By Claude Barfield

The New York Times has it right: The battle in Congress over semiconductor chip funding has reached an “awkward moment.” At the time of this writing, Congress is still struggling to pass the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, which would funnel $52 billion government dollars to the semiconductor industry, including research and development funds and subsidies for new plant (fab) construction over the next five years. Both the Biden administration and industry leaders have pointed to a worldwide shortage of semiconductor chips as one of the main urgent reasons for supporting the legislation. Secretary of Commerce Gina Raimondo has asserted that the US is living on “borrowed time,” and Intel CEO Pat Gelsinger recently warned that the shortage could “drift” into 2024. The chip drought is indeed affecting vital goods and services, from automobiles and airplanes to smartphones and medical devices.

Specifically, the CHIPS Act and an accompanying investment tax credit are embedded in a controversial, massive bill that addresses US competitiveness and trade vis-à-vis China. And while at this point prospects for passage of the entire bill are dim, there is still hope that somehow the semiconductor elements can be agreed to, possibly as separate legislation. But what was once undoubted bipartisan urgency has recently been complicated by a spate of news pointing to an easing of the shortage for key chips and a possible downturn in central elements of the semiconductor industry.

To note a few specifics, while sales for relatively low-end
chips for automobiles and data centers are holding up, sales of computers and
other electronic devices (particularly those with the once-hot cryptocurrency-
and video game–related chips) are sliding substantially. These rapidly shifting
economic realities are having a big impact on major US semiconductor firms.
Intel, which remained bullish until recently, has frozen hiring in its computer
division and says that the last half of 2022 will be “a lot noisier” and
difficult than previously thought. Micron, which specializes in data storage
and memory chips for computers and smartphones, has issued a “subdued revenue outlook” for sales throughout the
rest of the year. Nvidia announced it was dialing back hiring plans as it faces a
drop-off in crypto mining and video games—two key sales areas.

All of this has led New York Times Technology Analyst
Shira Ovide to conclude, “Tossing around government money to fix chip
shortages had seemed questionable. Now it looks like a mistake.” Ovide also
acknowledges valid reasons for passing the CHIPS Act—namely, the importance of
advancing US manufacturing capability, competing with China, and beefing up US
technological prowess.

But there is also a larger issue raised by the chip shortage rationale. As amply chronicled, the history of the semiconductor industry is one of continual boom and bust. Whatever the supply situation in the immediate future may be, it is also true that major advanced nations are planning huge outlays and fab construction in the near term. This would include the United States’s projected $52 billion, plus an almost equal amount from the European Union, tens to hundreds of billions from Taiwan and Korea, and likely another sizable amount from Japan—all without counting in the vast unknown billions being spent by China. While there has been some talk of coordination regarding specific fab priorities between the US and EU—as the recent French fab decision makes clear—even here individual nation decisions may predominate.

Finally, to bring all of this back to the US, assuming the nation has spent tens of billions in fab subsidies by, say, 2030, what will happen when fabs in friendly countries and continents—Europe, Japan, South Korea, and Taiwan—start producing chips up and down the chip food chain that are possibly cheaper and likely as capable? Will we allow “friend-shoring” and competition with subsidized US-based fabs—or revert to Trump-esque protectionism?

The point is, after a number of advanced nations have poured
large sums of subsidies into the semiconductor industry, there will likely be
new challenges to trade.

The post The Politically “Awkward” Easing of the Chip Shortage appeared first on American Enterprise Institute – AEI.