Can the CHIPS Act Put the U.S. Back in the Game?

The push to bolster domestic semiconductor production comes as the United States lags behind Asia and China squeezes Taiwan.

By , a former intern at Foreign Policy.
Actor Erik Estrada is seen at the premiere of Warner Bros. Pictures’ Chips at TCL Chinese Theatre in Hollywood, California, on March 20, 2017.
Actor Erik Estrada is seen at the premiere of Warner Bros. Pictures’ Chips at TCL Chinese Theatre in Hollywood, California, on March 20, 2017.
Actor Erik Estrada is seen at the premiere of Warner Bros. Pictures’ Chips at TCL Chinese Theatre in Hollywood, California, on March 20, 2017. Frazer Harrison via Getty Images

U.S. President Joe Biden signed an executive order on Thursday reinforcing the implementation of the recently passed CHIPS and Science Act, which sets aside $280 billion to boost domestic semiconductor production and technology research.

The bipartisan act, signed into law this month, is aimed in part at reducing the United States’ “dependence on critical technologies from China and other vulnerable or overly concentrated foreign supply chains,” according to the executive order.

Although the move was met with some resistance in Congress, with Republicans worried that it would severely limit U.S. capabilities to spend elsewhere, the act was regarded as a key advancement in protecting the United States against shortages in the lifeblood of the modern economy. Republicans in any event warmed up to the bill out of concern for national defense amid growing fears of a Chinese invasion of Taiwan, which alone pumps out two-thirds of the world’s semiconductors.

U.S. President Joe Biden signed an executive order on Thursday reinforcing the implementation of the recently passed CHIPS and Science Act, which sets aside $280 billion to boost domestic semiconductor production and technology research.

The bipartisan act, signed into law this month, is aimed in part at reducing the United States’ “dependence on critical technologies from China and other vulnerable or overly concentrated foreign supply chains,” according to the executive order.

Although the move was met with some resistance in Congress, with Republicans worried that it would severely limit U.S. capabilities to spend elsewhere, the act was regarded as a key advancement in protecting the United States against shortages in the lifeblood of the modern economy. Republicans in any event warmed up to the bill out of concern for national defense amid growing fears of a Chinese invasion of Taiwan, which alone pumps out two-thirds of the world’s semiconductors.

Semiconductors—the materials that make up computer chips and essential components of all electronic devices—now underpin daily life. The small energy generators are critical in industries from cars to defense to household appliances, such as toasters and cellphones, and the United States doesn’t want to get left behind.


What exactly is the CHIPS and Science Act?

At its core, it’s an industrial policy aimed at protecting the United States against severe supply chain disruptions. “But it’s particularly acute in the chip sector, which is the heart of all things that we use,” said Shihoko Goto, director for geoeconomics and Indo-Pacific enterprise at the Wilson Center.

The combined CHIP and Science Act, which allocates $52 billion for chipmakers building new factories in the United States, is designed to expand semiconductor production within the boundaries of the country, decreasing its vulnerability to supply chain disruptions like the car shortage that occurred during the pandemic.

But there was also an added urgency for the United States to expand domestic chip production as tensions have mounted in Asia, particularly between China and Taiwan. Heeding warnings that China is ramping up its capabilities to invade Taiwan, bolstering U.S. semiconductor manufacturing would help ensure American industries are not captive to China if it invades the island nation.

“The vulnerability to the U.S.—including to the U.S. military, as it is incredibly dependent upon advanced semiconductors—is just way too high,” said Robert Atkinson, founder and president of the science and technology policy think tank Information Technology and Innovation Foundation. “It was really, principally, a [national] defense move.”


Can the United States reshore semiconductors with a stroke of a pen?

Not in the near future. Currently, only the Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung, in Taiwan and South Korea, respectively, have the capabilities to produce advanced semiconductor technology—used in industries and to power electric vehicles. The CHIPS and Science Act will help bolster advanced manufacturing—beyond toasters and cellphones—in the United States.

But it’s going to take some time. Asia’s supply chain has been built around chips for the last two decades, said Daniel Ives, a managing director focused on the technology sector at the Los Angeles-based private investment firm Wedbush Securities.

“Every component and supplier is in and around Taiwan, Vietnam, China, Cambodia, Malaysia,” Ives said. “You can’t just replicate that with the snap of a finger in the U.S.”

Ives said he doesn’t see any real progress in the next three to five years because of the time it would take to build domestic production. Although the CHIPS act lays the groundwork, it’s only a first step. “The CHIPS act sounds great on paper from a grandstanding perspective, but the execution will be very difficult,” he said.


What does this mean in terms of U.S.-China competition? What is China doing?

While the United States still holds the dominant share of the global chip market, China is putting an enormous amount of money into semiconductors, part of its plan to assert global leadership in a host of global high-tech industries this decade. “Their wallet is pretty unlimited,” Atkinson said. China, as the world’s fastest-growing economy, is also the largest exporter of consumer goods and has a rapidly growing consumer market.

Forty years ago, the United States was producing nearly 40 percent of the worlds semiconductors domestically. But production dropped dramatically as demand slowed after the end of the Cold War. Today, the United States only makes up about 12 percent of the global chip market, Atkinson said.

Still, a lot of that Chinese investment gets wasted; China’s technology and development capabilities lag at least a generation or two behind the United States, experts said. China has been trying for more than 40 years to build up a strong semiconductor industry, said James Lewis, senior vice president and director of the strategic technologies program at the Center for Strategic and International Studies. They havent succeeded, but theyre not giving up. “And theyre willing to spend a lot more,” he said. Chinas goal for computer chips parallels its previous aspirations for the telecommunications market, which China-based telecommunications company Huawei leads. “They want to be not dependent on the West, and they want to dominate the global market.”

But the United States doesn’t want itself or allies to fall further into China’s orbit. Europe, especially Germany, has been increasingly dependent on trade with China. And the United States wants to avoid future technology dependence on Asia. It already has enough headaches with rare earth materials and the defense sector.

“It’s meant to ensure that the United States is resilient to economic coercion,” Goto said.


Where does Taiwan come into all of this?

Taiwan, in particular, dominates the chip industry, which the small island has used to its advantage in countering China. TSMC is the biggest and most important company in Taiwan, and it is also looking to establish itself more in Southeast Asia.

“The Taiwanese decided, ‘Well make ourselves so indispensable in chip production that the Chinese wont dare to invade us,’” Lewis said.

Still, from Washington’s point of view, it’s tricky; recognizing its dependence on Taiwan—which is vulnerable to Chinese economic and perhaps military coercion—the United States and other countries around the world are looking to increase production at home.


What makes semiconductors so critical, anyway?

“The world has become digital. Digital depends on chips,” Lewis said. “They’re in toasters. They’re in your electric toothbrush. Theyre in your car.”

Expanding domestic semiconductor manufacturing is a long-term investment, Atkinson said, as he estimated that the United States could double its share of the global chip market within the next decade. “I think it will be a game-changer.”

“The CHIPs act is the beginning; it has to be,” Goto said, adding that the United States must address all phases of the semiconductor supply chain—investing in research and design, production, the use of critical minerals, and people. “What the semiconductor industry really needs is an ecosystem.”

Mary Yang is a former intern at Foreign Policy. Twitter: @MaryRanYang

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