Semiconductors—commonly known as microchips, chips, or integrated circuits—enable modern life. Those small devices make everything from computers, smartphones, microwaves, and cars to advanced weaponry work. A car, for instance, needs as many as 3,000 semiconductors while one Javelin anti-tank missile requires more than 250 chips. As artificial intelligence (AI) and quantum computing continue to advance, the global demand for semiconductors will only increase, while power will accrue to those countries that can develop, produce, and harness the most advanced chips.

Currently, however, none of the world’s most advanced chips are produced in the United States; Taiwanese companies dominate the market. U.S. policymakers, worried that the United States would lose access to semiconductors during a conflict with China over Taiwan, have turned to industrial policy to address this issue. Such an approach, however, comes with the inherent trade-off of maximizing economic efficiency versus bolstering national security and resilience. 

State of Play 

Despite the critical importance of semiconductors, the United States remains highly dependent on imports to meet domestic demand—especially from Taiwan. Although U.S. companies design the most advanced chips, they are entirely or largely “fabless,” meaning that they contract out production. According to U.S. International Trade Commission estimates, 44.2 percent of U.S. imports of the most sophisticated logic chips (the “brains” of devices that process information) are manufactured in Taiwan. But even that understates Taiwan’s dominance of the global semiconductor market: 60 percent of all semiconductors and more than 90 percent of the most advanced chips are manufactured in Taiwan. 

The supply chain for semiconductors is a model of efficiency, with companies hyper-specializing in one area and leaving other parts to their peers. Although semiconductors were invented in the United States—at one point it produced nearly 40 percent of the world’s chips—U.S. companies decided to focus on chip design, which has the highest margins, and outsource actual production. Foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), which dominates semiconductor manufacturing, produce chips designed by firms such as Apple, Intel, Nvidia, and Qualcomm. Once a chip is made, it is typically sent to Southeast Asia for assembly, testing, and packaging. Chips are then shipped to factories around the world. 

This process, an archetype of globalization, has allowed each participant to focus on their respective comparative advantage, driving down costs and enabling the industry’s blistering rate of innovation. At the same time, however, this industry, which is vital to the global economy and to national security, has become heavily reliant on one manufacturing hub, Taiwan, which has raised anxieties in the United States regarding the fragility of the supply chain. 

Rising Concerns 

With China exerting more pressure on Taiwan and questions growing about whether Chinese leader Xi Jinping will use military force against the island, the United States is increasingly focused on the implications of a conflict for the global economy. Bloomberg, for instance, estimates that a war between the United States and China over Taiwan could shave as much as $10 trillion off of global gross domestic product. The economic devastation that a conflict would bring is driven above all by the reality that such a war would likely entail a prolonged halt in the production and shipment of chips, which would make it difficult for companies to produce much of anything. 

The argument for establishing semiconductor manufacturing capacity outside Taiwan and in the United States, however, extends beyond the growing possibility of war. Taiwan’s susceptibility to earthquakes and typhoons carries heightened risks for supply chain disruptions. Manufacturing semiconductors also requires vast amounts of water, which Taiwan has been forced to ration during droughts, raising the possibility that semiconductor manufacturing could be impacted during an extended drought. 

To guard against the possibility of such a disruption and enhance supply chain resiliency, the United States has poured resources into rebuilding its long-dormant domestic semiconductor manufacturing industry. There is no guarantee, however, that industrial policy along these lines will work, as it could drive up prices and reduce innovation. 

Made in America 

Recognizing the United States’ vulnerability to semiconductor supply chain disruptions, in 2022 Congress passed and President Joe Biden signed into law the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, which will deliver $280 billion in federal subsidies over ten years to increase domestic semiconductor capacity, of which some $39 billion will go to building and expanding fabrication plants (or fabs) in the United States. To that end, the Biden administration has awarded $8.5 billion to Intel, $6.6 billion to TSMC, and $6.4 billion to Samsung. The recipients of these grants have vowed to invest billions more in the United States, with the goal of producing two nanometer or more advanced chips, which support AI and high-performance computing. The United States has set a goal of producing 20 percent of the world’s leading-edge chips by the end of the decade. 

At What Cost? 

The push to build resiliency in the semiconductor industry could result in higher costs and less innovation. TSMC founder Morris Chang has cautioned that U.S. efforts “will be a very expensive exercise in futility.” He has estimated that shifting production to the United States could double the cost of chips and warned that “when the cost goes up, the pervasiveness of chips will either stop or slow down considerably.” Chang pointed to TSMC’s fab in Oregon, where he claimed chips cost 50 percent more than those made in Taiwan. If companies like TSMC have to spend more on production, they will likely pass those costs on to their customers, which will then pass the costs to the consumer. This means pricier phones, computers, and AI-related applications. 

In addition, the CHIPS Act alone is likely not enough to guarantee success. TSMC’s annual capital expenditures are nearly as much as the entire sum in the CHIPS Act dedicated to boosting U.S. manufacturing. TSMC benefits from an ecosystem of critical suppliers that has grown around it in Taiwan, which lowers its costs and allows it to quickly repair and upgrade equipment. Such a network, however, does not currently exist in the United States. Taiwan’s undervalued currency, the New Taiwan Dollar (NTD), also enables Taiwan to offer more competitive exports. Some have pointed to the perceived mismatch between the United States’ workforce and that of Taiwan in terms of compensation expectations, training level, and work ethic. To address those shortcomings, the United States could find itself having to spend billions more to keep a nascent semiconductor manufacturing industry afloat. Indeed, Intel CEO Pat Gelsinger has alluded to just this, commenting, “I don’t think CHIPS 1 is the end of what we need to do to rebuild the industry.” Secretary of Commerce Gina Raimondo seems to agree, stating, “I suspect there will have to be… continued investment.” 

U.S. efforts to reshore semiconductor manufacturing could also threaten Taiwan’s crown jewel, the “silicon shield” that some believe deters China by raising the costs to Beijing of military action. In addition, China has used U.S. onshoring efforts as an opportunity to sow distrust of the United States in Taiwan by pushing the narrative that the United States is looking to hollow out and then abandon the island. The U.S. focus on onshoring because of perceived risk over Taiwan has also prompted other businesses to reevaluate their investment plans and presence in Taiwan, which could make Taiwan more vulnerable to Chinese pressure. If Taiwan becomes less economically competitive and more susceptible to Chinese coercion while Taiwanese people grow skeptical of U.S. intentions, the U.S.-Taiwan partnership could grow strained. 

Do Alternatives Exist? 

If onshoring proves to be too expensive or difficult, one alternative that would still increase resilience is to friendshore production in places like Japan, South Korea, and Malaysia. Each of those countries has experience with semiconductor manufacturing or testing and packaging and offers lower costs than production in the United States. In the event of a conflict over Taiwan, those countries would still likely be able to produce and ship chips. 

If policymakers conclude that Taiwan is truly irreplaceable to the global semiconductor supply chain and that it is nearly impossible to meaningfully reduce reliance on chips manufactured in Taiwan, that will provide an added incentive to safeguard Taiwan’s security. An alternative, or supplemental, approach could therefore be to make explicit that the United States will come to Taiwan’s defense or to invest greater resources in bolstering Taiwan’s own military capabilities. After all, if the effort to onshore semiconductor manufacturing is largely a product of fears of a conflict over Taiwan, then reducing the likelihood of such a conflict by bolstering deterrence would directly address such concerns. 

Alternatively, policymakers could turn to coercive diplomacy if they deem that relocating the bulk of semiconductor manufacturing is a strategic imperative but the CHIPS Act is insufficient. Such an approach could entail threatening to withhold critical manufacturing equipment or refusing to service existing equipment at Taiwan’s foundries unless they shifted more production to the United States. Doing so, however, would fundamentally damage U.S.-Taiwan relations and make Taiwan far more vulnerable to Chinese pressure. 

Finally, the United States could seek to supplement the CHIPS Act by pursuing legislation or regulatory changes that incentivize companies to procure domestically manufactured chips. While the CHIPS Act seeks to ensure a supply of chips made in the United States, as of now there is no guarantee customers will demand that a certain percentage of their chips be made in the United States. The United States could offer tax breaks to those companies that source chips made in the United States or require that chips used in national security applications be made in the United States.

To read the full article post as it appears on the Council on Foreign Relations (CFR) website, click here.

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The past two years have underscored the importance of semiconductors to the U.S. economy and its national security interests. Pandemic-induced spikes in consumer demand boosted semiconductor demand by 17 percent between 2019 and 2021. Global sales reached $555.9 billion in 2021, 26.2 percent more than the year before. Although China remains the largest market in the world for semiconductors, sales in the Americas represented the largest region for industry growth in 2021. However, this spike in demand, along with stagnating investment, inadequate input supplies, and logistics breakdowns, has led to an unprecedented shortage of semiconductors that has reverberated throughout the roughly 200 downstream industries that depend on chips. In the automotive industry alone, it was projected that global semiconductor shortages were responsible for $210 billion in lost revenue as of September 2021. Short-term supply chain disruptions for the semiconductor industry are compounded by long-term geopolitical challenges and the need to rethink what constitutes both secure and resilient supply chains. While China is a top customer for the semiconductor industry, the perception of China has shifted in recent years from potential partner to existential threat. This shift has led companies and countries alike to rethink their dependency on China as both partner and customer. In particular, the Biden administration has sought policies that attempt to accelerate progress and prolong the United States’ innovative edge, while simultaneously dampening China’s influence throughout the semiconductor marketplace. Countries around the world have begun thinking about ways to reduce dependencies on China, enhance supply chain resiliency, and keep costs down.

In the United States, this confluence has manifested in calls for nearshoring and “friend-shoring.” As Treasury Secretary Janet Yellen said in April 2022 remarks, “friend-shoring means . . . that we have a group of countries that have strong adherence to a set of norms and values about how to operate in the global economy and about how to run the global economic system, and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.” The key difference between onshoring and friend-shoring is that friend-shoring is not restricted to domestic production, but rather seeks to move production to allied partners.

To read the full report from CSIS, please click here.

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America’s loss of semiconductor manufacturing capacity (which has fallen from 37 to 12 percent of global production over the past three decades) and its lag in cutting-edge chip development both are due in significant part to policy inattentiveness. This should serve as a warning for policymakers: Failing to maintain a policy environment that nurtures both innovation and domestic production capability risks sacrificing U.S. leadership in other advanced-technology industries, such as biopharmaceuticals.

To read the full report from the Information Technology & Innovation Foundation, please click here.

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The semiconductor sector is highly concentrated, capital- and R&D-intensive, and particularly exposed to bottlenecks and political risks. High-end chip fabrication is centred in Asia, dominated by the duopoly of Taiwan’s TSMC and South Korea’s Samsung. In other parts of the supply chain, companies in the United States and Europe hold relative monopolies that have been leveraged for trade sanctions. The United States has taken steps to block the supply of chips and components to emerging tech giants in China, and to contain China’s ambitions of building its own cutting-edge chip production capacities.

Heavy United states and Chinese investment poses a challenge to the European Union, which in response has set the goal of increasing European production beyond domestic demand. To increase its presence in this strategic and thriving sector, the EU needs a more targeted strategy that builds on its existing strengths while accommodating its relatively low domestic needs. Instead of investing public funds in a subsidy war over fabrication capacity, the EU should focus on inputs and chip design. However, no economy can hope to fully achieve independence in the sector and ensuring sustainable supply through diplomatic means should therefore also be a priority. Lastly, Europe’s small role in global semiconductor production is symptomatic of shortcomings in the European environment for high-tech innovation. These shortcomings should be addressed.

Niclas Frederic Poitiers is a Research Fellow at Bruegel. Pauline Weil is a Research Assistant at Bruegel. 

To read the full report from Bruegel, please click here. 

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To be clear, we recognize the political difficulty of creating any new agency, given committee conflicts, a view that such reorganization is difficult, and resistance by some to larger government. But doing so is critical. NSF and the academic science community play a key role in the advancement of basic science, but that is different than supporting technological innovation and value capture in the United States. While the Department of Defense (DOD) plays a key role in technology development, its focus will always be on defense needs. The Department of Energy (DOE) is either focused on basic science or energy technology. What the United States lacks and desperately needs is a free-standing federal entity whose sole mission is supporting advanced technology industry development in order to help America compete.

Such an agency should take the lead in crafting and regularly revising a national advanced industry and technology strategy (AITS). It should coordinate, along with the White House, an interagency process to help align federal, state, and international (allied nation) policies and programs with the goal of U.S. advanced industry competitiveness. And it should be the one place in government that funds activities explicitly focused on commercial competitiveness.

To read the full report from the Information Technology and Innovation Foundation, please click here.

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The increased attention on semiconductor global value chains brought stark realities to light. First, semiconductor manufacturing is disproportionately concentrated in Asia, especially in Taiwan. Single-source supply chains are fragile and highly vulnerable. Second, China’s increasingly competitive relationship with the US and its allies is accelerating strategic decoupling, reshoring, and ringfencing throughout the semiconductor landscape.

As geopolitical rivalry intensifies, the US and China share one common goal: They both want to localize semiconductor manufacturing. This behavior is typical of early-stage techno-nationalism, the neo-mercantilist mindset that links a nation-state’s technology prowess with its national security, economic prosperity, and socio-political stability.

This report is Part 2 of the comprehensive Hinrich Foundation primer Semiconductors at the heart of a US-China tech war. In this Part 2 of the series, author and Research Fellow Alex Capri focuses on the actions the United States has taken to try and revitalize its semiconductor industry.

To read the full report from The Hinrich Foundation, please click here.

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Stephen Ezell is vice president, global innovation policy, at the Information Technology and Innovation Foundation (ITIF)

To read the full report, please click here.

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While national, including U.S., policies to spur semiconductor R&D and production are important, it’s also important to recognize that self-sufficiency cannot and should not be the goal. The increasing expense, complexity, and scale required to innovate and manufacture semiconductors means that no single nation can afford to go it alone. However, there exists an opportunity and a need for a like-minded set of nations committed to open trade and fair economic competition to collaborate in ways that collectively empower the competitiveness of their semiconductor industries.

This report begins by examining the global semiconductor industry, including the rise of semiconductor global value chains, and by examining nations’ semiconductor competitiveness strategies. It then examines how a community of allied nations can work together across four areas—by working collaboratively on semiconductor technology development, ecosystem support, and technology protection, as well as by developing supportive trade rules and regimes—to collectively enhance the competitiveness and innovation potential of their respective semiconductor industries and the industry globally.

Stephen Ezell is vice president, global innovation policy, at the Information Technology and Innovation Foundation (ITIF)

To read the original report, please click here. 

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Beijing’s eventual reaction to US pressure may complicate US efforts to build trusted semiconductor supply chains in multiple ways. A strong reaction from Beijing that seeks to punish Taiwan or TSMC would roil markets, provide added impetus to US attempts to bring advanced semiconductor manufacturing to US shores, and throw industry supply chains into turmoil, accelerating the bifurcation of the US and Chinese tech ecosystems.

Although this could occur swiftly in many aspects of US-China economic integration—such as the internet, electric vehicles, and 5G decoupling in the technology underpinning all of these—vast changes to the semiconductor sector would be more difficult and painful. Constraints on capital, personnel, and technology will limit the potential emergence of two wholly separate systems. But the process is likely to be messy and costly, creating new risks for the $5 trillion ICT industry and market participants throughout 2020 and beyond.

For leading technology firms in China such as Huawei, which are used to easy access to advanced manufacturing in Taiwan or elsewhere, the search is on for an alternative semiconductor manufacturing ecosystem. Beijing will be there to help, with the National IC Investment Fund, preferential policies for the industry including new ones released in August, and an expedited listing process for semiconductor firms on the new high-tech STAR market in Shanghai.

Yet major challenges will persist for some time given constraints such as a shortage of domestic talent, lack of experience with cutting-edge manufacturing technologies, and the steady advance of the global cutting edge. A slowdown of Moore’s Law and a stretched-out industry roadmap below 3 nm, coupled with the sky-high costs of building and operating a cutting-edge fab, will mean that the pace of growth in the gap between Chinese domestic players and global industry leaders will likely slow in the coming years, improving prospects for Chinese companies to move faster up the curve. Huawei’s deep pockets, industry experience, management system, and entrepreneurial attitude will also enable progress in some areas. Other efforts will be aimed at devising system-level solutions with less advanced semiconductors that are “good enough” for some applications.

China’s advantages in this competition, including its STEM education system, dedicated industrial ministries, funding mechanisms, and market size will eventually produce breakthroughs, but the US will continue to hold key advantages and harbor a willingness to use punitive measures. If the US decides to further restrict semiconductor manufacturing equipment exports to China in addition to other measures such as the foreign direct product rule, China’s timeline for achieving greater self-sufficiency will be pushed further out.

In any case, the global semiconductor industry will be in for a prolonged period of adjustment as the US-China-Taiwan triangle moves toward a new and hopefully more stable equilibrium.

Paul S. Triolo is the practice head for geo-technology at the Eurasia Group.

Kevin Allison is a director in Eurasia Group’s geo-technology practice, based in Berlin, Germany.

To download the full report, please click here.

This report is based on the opinions of Eurasia Group analysts and various in-country specialists. Eurasia Group is a private research and consulting firm that maintains no affiliations with governments or political parties. Report issued September 2020 | © 2020 Eurasia Group

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