On August 9, 2022, President Biden signed the CHIPS and Science Act into law, stating that it would make “historic investments that poise U.S. workers, communities, and businesses to win the race for the 21st century.” Instead of subsidizing chip production, however, the Biden administration should increase economic freedom and thereby improve the comparative advantage of American businesses in all sorts of manufacturing. Moreover, increasing economic freedom is more socially just than taxing the poor to subsidize the rich.
The CHIPS and Science Act will direct $280 billion in spending over the next ten years: $200 billion towards scientific research and development (R&D) and commercialization, $52.7 billion towards semiconductor manufacturing, R&D, and workplace development, and $24 billion towards tax credits for new semiconductor manufacturing facilities.
Semiconductors are essential inputs into automobiles, phones, laptops, and many other key consumer and military products. Thousands of firms, mostly in North America and East Asia, specialize in various aspects of the design, manufacture, or assembly of these tiny 10 to 14 nanometer chips. American firms dominate the industry segment called “Fabless,” that requires intensive R&D, core intellectual property (IP), and chip design. They also dominate the manufacture of the equipment used to forge the chips. Furthermore, by one metric, American firms control almost half of the overall global semiconductor market, while China lags far behind with a market share of merely 5 percent.
Eddie Bernice Johnson, chairwoman of the House Committee on Science, Space and Technology, stated that the CHIPs Act was created with “the needs of each and every American in mind.” It remains unclear, however, why American citizens need to subsidize semiconductor companies like Intel and Nvidia, which achieved annual revenues of $79 billion and $16 billion in 2021, respectively.
National security concerns could justify the massive subsidies, because manufacturers operating in China dominate the semiconductor manufacturing segment; Adam Smith himself argued that free trade should be suspended whenever “some sort of industry is necessary for the defence of the country.” China’s dominance of the semiconductor manufacturing market, however, is a modest 35 percent, and the threat it poses is not clearly worth $280 billion while the US economy struggles with high inflation and anemic and uneven aggregate output.
In fact, China is the world’s top importer of semiconductors, importing a whopping $378 billion worth in 2020. However, last month the Biden administration issued “prohibitions on exports to China of semiconductor chips and other high-tech equipment,” a ban which has been described as “strangling with an intent to kill.” Additionally, in the first half of 2022 alone, China imported $79.4 billion USD worth of integrated circuits (ICs) from Taiwan, which holds more than 90 percent of the manufacturing capacity for advanced semiconductors. Consequently, China’s dependency on Taiwan for 38 percent of its IC imports, coupled with the pressure from the US chip export ban, has heightened concerns that the Biden administration may be attempting what Jordan Schneider called “industry-wide decapitation.”
Of course America’s “decapitation” attempt may induce China to try to seize Taiwan militarily, just as its economic embargoes forced Japan into war in 1941. Even if China manages to take over or destroy Taiwan’s chip manufacturers, however, American companies could begin to increase manufacturing and assembling of chips in the United States, which already accounts for 12 percent of the world’s semiconductor manufacturing capacity. Its Fabless industry will still be able to design chips and the chip making machines already built in the US could soon start churning out chips, which are created mostly from energy and readily available silicon (Si 14).
American companies do not have the lead in the manufacturing of semiconductors at present because they do not have a comparative advantage in doing so. In other words, American companies allow companies in other countries to dominate in chip-making so that US firms and workers can engage in more profitable activities in which they do hold a comparative advantage. That would quickly change if war or major supply chain disruptions occurred.
If, however, the Biden administration wants to ensure that American companies produce chips in America, it has only to increase economic freedom at home – stabilize the value of the dollar, make it easier for companies to hire and fire workers, reverse the freedom-reducing policies it has implemented over the last two years, and credibly commit to supporting, and not undermining, American businesses and workers.
Not only does increasing economic freedom cost far less than subsidizing chip manufacturing, it will aid US manufacturers in all areas, including the increasingly important telecom sector. Moreover, increasing economic freedom is more socially just than expanding corporate welfare because it does not divert precious resources away from people of color and members of other disadvantaged groups. We would hate to see the Biden administration’s all-important ESG score decline for no good reason.