Semiconductors are the foundation of everything from weapons systems to technologies used daily by consumers and businesses. The current shortage has exposed gaps and vulnerabilities across the global semiconductor supply system.
This shortage reflects a variety of factors — including significant pandemic-driven disruptions in both demand and supply and U.S. trade restrictions with China. Any number of causes could trigger future shortages.
For the sake of both national and economic security, the United States needs a multifaceted strategy for providing a competitive, resilient, secure and sustainable supply of semiconductors. Such a strategy must address all parts of the industry — from design, fabrication, assembly and packaging to materials and manufacturing equipment.
This does not mean national autonomy in the semiconductor sector. That goal would be neither feasible nor economically rational, given the complex global supply system and the dispersion of industry knowledge, talent and production. What it does mean is that the U.S. should cooperate closely with the European Union, Japan, Singapore, Israel and others who form core parts of its supply base.
The strategy also does not mean preventing China from purchasing or selling semiconductors on global markets, or preventing China from developing its own semiconductor industry in ways that do not violate global trade and investment rules. Weaponizing trade and investment restrictions to thwart China’s long-run semiconductor goals would be counterproductive. It will disrupt global supplies, increase semiconductor prices, exacerbate shortages and strengthen China’s resolve to move faster to achieve autonomy.
A successful approach does, however, require the U.S. and its allies to maintain a competitive edge vis-à-vis China, including through coordinated trade and investment policies to contain the growing security threats that China poses within the semiconductor supply system.
As a recent analysis by the Biden administration notes, although companies headquartered in the U.S. and Europe retain significant positions and leverage throughout the industry, most chip production has moved out of the U.S. For leading-edge chips, the U.S. and its allies rely heavily on the Taiwan Semiconductor Manufacturing Co., which has a dominant market position. For cheaper commodity chips, they increasingly rely on other producers in Taiwan, South Korea and China.
With production so heavily concentrated in Asia, supply-chain resilience is threatened by mounting geopolitical tensions with China. A top priority should be to expand the competitive production capabilities of American companies and foreign companies located in the U.S.
Fortunately, there are promising private sector plans to do this. Intel, for example, has recommitted to domestic production of leading-edge chips, and both Taiwan Semiconductor and Samsung have announced plans to build production facilities in the U.S. The EU is also committed to expanding its own semiconductor production, which, if successful, would make the global system more competitive, resilient and secure.
Beyond maintaining the chip supply, leading-edge foundries play a critical role in driving competition and innovation throughout the supply system. The state of foundry technology tells design companies what can be built now and what future capabilities they can expect.
To help expand domestic production capabilities, President Biden has called for a $50-billion investment in the semiconductor industry, and the Senate has passed a bill that includes generous refundable investment tax credits and a federal fund to match state and local fiscal incentives for investments in semiconductor production.
The effectiveness of these tools will depend on how the incentives are targeted and how the funds are allocated. There is a danger that generous fiscal support will end up subsidizing private investments that are already being planned in response to growing demand. We may find that conventional fiscal tools are not up to the task and that out-of-the-box approaches are needed. Ensuring U.S. production of chips designed and used for defense and military purposes will be a particular challenge.
Recognizing that resilient and secure chip supply also depends on innovation, the Biden administration and Senate have called for significant increases in funding for research and development. Both basic and pre-competitive research in semiconductors is an increasingly borderless process, which means that the effectiveness of U.S. investments will depend on cooperation with allies and participation by their companies.
Finally, while the U.S. continues to lead in overall semiconductor research and development, its ability to create prototypes and scale innovations has been hampered by the “lab-to-fab valley of death.” Breakthrough projects that may be viable in research labs are often prohibitively expensive to demonstrate, leaving them starved of the private investment needed to achieve scale. One way to address this problem is a public-private R&D partnership to share equipment and other costs among participants. Perhaps a similar “commons” approach could be extended to chip production as well.
While the tactics of a semiconductor policy response can be debated, the need for one is certainly not in doubt.
Laura Tyson, former chair of the President’s Council of Economic Advisers, is a professor of the graduate school at the Haas School of Business and chair of the Blum Center Board of Trustees at UC Berkeley. John Zysman, a professor of political science at UC Berkeley, is co-founder of the Berkeley Roundtable on the International Economy.
