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The US Is No Longer on Track With Computer Chips

American decision-makers are unsure of how to proceed with a semiconductor strategy.

The US Senate approved a bill in June 2021 allocating more than $50 billion to boost semiconductor production. At the same time that rising friction with China heightened national security worries regarding technology, pandemic-related shortages in computer chips highlighted the US’s susceptibility to supply chain disruptions. For officials from all political parties, increasing domestic production of components with such significant economic and strategic value seemed like a sure-fire way to win.

The Chips Act’s core, the money, has still not been used more than a year later.

According to Senate Minority Leader Mitch McConnell, the Democrats’ proposals for spending on climate change and other causes must be abandoned before his party will back a bill to do so. A more condensed version from the Democrats, whose larger plan has already stalled, is being prepared for a vote soon, and GOP leadership is willing to back it.

Given how Congress has performed recently, it’s a reasonable bet that the legislative momentum could possibly give way to another round of inertia. In any case, the delays and ambiguity have demonstrated that Washington is not ready to act with the urgency that is consistent with its promises.

The rest of the world is moving on with this, says Bruce Andrews, chief government affairs officer at Intel Corp. Other countries are aggressively recruiting. They’re providing incentives. They’re rolling out the red carpet.

Despite being literally named after the material that semiconductors are built of, Silicon Valley is no longer where the majority of the action in the chip industry lies. The domestic production of chips has decreased from 37% in the 1990s to about 12% now, and the US is unable to mass produce the most cutting-edge components. The majority of Intel’s US production is done in Oregon, Arizona, and New Mexico. Additionally, it intends to construct a sizable facility in Ohio. However, Asian powerhouses like Samsung Electronics Co., which last year surpassed Intel as the largest chipmaker by revenue, and Taiwan Semiconductor Manufacturing Co., which is on target to overtake Intel in 2023, are the industry’s emerging stars.

According to Intel Chief Executive Officer Pat Gelsinger, the governments of China, Japan, South Korea, and Taiwan have all prioritized localizing production and are providing incentives that make it at least 30% less expensive to establish operations in these nations than in the US. The majority of advanced industry has moved to Asia because to these incentives. Additionally, the European Union is developing a fresh set of incentives for chipmakers.

Comparable to their counterparts in Asia and Europe, US policymakers have never been as passionate about pursuing a full-throated industrial policy. Officials who lean toward the center or the right proclaim faith in the ability of the market to allocate resources and are reluctant to take actions that can be seen as interfering with it.

Although the left is not opposed to government action, it is against corporate welfare policies: Robert Reich, a former US secretary of labor, recently called the Chips Act “pure extortion.”

The US is attempting to enhance production of its own cutting-edge chips while also working to prevent China from becoming so proficient that it can produce the most cutting-edge semiconductors on its own. Officials there also appear to be working in opposition to one another.

US policy has made it a priority to deny Chinese enterprises access to the resources needed to manufacture cutting-edge technology. When it forbade the supply of US components to Huawei Technologies Co. in 2019, the US effectively deployed this weapon against the corporation.

More of these limits have now been put in place. The largest chipmaker in China, Semiconductor Manufacturing International Corp., and more than 60 other Chinese corporations were added to the US Department of Commerce’s “entity list,” which is a list of organizations that could endanger national security, in December 2020. Being on the list prevented access to the equipment required to produce more sophisticated chips. Companies receiving federal support are prohibited from investing in China and Russia, according to a draft of the measure senators are now voting on.

The chip sector is supportive of manufacturing subsidies but less so of limits on the companies it can do business with.

According to data from industry organization Semi, Chinese orders for overseas providers of chip fabrication equipment increased by 58% in 2021, making China the largest market for those items for the second year in a row. Broad limits have been fiercely resisted by chip equipment producers and certain semiconductor producers, who claim that doing so will reduce their capacity to fund future research and hurt US competitiveness. According to their argument, China won’t be motivated to invest the time and money necessary to develop the capacity to produce the US technology on its own if it can continue to obtain it.

Instead of pursuing more extensive restrictions against Chinese companies, the Commerce Department has absorbed this argument and is now only concentrating on the entities that are currently on the entity list. By doing thus, the department successfully positions these limitations as a means of punishing bad actors rather than a tool for implementing policy in the context of the larger US-China rivalry.

I don’t think anyone would want the US government to dip into the private-sector supply chain and try to micromanage it if nothing wrong is happening, Secretary of Commerce Gina Raimondo said.

Hawks claim that this strategy undercuts the objective of stopping China from producing cutting-edge chips.

It’s one of the industries that can’t compete via free-market notions, says Florida Senator Marco Rubio.

Putting pressure on rivals based in allies to stop providing chipmaking technology to China is one method to resolve concerns from US corporations. For example, the US has pushed the Netherlands to forbid ASML Holding NV from supplying China with the machinery required for older chips. However, the strategy for chip diplomacy has been erratic, with the pursuit of several agendas resulting in stagnation. By acknowledging that it has an issue with semiconductors, the US has made the first step toward a solution. Years later, it’s having problems progressing to phase two.

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