How are Washington and Beijing Utilizing Industrial Policy to Bolster Domestic Semiconductor Manufacturing?
'New Perspectives on Asia' highlights the research of junior CSIS staff and interns on issues that are quietly shaping the world's most dynamic region.
Starting in early 2021, Washington and Beijing renewed efforts to strengthen their self-sufficiency in the semiconductor industry as a hedge against worsening geopolitical tensions and global chip shortages. In the short term, both countries’ industrial policy initiatives have spurred massive private sector investments in local chip manufacturing. The full implications of these policies and investments will be revealed when the new chipmaking plants become operational in two to three years.
Washington Reshores Chip Manufacturing
In January 2021, Congress passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021. Through its investment and subsidies programs, the CHIPS for America Act will promote the research, development, and manufacturing of domestic semiconductor chips. Although most lawmakers agree on the need to strengthen domestic chip manufacturing, Congress has yet to finalize a funding bill for the CHIPS for America Act.
In June 2021, the Senate passed the U.S. Innovation and Competition Act (USICA), which allocated $250 billion in government spending for technology R&D and $52 billion to encourage domestic chip manufacturing. The House passed its own funding package in February 2022, titled the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (America Competes) Act, which included the same $52 billion in grants and incentives for the domestic semiconductor industry. However, the House bill allocated $350 billion in total federal funding and focused broadly on global economic challenges—such as climate change, human rights, and inequality—rather than exclusively on competition with China. These differences are a point of contention for Republicans who accuse House Democrats of attempting to sneak portions of the failed $2 trillion Build Back Better initiative into a supposed China-focused semiconductor competitiveness bill.
Congressional efforts to reshore chip manufacturing have also been complemented by executive branch initiatives from the Biden administration. On February 24, 2022, the White House released its Plan to Revitalize American Manufacturing and Secure Critical Supply Chains, which aims to encourage domestic production of critical items and reshore strategic supply chains. Semiconductors are designated as a critical export sector and will receive financing under the plan’s Export-Import Bank (EXIM) Domestic Manufacturing Initiative.
Washington’s clear signals on promoting domestic chip manufacturing since early 2021 has attracted strong private sector investment. In June 2021, Taiwan Semiconductor Manufacturing Co (TSMC) began construction on a $12 billion chipmaking plant in Arizona that will specialize in the production of advanced 5 nanometer chips. Intel followed suit in September 2021 by breaking ground on two new chip plants in Arizona totaling $20 billion in investments. Samsung joined its competitors in November 2021 by announcing plans to build a $17 billion chip plant in Texas. In January 2022, Intel announced an additional $20 billion investment in two new Ohio chip plants, citing strong consumer demand amid the ongoing chip shortage and favorable local subsidy programs.
Beijing Pushes Semiconductor Self-Sufficiency
The origins of Beijing’s latest semiconductor self-sufficiency drive can be traced back to June 2014, when the government announced its Guidelines to Promote the National Integrated Circuit Industry, which called for a $150 billion investment in semiconductors. The National Semiconductor Fund—set up by the Ministry of Finance and China Development Bank Capital to facilitate state investment—allocates around two-thirds of its investments in chip manufacturing and maintains minority stakes in over 70 companies. In May 2015, Beijing announced its Made in China 2025 (MIC 2025) initiative, which—among other objectives—aimed to raise the local content of semiconductor chips to 40 percent by 2020 and 70 percent by 2025. However, despite strong government investments, domestic production of total Chinese chip consumption rose from 10 percent in 2016 to only 16 percent in 2021. These underwhelming results—combined with tightening U.S. export restrictions and supply chain disruptions during the COVID-19 pandemic—prompted Beijing to renew its semiconductor push.
In March 2021, the National People’s Congress (NPC) approved the 14th Five Year Plan, which elevated technological development to a national security issue, increased R&D spending by 7 percent over the next five years, and identified semiconductors as a critical technology. Soon afterwards, the government announced that it would waive import taxes on raw materials and equipment parts for domestic producers of logic and memory chips with processing nodes of 65 nanometers or smaller. China’s domestic semiconductor industry received another boost in January 2022, when the State Council published the 14th Five Year Plan on the Digital Economy to enhance basic research capabilities in strategic sectors, improve self-sufficiency, and strengthen supply chain security in key industries.
Following the announcements of the 14th Five Year Plan and Plan on the Digital Economy, public and private sector investors embarked on an unprecedented chip spending spree. Local governments also sprang into action to attract new chip making plants. In January 2022, the Shanghai municipal and Zhejiang provincial governments each announced subsidy programs and preferential tax policies to cement their strong positions in China’s chip industry. That same month, the National Development and Reform Commission (NDRC) and Ministry of Commerce announced plans to establish an international sourcing platform for the semiconductor industry in Shenzhen.
Similar to the case in the United States, China’s recent semiconductor push has generated considerable private sector investment. In July 2021, TSMC confirmed plans to expand its Nanjing fab with 28 nanometer volume production set to begin in the second half of 2022. Semiconductor Manufacturing International Corp. (SMIC) announced plans in September 2021 to build a new 56 billion RMB ($8.87 billion USD) 28 nanometer chip plant in Shanghai. In October 2021, SK Hynix started construction on a new 2 billion RMB ($310 million USD) “China-Korea Integrated Circuit Industrial Park” in Wuxi, Jiangsu province. That same month, SMIC finalized a deal with the Shenzhen government to build a new chip plant using the 28 nanometer process nodes. In February 2022, Mitsubishi Gas Chemical announced plans to construct a new plant in China which will manufacture cleaning agents that remove the fine particles produced during the chipmaking process.
In the past two years, Washington and Beijing have both heavily utilized industrial policy tools (e.g., government subsidies, business incentives, R&D funding, etc.) to boost domestic semiconductor manufacturing. In response, the private sector has enthusiastically built a host of new chip fabrication plants (commonly called “fabs”), most of which will be operational starting in 2024. These enormous investments face significant risks stemming from geopolitics, demand fluctuations, and extreme weather events. However, long-term global semiconductor demand will remain strong given the importance of chips in Bitcoin mining, artificial intelligence, quantum computing, electric vehicles, and other frontier technologies. Moving forward, the market should expect further chip investments by the United States and China, as well as other industry players such as Japan, South Korea, Taiwan, and the European Union.
Justin Feng is a research intern with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
'New Perspectives on Asia' 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).