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The U.S. and China continue to battle it out over semiconductor manufacturing as part of the larger tech war between the two countries. While the Semiconductor Industry Association (SIA) estimates U.S. firms account for 45 to 50 percent of annual semiconductor sales worldwide, their share of global semiconductor manufacturing capacity has declined from 37 percent in 1990 to 12 percent in 2020. Asian countries meanwhile account for nearly 75 percent of global semiconductor manufacturing capacity today. Importantly, China is projected to lead the world in manufacturing capacity by 2030, more than doubling its capacity from 2010 and 2030.

Going forward, only 6 percent of new capacity is expected to be located in the U.S., under current market conditions. That’s not acceptable. As we’ve seen this year, during tough times like pandemics and wars, countries with factories producing crucial goods prioritize their own needs ahead of foreign customers. Moreover, it takes time and money to build up alternative sources of supply. That’s why N95 masks, a “middle-tech” product, are still in short supply. In the event of a global crisis that cut off semiconductor supplies from Asia, it could take years to make up the difference at home.

It should be noted that semiconductors, more than data, are the oil of the 21st Century. By allowing semiconductor production to drift overseas, the U.S. is putting itself in the uncomfortable position of allowing foreign countries to control an essential input to the economy and defense sector.

Investments in semiconductors have huge externalities for the rest of the economy. PPI has often talked about the need to apply tech and advanced communication capabilities like 5G to the physical industries, in order to boost productivity and create new cognitive-physical jobs. But these gains won’t be possible without a steady and reliable source of semiconductors. 

In terms of defense, relying on a potential rival as a major source of key semiconductors would present an important national security issue. It’s essential for the U.S. to retain a substantial semiconductor production base that can be expanded as needed in a crisis. 

The rise of Asian capacity can partly be attributed to cheap capital and government incentivization of the industry, including land, housing, telecommunications, utilities, logistics, regulatory relief, expedited permitting, and special economic zones and science parks. In other words, the workings of the market have been distorted by government policy. 

In order to match these foreign advantages, a bipartisan group of legislators have sponsored the Creating Helpful Incentives to Produce Semiconductors for America Act, known as the CHIPS for America Act. Introduced in the Senate by Sens. Warner (D-VA), Sinema (D-AZ), Cornyn (R-TX), Risch (R-ID), and Rubio (R-FL) and in the House by Reps. Matsui (D-CA) and McCaul (R-TX), the proposal would provide a 40 percent refundable investment tax credit for semiconductor equipment and facilities, as well as billions more for research, development, and production incentives over the next decade.

The SIA estimates a $20 to $50 billion federal program of additional grants and tax incentives for new manufacturing facilities built over the next 10 years would be enough to reverse the declining trend of U.S. semiconductor manufacturing over the last three decades. The CHIPS for America Act would be a down payment on this amount, helping the U.S. re-secure its foothold in semiconductor manufacturing and unlocking the next wave of economic growth.