packaging. Carried out by countless firms in the chain, no country has complete end-to-end control of chip manufacturing. Indeed, as Brookings non-resident senior fellow Chris Thomas notes, this hyper-specialization “makes semiconductors a winner-take-all industry” such that “the top one or two players in any given niche […] earn all the economic profits in that niche.”

Despite the fact that seven of the top 10 (by revenue) semiconductor design firms are American companies according to a Congressional Research Service report, the fabrication facilities that manufacture the chips are controlled by companies in China, Taiwan Province and the Republic of Korea. Other parts of the chain are also equally difficult to reproduce; the most important equipment suppliers are a Dutch and a Japanese firm. Back-end production, which is labour-intensive, is concentrated in Malaysia, Viet Nam, and the Philippines. In short, there is a lot to reshore.

Global semiconductor industry market share by sales (2019)

Note: Sales are based on the location of the company headquarters.

Source: SIA (2020) State of the U.S. Semiconductor Industry.

Reshored fabrication facilities will be unable to meet their production and cost targets without reliable access to inputs. In the short term, access to critical supplies is likely to remain strained. The Russian Federation  and Ukraine, which are now engaged in an armed conflict, both provide key inputs for semiconductor manufacturing, such as nickel, palladium and neon. Key minerals, including rare earth elements, overwhelmingly come from China. Securing these upstream resources will be an additional challenge.

A new era of industrial policy?

Semiconductor manufacturing facilities will take several years to build. Intel’s USD 20 billion fabrication expansion will not be fully operational until 2024. Moreover, it is unclear whether they will be profitable without government assistance once constructed. While semiconductor supply chains remain strained, fewer COVID-19-related disruptions and the industry’s efforts to expand capacity may ease shortages in the medium term. Legislation, in turn, could be a long-term solution to a short-term problem.

Government intervention to prop up the U.S. semiconductor industry would be reminiscent of 20th century efforts to create “national champions” by offering subsidies to firms in domestically popular industries. Politicians have long campaigned successfully on reviving industries, such as steel and coal, despite the fact that there is no consensus that industrial policy is efficacious relative to their cost to taxpayers. A better way to improve the availability of semiconductors and the resilience of the chip supply chain would be to embrace foreign expertise and talent rather than expensive unilateralism.

A potential solution

As such, we propose a two-pronged approach. First, the U.S. should focus on deepening its high-tech collaboration with strategic partners. Relying on allies and friends can improve supply chain resilience while capitalizing on comparative advantages to keep consumer prices down. 

Second, the U.S. should amend its immigration rules to allow more skilled workers to enter the country, augmenting the talent pool during a period of labour shortages and increasing the competitiveness of American industry. This would allow Intel to keep its promise of adding 7,000 construction jobs and another 3,000 permanent jobs. It would also help mitigate concerns about price increases; current estimates suggest that silicon wafers produced by TSMC in Arizona will be more expensive than those manufactured in China, Taiwan Province, which will hit consumers.

U.S. global semiconductor fabrication capacity (1990-2019)

Source: Congressional Research Service (2020).

We recommend this combination of policies rather than the costlier and riskier proposition of reshoring the industry from the ground up. The United States may not return to its 40 per cent semiconductor manufacturing market share from the 1990s (see figure above), but these policies would nonetheless help boost domestic production from 10 per cent to 12 per cent of the global market and increase supply-chain resilience while minimizing potential efficiency losses from over-reliance on local manufacturing.

  • Sarah Kreps is John L. Wetherill Professor of Government, Adjunct Professor of Law, and Director of the Tech Policy Institute at Cornell University.
  • Richard Clark is Assistant Professor of Government at Cornell University.
  • Adi Rao is PhD student at Cornell University's Department of Government where he specializes in International Relations and technology.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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