Semiconductors and Security

Many people know that China has spent hundreds of billions of dollars to build its own semiconductor industry and has committed billions more. Taiwan is spending $120 billion to build 20 new plants, including four cutting-edge semiconductor fabs, and is already breaking ground for the new plants. Japan and Korea have approved subsidies. Even the European Union, in its own Chips Act, a copy of U.S. legislation, has approved $46 billion in subsidies, and member states like Germany have allocated billions more. Only one country lags behind: the United States. This makes semiconductor funding a national security issue.
Congress, to its credit, passed two Chips Acts. Unfortunately, the two bills have major differences that need to be resolved in conference, and there are substantial disagreements. The first is the question of investment in China. Some legislators believe that any company that gets Chips Act funding should forswear future investment in China. This does not make any sense for national security. A Cold War analogy is misleading; in the Cold War, there was a clear bifurcation between democracies and communists, an “Iron Curtain,” with very little trade or exchange between them. There were two separate blocs. This bifurcation cannot be replicated now with China. The U.S. and Chinese economies are too closely intertwined, the global market is too interconnected, and other countries will not boycott low-risk sales or investments in the Chinese market.
Interdependence with China means there are transfers from the United States should be allowed to continue. Sales of commodity chips or even some production in China pose no national security risk. U.S. export controls prevent the transfer of the advanced manufacturing equipment needed to build a cutting-edge fabs in China. There are other parts of chip production that are neither advanced nor threaten national security, such as final-stage processes like testing and packaging. These benefit from being located close to Chinese customers (and China is the largest chip consumer in the world). U.S. companies should be allowed to sell chips and make investments that do not create risk by directly supporting China’s chip industry (and most do not) as a way to use Chinese money to strengthen America’s own chip industry. Blocking new investments only hurts U.S. firms and cedes the China market to others.      
The second difference is over various conditions attached to subsidies in the House bill. The House bill has added provisions on funding levels, trade, investment, and labor. These may all be worthy aspirations and if U.S. subsidies were the only source of funding or if semiconductors were not made in a global supply chain distributed across many countries, companies might accept these conditions. Other countries only impose conditions to guarantee the funding will be used to create new plants and jobs in their countries, and since those other countries are offering money with no strings, it makes them more attractive as a location for new fabs. The House conditions lower the value of any subsidy and make it more economical for companies to build somewhere else.  
Passing the Chips Act cannot be delayed until next year—other governments are offering money now. Fabs take three years to build. Chip companies must make decisions soon on where to build to meet increasing demand and remedy the chip shortage, and they will build outside the United States if that is where the subsidies are. The main reason the U.S. share of global chip fabrication has dropped to 12 percent is the United States’ failure to subsidize when other nations show no such restraint. The economics of the industry mean that if the Chips Act does not pass soon, the opportunity to invest in chip-making capacity in the United States will need to wait years for another cycle of investment, the price of catching up will be higher, and it may not even be possible to avoid losing this industry (just as the United States lost telecom manufacturing). The United States wants to avoid a situation where it ends up more dependent on foreign sources of supply for semiconductors, including an increasingly vulnerable Taiwan.
Some object to giving subsidies to wealthy companies. This was not a problem during any of the twentieth-century contests with authoritarian regimes and helps explain why the United States won those contests. In World War II, the government built factories and plants to create the manufacturing capability to win the war. Once the war was won, these plants were sold to the private owners, often at nominal prices. The government and Congress of 1941 felt a clear sense of urgency and recognized the threat. That sense of urgency in the contest today with China sometimes seems to be lacking. Congress needs to pass the Chips Act before the August recess or the United States will fall further behind in chips. This would threaten both U.S. security and its economy.
James A. Lewis is senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, D.C.  
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).  
James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program