Securing the United States’ strong position in the semiconductor sector has been at the center of U.S. President Joe Biden’s policy agenda. The country’s strategic attention in the area is not new, but the challenges facing the Biden administration are unprecedented.
An understanding of the extent of these challenges requires reviewing the history of U.S. dominance in semiconductors. The United States has led the development and manufacturing of semiconductors, which has proven vital to its national security, throughout the post-war period. U.S. leadership was challenged only briefly in the late 1980s by the rise of Japanese semiconductor firms. U.S. chip producers quickly won out by relying on innovation rather than protectionism, solidifying U.S. dominance in the sector by the early 1990s.
Central to this dominance was the formation of a global value chain (GVC) for the semiconductor sector. Technological development, particularly in electronic design automation (EDA) software and chip design automation, led to the emergence of fabless manufacturing that focused on design and sales, while outsourcing actual production of semiconductors. The rapid emergence of East Asian semiconductor manufacturing firms that provide chip production services has allowed advanced U.S. firms to focus on chip design while taking advantage of relatively low-cost skilled labor in Asia.
Through a strong national innovation system, U.S. chipmakers (including Broadcom, Qualcomm, Nvidia, and AMD) quickly entered the top end of the value chain. With the growing value accruing to semiconductor design, chip industry innovation, and the importance of IP and intangible assets in the global ICT ecosystem, U.S. firms quickly became the dominant players in the semiconductor sector. Meanwhile, East Asian and European semiconductor companies, which occupied the middle segment of the GVC, became suppliers to U.S. semiconductor companies.
U.S. dominance in the semiconductor sector is clearly reflected in a monopoly on semiconductor design software. EDA tools come mainly from three U.S. companies: Cadence Design Systems, Synopsys, and Mentor Graphics (acquired by Siemens in 2017). Without these U.S.-made tools, it would not be possible to develop modern chips, which explains why the Biden administration’s latest export control policy vis-à-vis China is so effective.
It is clear that U.S. dominance of the global semiconductor sector was built on its strength in occupying the higher end of the GVC. However, what the Biden administration is seeking to achieve is far more ambitious than what the U.S. previously accomplished.
The United States is determined to defend its absolute dominance at the top of the semiconductor GVC, and there is growing momentum for industrial policy to support the domestic chip industry. Industrial policy proposals have been emerging in Congress since the end of the Trump administration, and in mid-2020 several bills were proposed to provide financial incentives to stimulate the semiconductor industry. The U.S. Innovation and Competition Act, which includes $52 billion in federal investments for domestic semiconductor research, design, and manufacturing provisions in the CHIPS for America Fund, is regarded as the first step in preventing Chinese dominance.
However, Biden seeks more than just retaining leadership in the high end of the GVC. Since taking office in January 2021, he has prioritized both the competitiveness and security of the country’s semiconductor sector. A 100-day comprehensive supply chain review released by the White House in June 2021 outlined a vision for the U.S. to achieve both “leadership” and “resilience” in the global semiconductor value chain.
Biden’s plan necessitates the U.S. to pay attention to the middle and lower ends of the GVC. This strategy is currently being pursued in two ways. The first is to ally with global semiconductor firms to re-shore production by building domestic manufacturing facilities. Intel announced a bold “IDM 2.0” strategy to regain its ability in advanced manufacturing and offer foundry services to other companies. At the urging of the U.S. government, both Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung have also announced plans to expand manufacturing facilities in the United States.
The second is the Biden administration’s intention to work with “like-minded” countries to build a more reliable semiconductor supply chain that does not involve China. Developing the resiliency of the U.S. semiconductor supply chain is a major component of the recently announced Indo-Pacific Economic Framework (IPEF), an initiative designed to promote economic cooperation with Washington’s Asian allies.
Despite its significance for national security, the United States’ ambitious plan to address the supply chain crisis is likely to disrupt its current high-end dominance in the GVC. Specifically, there are two major challenges facing the Biden administration. First, a security-oriented “self-reliance” policy that focuses on the entire value chain would inevitably disrupt the current global semiconductor production system by incurring significant economic costs and diverting economic resources that could be used to strengthen the U.S. position at the top end.
To onshore semiconductor manufacturing, the Biden administration will first have to address the problems associated with a manufacturing workforce that no longer exists in the United States and the lack of infrastructure that is essential for rebuilding its manufacturing capacities.
Perhaps an even more critical challenge is production cost. The formation of the semiconductor GVC has enabled U.S. companies at the higher end of the value chain to obtain the best production capacity at the lowest economic cost, thus driving a virtuous cycle of technological breakthroughs and innovation. This will no longer be the case when Biden sets out to bring manufacturing back. A report by the Boston Consulting Group shows that the costs associated with operating a fab in the U.S. for 10 years will be about 30 percent higher than in Taiwan, South Korea, or Singapore, and about 37 percent to 50 percent higher than in China. Given the tremendous economic costs, bringing manufacturing back to the United States is easier said than done.
Second, the U.S. strategy of supplementing domestic production through cooperation with its technological allies could further disrupt the operation of the semiconductor GVC. Biden has looked to form techno-alliances with East Asian powerhouses to strengthen supply chain resiliency. The effectiveness of this security-centered strategy, which runs counter to economic rationales, is predicated on Washington’s diplomatic ties with its allies. Biden’s security-first supply chain restructuring efforts could affect the relationship between U.S. companies at the top end of the value chain and their suppliers at the middle and lower ends.
The uneasiness of government and capital is increasingly evident in East Asia. The Japanese government, for example, is concerned that the return of U.S. manufacturing could hollow out manufacturing in East Asia as a whole, making Japan’s ambitions to regain its semiconductor industry dominance by 2030 unlikely. In Taiwan, TSMC founder Morris Chang has also expressed skepticism about the U.S. onshoring efforts.
In short, the supply chain issue is forcing the Biden administration to overstretch U.S. capacity in semiconductors. The ambitious project to reshape the global semiconductor sector will require national mobilization and a series of diplomatic actions that will surely take a long time to materialize.