Cropped image of an etched silicon wafer by Sangitiana Fararano
Washington Must Rethink Semiconductor Policy
American semiconductor firm Intel has struggled with declining revenue and stock price drops over the past year, to the extent that fellow American firm Qualcomm informally approached Intel regarding a potential acquisition. Moreover, Intel is losing its technological edge to foreign firms such as Taiwan Semiconductor Manufacturing Company (TSMC). These issues have led Intel to break off its manufacturing division into an independent subsidiary. A struggling American semiconductor manufacturing sector poses a distinct threat to national security because of their importance in modern economies and militaries. Washington needs to move beyond grants for new manufacturing facilities to bolster the U.S. semiconductor industry, as the industry faces problems far greater than simply a lack of capital investment.
75 percent of global semiconductors are currently produced in East Asia, where supply chains would be jeopardized in a hypothetical war with China. For that reason, the U.S. Congress passed the CHIPS and Science Act in 2022, which grants large subsidies to firms developing semiconductor fabrication plants within the United States. Semiconductor manufacturing is an enormously capital-intensive business, and the CHIPS Act seeks to ease the burden of expansion. While the CHIPS Act has been successful in bringing more than $33 billion worth of semiconductor manufacturing investments into the United States, it does not ensure that American semiconductor manufacturing will be independently sustainable in the future.
Advanced semiconductors can lose firms billions of dollars in the early years of development and production without guaranteed commercial success. Due to these high costs, some American semiconductor manufacturers are abandoning the bleeding edge of the industry. In 2018, GlobalFoundries cancelled its development of the 7-nanometer node to focus on the larger markets of older chips. Intel is also facing manufacturing problems in its most advanced processes; their customers are disappointed with current chip defect rates. If American semiconductor manufacturers cannot keep up with the technological progression of their foreign competitors, future supply chain disruptions overseas could severely limit American capabilities in technologies such as artificial intelligence. This is of particular concern as the U.S. military increases its reliance on technologies such as AI. In a war with China, the United States would require an enormous number of advanced chips to maintain and expand military capabilities but would simultaneously lose access to those very chips.
Some semiconductor industry experts believe that the American economy is not ready for a massive expansion in advanced manufacturing. In the 1970s and 80s, the U.S. economy shifted to a mode of production that some label “post-industrial”. These changes saw a hollowing out of the American industrial core, and with it the loss of American expertise in manufacturing processes and industrial business operations. In 2023, TSMC delayed the opening of its Arizona plant due to a lack of technically trained workers in the area. Daron Acemoglu, a Nobel prize winning economist, believes that this lack of manufacturing expertise puts the future of American manufacturing at risk. U.S. firms may struggle with productivity and labor shortages, and thus profitability, in the near-term before the industry finds its legs. While the U.S. builds its training infrastructure, East Asia has a decades-long first mover advantage.
Policymakers may look to trade barriers to alleviate the U.S.’s weaker position, but excessive trade barriers, especially when combined with the CHIPS Act’s industrial policy, risk retaliation from trading partners. Incentives to buy U.S. chips, rather than penalties to foreign firms, could be successful in bolstering the American semiconductor industry. Further, increased funding toward research and development toward manufacturing processes could grant U.S. firms a comparative advantage that could alleviate the need for stringent trade policy. Strengthening stipulations and incentives for defense contractors to buy American-made chips is also a feasible path to strengthen demand for domestic manufacturing.
Long-term strategies to increase manufacturing productivity and improving American human capital in the industry, such as investments in apprenticeship programs and automation, are necessary steps towards developing American technical competency and increasing productivity. Competing with East Asian economies on labor costs will be difficult, as workers’ rights and wages are often much worse compared to the West . However, investment in automation research and development can lower American labor costs and hedge against incoming demographic changes.
Washington cannot rely solely on state investment to ensure a sustainable advanced chip manufacturing industry. Policymakers need to ensure that the United States is a good place to manufacture and build businesses that are profitable, and not just with subsidies. Manufacturing firms have abandoned the country before and could do it again. The primary goal of the United States should be ensuring that America’s manufacturing power does not wane for a second time.
