Indian Council of World Affairs

Introduction

Semiconductors are fundamental to all technologies such as quantum computing, artificial intelligence (AI) and fighter jets and they form an essential part for all modern industrial activities. In certain high technology sectors, governments are seen as the first supporter and they encourage technological innovation through grants for research and development (R&D) and by bringing policies and regulations.

In this context, the paper looks at the drivers for the United States (US) to pass the Creating Helpful Incentives to Produce Semiconductor (CHIPS) and Science Act and the reactions to the Act from within the US and leading countries involved in chip production.

American Semiconductor Industry

Post-World War II, the US became the forefront country in R&D, design and manufacturing of semiconductors and continues to remains the global leader when it comes to R&D and Chip design.[i] However in the manufacturing domain, the US has lost its position.

According to a report produced by Congressional Research Service (CRS), in 1990, the US accounted for 40% of global semiconductor manufacturing but this number has since come down to just 10% in 2020.[ii] The primary reason behind this drop is many chip manufacturing companies relocated to East Asia. There were various factors for this shift such as lower operational cost in this region, cost effective labour and subsidies provided by governments for the production of semiconductors. The pivot to East Asia also coincided with increase in demand for semiconductors from within this region as a result of growth of information and communication technology (ICT) industry. Due to these policies and technological innovation, countries like Taiwan and South Korea have emerged as the two largest chip producing countries, with the most advanced chip manufacturing capacity. South Korea accounts for 8% of global manufacturing with Taiwan producing close to 90% of chips for the global market.[iii] In recent years, China has also taken an active interest in expanding its semiconductor industry.

Given the importance of semiconductors for their use in emerging technologies like AI and supercomputers, the continued decline of chip manufacturing and technology in the US coupled with China’s growing interest in this domain, policymakers in the US have expressed concerns over the long-term security implications.

Chinese Semiconductor Industry

Around 60% of global demand for chips comes from China as it is a global hub for electronics manufacturing. These chips are either imported or manufactured by foreign firms located in China. The Chinese government is trying to develop an indigenous semiconductor sector and its industrial policies aim to establish global leadership in semiconductor industry by 2030.[iv]

In China, there are many semiconductor foundries but they are at least one and half generations behind than other foreign firms. All advanced memory producers are foreign owned and Chinese manufacturing of advanced logic chips is currently far behind the state-of-the-art technology used in the US and Taiwan.[v] Chinese semiconductor companies mainly manufacture generic chips and there are no domestic firms producing at commercial volumes.

According to CRS, China is looking for an effort to establish its domestic industrial base through collaboration, acquisition, joint ventures, open-source technology platforms for chip design, purchasing US equipment and software tools. To achieve this, China has acquired companies who are well established in this sector including those based in the US such as an American chip company OmniVision was acquired by a consortium of Chinese investors.[vi] The US is concerned that if these efforts were successful, they would threaten the growth of US and other foreign companies and shift the centre of global chip manufacturing to China and have long term economic and military implications for the US.

CHIPS and Science Act

In August 2022, President Biden signed Creating Helpful Incentives to Produce Semiconductor (CHIPS) and Science Act into law. According to the White House statement, the Biden Administration implemented this Act to increase domestic production, secure American semiconductor supply chains and create American jobs.[vii] This Act provides $52.7 billion in the form of direct funding, government loans and loan guarantees for R&D, chip production and human resources development. This is one of the biggest investments from the US federal government in one industry and shows the deep-rooted concern about high reliance on foreign chips.[viii] For manufacturing incentives, the Act provides $39 billion, which includes $2 billion for production of legacy chips[ix], $13.2 billion for workforce development and R&D and $500 million for international information communications technology security and semiconductor supply chain activities.[x] Secretary of Commerce Gina Raimondo said that this Act will ensure that world’s most advanced chips are manufactured on American soil with strong supplier ecosystem and facilities of R&D for innovating better technologies.

The crux of this is creation of National Semiconductor Technology Centre (NSTC), which will be a hub for innovation to further enhance semiconductor technology. It will be a public-private partnership that brings together government, industry, customers, suppliers, educational institutions, entrepreneurs, workforce advocates, and investors to solve the most pressing issues and opportunities in the semiconductor ecosystem.[xi] Apart from this, the Act provides 25% investment tax credit (ITC) for encouraging local chip manufacturing.

The Guardrails

From an economic point of view, federal incentives to the US semiconductor industry are expected to create 1.1 million temporary jobs and an addition of $24.6 billion yearly to the American economy from 2021 to 2026.[xii] But in strategic terms, it aims to ensure that the US stays ahead of its adversaries in the technology domain. Currently, the defence industry in US is heavily reliant on foreign manufactured chips for their leading-edge defence technologies. As these companies did not have any alternative option to procure chips, in the event of any military conflict, it may lead to severe economic consequences for defence industry. Many in the US agreed that having domestic manufacturing capability for producing advanced chips is essential for national security. To tackle these issues, the Biden Administration enacted the CHIPS and Science Act.

This legislation consists of certain provisions which are referred to as guardrails and which are to ensure that the fund provided under the Act are not used for hostile purposes by ‘foreign countries of concern’. This particular national security measure is intended to stop recipients of funds from investing in the expansion of chip manufacturing facilities in the People’s Republic of China (PRC), Iran, North Korea and Russia. The Act prohibits companies who have received funding under its provisions from using such funding in other countries and restricts investing in chips production in foreign countries of concern for 10 years. The Act also limits American companies from conducting joint research or technology licensing efforts with foreign entity of concern.[xiii] All these provisions are to ensure that countries of concern do not get hold of leading-edge technology which can be used against US.

In addition to this, in October 2022, the Department’s Bureau of Industry and Security (BIS) announced export control measures which restricts China from purchasing and producing certain advanced chips used in military applications from the US. According to BIS, “The export controls announced in the two rules restrict the PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. These items and capabilities are used by the PRC to produce advanced military systems including weapons of mass destruction; improve the speed and accuracy of its military decision making, planning, and logistics, as well as of its autonomous military systems”.[xiv]

This particular export control restricts leading American semiconductor designers such as AMD and Nvidia from selling their advanced chips for AI and supercomputing to China. Through these measures, the Biden Administration is trying to curb China’s ability to design AI Chips and advance logic chips by choking off access to American built chip manufacturing equipment, components and chip design software. These measures clearly show the intention of the American government to de-risk semiconductor supply chains.

The domestic industry in America has supported this legislation, with leading US firms like Intel and IBM welcoming the passage of the CHIPS Act [xv]^,[xvi] and the Semiconductor Industry Association which is a trade association and a lobbying group which represents the American chip industry also supported the passage of Act [xvii]. Mike Pompeo, the former Secretary of State and Nancy Pelosi former Speaker of the House have also supported this Act. [xviii]

Nonetheless, Republican leader Kevin McCarthy (Republican/California)[xix], Senator Cindy Hyde-Smith (Republican/ Mississippi)[xx] and Senator Ron Johnson (Republican/ Wisconsin)[xxi] opposed the Act as they feel it may fuel inflation.

Reactions from Taiwan and China

Taiwan manufactures over 90% of advanced chips globally,[xxii] with Taiwan Semiconductor Manufacturing Corporation (TSMC) supplying the maximum number of chips. The Taiwan chip industry is also known as the silicon shield which helps to ensure security from possible Chinese military aggression.[xxiii] The global reliance, including from China, on Taiwan’s industries for semiconductors has been an advantage in ensuring its safety from possible aggressive moves from China. Hence it is important to understand reactions to the CHIPS Act from Taiwan and its semiconductor industry and whether it is benefiting them or not. On the other hand, this Act and the export controls target China’s semiconductor industry, hence it is important to understand reactions from China also.

Taiwan is concerned that this legislation could weaken its industry and erode its silicon shield. Morris Chang, founder of TSMC has criticised the passage of the Act and said it will undermine Taiwan’s chip sector and further erode the silicon shield. Nonetheless Taiwan’s economy minister Wang Mei-hua said in response to the passage of the Act that Taiwan’s leading position in chip making will not be shaken[xxiv] and was confident that the export controls on China will not hurt Taiwan’s economy.[xxv]

Whereas in China, Foreign Ministry Spokesperson Zhao Lijian officially denounced this CHIPS Act by saying, “The so-called CHIPS and Science Act is purportedly aimed at bolstering the competitive edge of the US’s sci-tech and chip industries. However, certain provisions in the Act restrain normal sci-tech cooperation between China and the US. China is firmly against it”.[xxvi] The spokesperson of Ministry of Commerce (MOFCOM) Shu Jueting emphasised that “Washington's semiconductor policy, especially the CHIPS and Science Act, as well as its export limits, are important economic and trade issues for China, as highlighted by Commerce Minister Wang Wentao in discussions with top US commerce officials”.[xxvii] At the World Trade Organisation (WTO), the Beijing representative said these industry subsidies and export control measures indicate Washington’s Cold War mentality and hegemonic behaviours. The representative said that US export control measures are incompatible with US’s obligations under multiple WTO agreements.[xxviii]

Since 2014, China has invested billions of dollars in building its domestic manufacturing capabilities. Currently it lacks the expertise in making advanced chips and still relies on the US software and tools to design and fabricate chips. And domestic companies have not been successful in manufacturing chips of high quality.[xxix] These restrictions and export controls are likely to impact Chinese semiconductor businesses.

Conclusion

It is evident that the CHIPS and Science Act intends to make America self-reliant and limits its dependency on foreign imports of chips. Through the passage of Act, it is understood that Biden Administration recognises semiconductor as a critical technology for America which needs to be secured. It wants to mitigate the risk of disruptions to semiconductor supply chains which can have security and economic implications. Many semiconductor companies, after the passage of the Act, have announced expansion of supply chain in US. Apart from this, it also intends to arrest the expansion of Chinese semiconductor industry and Chinese government plans to build domestic chip manufacturing capabilities. The subsequent reaction of China to the passage of Act and export controls have added to the existing tension between US and China. Whether this Act will revitalise the American semiconductor industry, create more jobs and bring America back to leading position in manufacturing domain only time will tell.

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*Rajan Sai Sukrut, Research Intern, Indian Council of World Affairs, Sapru House, New Delhi.
Disclaimer: The views are of the author. 

Endnotes 

[i] Congressional Research Service, “Semiconductors: U.S. Industry, Global Competition, and Federal Policy”, October 26,2020, https://crsreports.congress.gov/product/pdf/R/R46581 (Accessed on June 21, 2023)

[ii] Congressional Research Service, “Frequently Asked Questions: CHIPS Act of 2022 Provisions and Implementation”, April 25, 2023, https://crsreports.congress.gov/product/pdf/R/R47523 (Accessed on June 23, 2023)

[iii] Antonio Varas, Raj Varadarajan, Jimmy Goodrich, Falan Yinug, “ Strengthening the Global Semiconductor Supply in an Uncertain Era”, Semiconductor Industry Association, April 2021, https://www.semiconductors.org/wp-content/uploads/2021/05/BCG-x-SIA-Strengthening-the-Global-Semiconductor-Value-Chain-April-2021_1.pdf (Accessed on July 3rd 2023)

[iv] Op.Cit 1 Congressional Research Service.

[v] President’s Council of Advisors on Science and Technology, “REPORT TO THE PRESIDENT - Ensuring Long-Term U.S. Leadership in Semiconductors”, January 2017, https://obamawhitehouse.archives.gov/sites/default/files/microsites/ostp/PCAST/pcast_ensuring_long-term_us_leadership_in_semiconductors.pdf (Accessed on June 25th 2023)

[vi] Emily Feng, “How China acquired mastery of vital microchip technology”, Financial Times, January 29, 2019, https://www.ft.com/content/7cfb2f82-1ecc-11e9-b126-46fc3ad87c65 (Accessed on June 7th 2023)

[vii] White House, “FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs”, Strengthen Supply Chains, and Counter China”, August 09, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/ (Accessed on June 26^th 2023)

[viii] Ana Swanson, “The CHIPS Act Is About More Than Chips: Here’s What’s in It”, The New York Times, February 28, 2023, https://www.nytimes.com/2023/02/28/business/economy/chips-act-childcare.html (Accessed on June 26th 2023)

[ix] Legacy Chips – Also known as mature chips and these chips are used in general technologies such as cars and washing machines.

[x] Op.Cit 7, White House Gov

[xi] National Institute of Standards and Technology, “The National Semiconductor Technology Centre Update to the Community”, https://www.nist.gov/chips/national-semiconductor-technology-center-update-community (Accessed on June 26th 2023)

[xii] Semiconductor Industry Association, “Chipping In The Positive Impact of the Semiconductor Industry on the American Workforce And How the Federal Industry Incentives will Increase Domestic Jobs”, SIA and Oxford Economics, May 2021, https://www.semiconductors.org/wp-content/uploads/2021/05/SIA-Impact_May2021-FINAL-May-19-2021_2.pdf (Accessed on June 7th 2023)

[xiii] U.S Department of Commerce, “Commerce Department Outlines Proposed National Security Guardrails for CHIPS for America Incentives Program” https://www.commerce.gov/news/press-releases/2023/03/commerce-department-outlines-proposed-national-security-guardrails (Accessed on June 26th 2023)

[xiv] Bureau of Industry and Security,” Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC), October 7, 2022, https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3158-2022-10-07-bis-press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/file (Accessed on June 26th 2023)

[xv] Intel Newsroom, “Intel Statement on CHIPS and Science Act Signing”, https://www.intel.com/content/www/us/en/newsroom/news/us-chips-act-signing.html#gs.1s24lh

(Accessed on June 26^th 2023)

[xvi] IBM,” IBM CEO Arvind Krishna Statement on Final CHIPS Act Passage” Jul 28,2022, https://www.ibm.com/policy/chips-act-passage/ (Accessed on June 26^th 2023)

[xvii] Semiconductor Industry Association, “SIA Applauds House Passage of CHIPS Act, Urges President to Sign Bill into Law” Jul 28, 2022, https://www.semiconductors.org/sia-applauds-house-passage-of-chips-act-urges-president-to-sign-bill-into-law/ (Accessed on June 27^th 2023)

[xviii] U.S Department of Commerce, “What They Are Saying: Bipartisan Calls for Crucial Semiconductor Manufacturing Legislation Grow Louder as Bill Gets Closer to President’s Desk”, https://www.commerce.gov/news/press-releases/2022/07/what-they-are-saying-bipartisan-calls-crucial-semiconductor, (Accessed on June 27^th 2023)

[xix] Kevin Breuninger, “House passes bill to boost U.S. chip production and China competition, sending it to Biden”, CNBC, July 28^th 2022, https://www.cnbc.com/2022/07/28/china-competitiveness-and-chip-bill-passes-house-goes-to-biden.html (Accessed on July 2nd, 2023)

[xx] US Senator Cindy Hyde-Smith, “Hyde-Smith Votes against CHIPS act, July 27, 2022, https://www.hydesmith.senate.gov/hyde-smith-votes-against-chips-act (Accessed on June 27th 2023)

[xxi] Ron Johnson U.S. Senator for Wisconsin, “Sen. Johnson Issues Statement on CHIPS-Plus Vote”, July 27, 2022, https://www.ronjohnson.senate.gov/2022/7/washington-on-wednesday-u-s-sen-ron-johnson-released-the-following-statement-after-voting-against-cloture-on-the-motion-to-concur-for-the-pact-act-i-support-providing-coverage-to-service-members-affected-by-burn-pit-exposure-unfortunately-the-bill-as-written-includes-an-unnecessary-provis (Accessed on June 27th 2023)

[xxii] Cheng Hwa, “Taiwan’s dominance of the chip industry makes it more important”, The Economist, March 6^th 2023, https://www.economist.com/special-report/2023/03/06/taiwans-dominance-of-the-chip-industry-makes-it-more-important (Accessed on July 2nd 2023)

[xxiii] Office of the President Republic of China (Taiwan), “President Tsai publishes article in Foreign Affairs on Taiwan's democracy and positive international role”, October 5 2023, https://english.president.gov.tw/NEWS/6169 (Accessed on July 2^nd 2023)

[xxiv]Ben Blanchard, “Taiwan says 'key position' in semiconductors won't be shaken as US passes chip act”, Reuters, July 29^th 2022 https://www.reuters.com/technology/taiwan-says-key-position-semiconductors-wont-be-shaken-us-passes-chip-act-2022-07-29/ (Accessed on July 3^rd 2023)

[xxv] Bloomberg, “Economy minister urges calm on TSMC”, Taipei Times, October 14^th 2022, https://www.taipeitimes.com/News/biz/archives/2022/10/14/2003786973 (Accessed on July 3rd 2023)

[xxvi] Ministry of Foreign Affairs of the People’s Republic of China, “Foreign Ministry Spokesperson Zhao Lijian’s Regular Press Conference on July 28, 2022” https://www.fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/2511_665403/202207/t20220728_10729508.html (Accessed on June 27th 2023)

[xxvii] Global Times, Chip sector 'key issue' raised by China during talks with US trade officials” June 01, 2023, https://www.globaltimes.cn/page/202306/1291782.shtml (Accessed on June 27th 2023)

[xxviii] SCMP, “Tech war: China slams US Chips Act subsidies at WTO in Beijing’s latest protest against Washington’s restrictions: Xinhua”. 4^th May 2023 https://www.scmp.com/tech/tech-war/article/3219279/tech-war-china-slams-us-chips-act-subsidies-wto-beijings-latest-protest-against-washingtons (Accessed on June 27th 2023)

[xxix] The Washington Post, “How does the U.S. block China from getting microchips made abroad?”, October 8, 2022, https://www.washingtonpost.com/politics/2022/10/08/how-does-us-block-china-getting-microchips-made-abroad/ (Accessed on June 27^th 2023)