America is at risk of losing its strategic advantage in technological innovation. One warning sign is in semiconductors, the silicon chips in everything from cell phones to satellites to jet planes. Recently, the hedge fund Third Point warned that US semiconductor giant Intel, the only US-based company that both designs and manufactures leading-edge logic chips domestically, was in trouble. The Biden administration faces a test: Can it craft an industrial policy as part of our competitive response to China?
While Intel has made some moves in recent days, policymakers and business leaders need to forge a sound industrial policy with a “buy American” standard and incentives to keep the manufacturing and innovation of critical goods like semiconductors on shore. The goal of this policy should not be ending trade, but building resilience in strategic sectors.
Beijing’s state capitalism tilts the playing field to its advantage. China, still categorized a developing country by the World Trade Organization, seeks to achieve self-sufficiency in critical areas, including semiconductors, by 2025. Since 2014, China has invested nearly $150 billion in its semiconductor industry. Most recently, its largest chipmaker received a $2.2 billion injection of capital. While still behind Taiwan, South Korea, and the United States, some predict that China will be independent in 7nm semiconductor production — an important technical achievement — in two years.
Similarly, Taiwan and South Korea are home to the world’s largest chip manufacturers — Taiwan Semiconductor Manufacturing Corporation (TSMC) and Samsung — and their governments have invested heavily in those capabilities. Singapore and Israel are also developing domestic semiconductor manufacturing capabilities with government support.
Economists are rightly skeptical of industrial policies, arguing that markets allocate capital than governments. However, a bipartisan consensus supports an exception for the defense industrial base. While jet fighters might be produced more cheaply abroad, we pay the premium to produce domestically to assure access in the event of conflict. Semiconductors and other key technologies should also be defended on national security grounds.
Despite Intel’s flaws, the loss of its manufacturing capability would put U.S. national security at great risk, since semiconductor chips occupy a vital role in commercial and military supply chains. Intel’s competitors are located in East Asia. This means that in the event of conflict, those supply chains could be cut off by an adversary. In such a scenario, America would require some semblance of an advanced semiconductor manufacturing capability from which to rebuild.
The 2021 National Defense Authorization Act (NDAA) took steps toward protecting and incentivizing domestic chip production. It contained provisions of the bipartisan American Foundries Act and the CHIPs Act, both of which authorized funding for microelectronics fabrication and advanced packaging, particularly those for specialized microelectronics for military applications. In incorporating these bills into the NDAA, funding was, unfortunately, reduced. Congress must now follow through with appropriations so that the semiconductor provisions can be implemented. and ensure that funding for research and development is not reduced.
Also, the Defense Department should take up Intel’s offer to build a commercial foundry in partnership. Foundries are expensive — costing from $10-15 billion. But given that microchips undergird virtually all of defense capabilities, spending a little over one percent of the defense budget spread over several years seems a reasonable choice. A single foundry will not solve America’s semiconductor challenges, but it would help build resiliency for at least some high-end chips.
The Trump Administration’s support for the construction of a TSMC factory in Arizona was a step toward an onshoring manufacturing capability. However, employees need to be American citizens, so that the knowhow to produce these chips is retained domestically. As Harvard’s Willy Shih has argued, outsourcing of sophisticated manufacturing capabilities has harmed U.S. innovation. And resiliency is not merely about production, but also innovation.
Moreover, many are worried that the Arizona plant’s 5 nanometer chips will be quickly supplanted by 3 nanometer chips slated to be produced in Taiwan. If the TSMC plant cannot ensure that America will benefit from domestic knowhow and that the new facility is at the cutting edge, it would make more sense to invest in American manufacturers like Intel and into more R&D.
Intel’s woes are just one sign of weaknesses after decades of outsourcing and the rise of a peer competitor. Telecommunications, space and pharmaceuticals face similar threats. Hyper-optimization of industries for financial returns has its place, but for industries critical to national security, we must prioritize maintaining our resiliency by protecting our national security innovation base.
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