Securing the United States’ strong position in the semiconductor sector has been at the heart of President Joe Biden’s policy agenda. The state’s strategic interest in the region is not new, but the challenges facing the Biden administration are unprecedented.
Understanding the extent of these challenges requires reviewing the history of US semiconductor dominance. The United States led the development and manufacture of semiconductors, which proved vital to its national security, throughout the postwar period. American leadership was only briefly challenged in the late 1980s by the rise of Japanese semiconductor companies. American chip producers quickly triumphed by relying on innovation rather than protectionism, solidifying US dominance in the sector by the early 1990s.
Central to this dominance was the formation of the global value chain (GVC) for the semiconductor sector. Technological development, particularly in Electronic Design Automation (EDA) software and chip design automation, has led to the emergence of phablet manufacturing focused on design and sales, with outsourcing the actual production of semiconductors. The rapid emergence of semiconductor manufacturers in East Asia that provide chip production services has allowed advanced US companies to focus on chip design while taking advantage of the relatively low-cost skilled labor in Asia.
With a strong national innovation system, US chip makers (including Broadcom, Qualcomm, Nvidia, and AMD) are rapidly entering the upper end of the value chain. With the increasing accumulated value of semiconductor design, innovation in the chip industry, and the importance of intellectual property and intangible assets in the global ICT ecosystem, US companies are quickly becoming the dominant player in the semiconductor sector. Meanwhile, semiconductor companies in East Asia and Europe, which occupied the middle part of global value chains, became suppliers to American semiconductor companies.
The dominance of the United States in the semiconductor sector is clearly reflected in the monopoly on semiconductor design software. EDA tools primarily come from three US companies: Cadence Design Systems, Synopsys, and Mentor Graphics (acquired by Siemens in 2017). Without these US-made gadgets, it would not be possible to develop modern chips, which explains why the Biden administration’s recent export control policy toward China is so effective.
It is clear that US dominance of the global semiconductor sector has been built on its strength at the higher end of global value chains. However, what the Biden administration is striving to achieve is far more ambitious than what the United States has previously accomplished.
The United States is determined to defend its absolute dominance at the top of the global semiconductor value chain, and there is a growing impetus for industrial policy to support the domestic chip industry. Industrial policy proposals have appeared 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 US Innovation and Competition Act, which includes $52 billion in federal investment for domestic semiconductor research, design, and manufacturing in the CHIPS for America Fund, is the first step in preventing Chinese dominance.
However, Biden seeks more than simply retaining leadership at the higher end of the global value chain. Since taking office in January 2021, he has prioritized both the competitiveness and security of the country’s semiconductor sector. A comprehensive 100-day supply chain review released by the White House in June 2021 outlined a vision for the United States to achieve “leadership” and “resilience” in the global semiconductor value chain.
Biden’s plan requires the United States to pay attention to the middle and lower ends of the global value chain. This strategy is currently pursued in two ways. The first is the alliance with global semiconductor companies to re-support production by building local manufacturing facilities. Intel announced a bold “IDM 2.0” strategy to reclaim its ability to provide advanced manufacturing and plumbing services to other companies. At the invitation of the US government, Taiwan Semiconductor Manufacturing Corporation (TSMC) and Samsung also announced plans to expand manufacturing facilities in the US.
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 include China. Developing the resilience of the US semiconductor supply chain is a key component of the recently announced Indo-Pacific Economic Framework (IPEF), an initiative aimed at strengthening economic cooperation with Washington’s Asian allies.
Despite its importance to national security, the United States’ ambitious plan to address the supply chain crisis is likely to disrupt its current high-end dominance in global value chains. Specifically, there are two main challenges facing the Biden administration. First, a policy of security-oriented “self-reliance” that focuses on the entire value chain will inevitably disrupt the current global semiconductor production system by incurring significant economic costs and diverting economic resources that could be used to strengthen the United States’ top position. .
To manufacture semiconductors on land, the Biden administration will first have to address problems associated with a manufacturing workforce that no longer exists in the United States and a lack of infrastructure necessary to rebuild its manufacturing capabilities.
Perhaps the most important challenge is the cost of production. The formation of semiconductor global value chains has enabled US companies at the higher end of the value chain to obtain the best production capacity at the lowest economic cost, thus leading a virtuous cycle of technological breakthroughs and innovation. This will no longer be the case when Biden sets out to remanufacture. A report from Boston Consulting Group showed that the costs associated with operating the Fab in the United States for 10 years would 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 enormous economic costs, bringing manufacturing back to the United States is easier said than done.
Second, the US strategy of supplementing domestic production by cooperating with its technical allies may further disrupt the work of global semiconductor chains. Biden has sought to form technology alliances with East Asian powers to enhance supply chain resilience. The effectiveness of this security-focused strategy, which goes against economic logic, depends on Washington’s diplomatic relations with its allies. Biden’s security supply chain restructuring efforts could first affect the relationship between US companies at the higher end of the value chain and their suppliers at the middle and lower ends.
Unease with government and capital is increasingly evident in East Asia. The Japanese government, for example, is concerned that the resurgence of US manufacturing could empty East Asia as a whole, making Japan’s ambitions to regain dominance of the semiconductor industry by 2030 unlikely. In Taiwan, TSMC founder Maurice Chang also expressed skepticism about US supply efforts.
In short, the supply chain issue is forcing the Biden administration to increase the capacity of the United States in the field of semiconductors. The ambitious project to reshape the global semiconductor sector will require national mobilization and a series of diplomatic actions that will certainly take a long time to materialize.