CHIP-ing Away: The CHIPS Act and US-China Tech War (Marcellus Policy Analysis)

By Benie Kwarteng, Spring 2023 Marcellus Policy Fellow

The United States must change its strategy in its technology competition with China. At the core of the US-China tech war and geopolitical tensions are advanced semiconductor chips. Since the invention of integrated circuits (commonly known as semiconductors), the United States has been a global leader in the industry for decades. However, since the 1990s, the American share of global manufacturing capacity has declined from 37 percent to 12 percent today. As the chip-making process became more complex and expensive, fabless manufacturers– companies without fabrication plants (or fabs)- emerged as an alternative. Influenced by foreign direct investment (FDI) and cheap labor, U.S. companies in the 1960 and 1970s took advantage of incentives offered by manufacturing companies in East Asia and outsourced the manufacturing and assembly process.

Currently, semiconductors are the fifth-largest export of the United States, accounting for 48 percent of the global market share. At the same time, the United States remains very dependent on East Asia for manufacturing. This reliance led the Biden Administration to spearhead the CHIPS Act of 2022 to revitalize onshore manufacturing in an effort to attain supply chain resilience.

However, this paper argues that the CHIPS Act of 2022 is not enough to revitalize manufacturing and obtain supply chain resilience. In fact, relying solely on the CHIPS Act detracts from the main U.S agenda behind supply chain resiliency. The CHIPS Act of 2022 focuses mainly on boosting the supply of chips for critical sectors such as defense, health care, and telecommunications, but it does not address the demand side of the market, which is driven by consumer electronics, cloud computing, and artificial intelligence (AI). Given the ubiquitous nature of semiconductors, the CHIPS Act greatly ignores national security concerns and broader US-China competition. This paper suggests the U.S. should employ the following measures to mitigate the weaknesses of the CHIPS Act:

1. Address the industry’s talent shortage.
2. Remove unnecessary barriers and conditions on CHIPS Act incentives.
3. Introduce parallel policies in demand market sectors like AI and consumer electronics.
4. Increase the investment budget for the CHIPS Act to gain industrial capacity.
5. Allyshore with industrial giant economies like the Netherlands, Taiwan, and South Korea.