ICYMI: New York Times: The Semiconductor Problem

New York Times: The Semiconductor Problem
[David Leonhardt, 7/14/22]

The most advanced category of mass-produced semiconductors — used in smartphones, military technology and much more — is known as 5 nm. A single company in Taiwan, known as TSMC, makes about 90 percent of them. U.S. factories make none.

The U.S.'s struggles to keep pace in semiconductor manufacturing have already had economic downsides: Many jobs in the industry pay more than $100,000 a year, and the U.S. has lost out on them. Longer term, the situation also has the potential to cause a national security crisis: If China were to invade Taiwan and cut off exports of semiconductors, the American military would be at risk of being overmatched by its main rival for global supremacy.

For these reasons, a bipartisan group of senators and the Biden administration negotiated a bill last summer that included $52 billion to jump-start the domestic semiconductor industry, as well as other measures to help the U.S. compete economically with China. The bill would offer the kind of semiconductors subsidies that other countries — including China, South Korea, Japan, India and Germany — provide. Without such subsidies, companies like Intel and Broadcom would probably choose to build new factories outside the U.S.

But the Senate's semiconductor bill still has not become law. The House spent months negotiating its own bill, passing one in February. Since then, the House and Senate have failed to resolve the differences between the two bills, and Mitch McConnell, the Republican Senate leader, recently threatened to scuttle the talks.

The standoff has become another example of dysfunctional congressional politics weakening the U.S.'s global standing.

There is a broad consensus — among many experts, President Biden, an overwhelming majority of Democrats in Congress and a meaningful number of Republicans — that the federal government should act. But it still has not.

Today's newsletter looks at the debate over the bills and the recent efforts to find a solution before Congress leaves for its August recess.

Corporate welfare?

The strongest substantive argument against the subsidies is that they are a handout to the semiconductor industry. The bills would use taxpayer dollars to benefit large companies that already can make a profit on the products they sell.

In economic terms, this argument makes a lot of sense. But geopolitics matter, too. Political leaders in other countries have already decided to offer subsidies for semiconductor manufacturing, because they want some of this manufacturing to take place in their countries.

If the U.S. does not also offer subsidies, it may continue to struggle to attract factories. Already, the U.S. market share of all semiconductor manufacturing has fallen to about 12 percent from 37 percent three decades ago.

Pat Gelsinger, the chief executive of Intel, has said that a typical factory costs about $10 billion to build, and subsidies from some countries cover 30 percent to 50 percent of that cost. China's subsidies cover closer to 70 percent. "It is not economically viable for us to compete in the world market if everyone else that we're competing with is seeing 30 to 50 percent lower cost structures," Gelsinger said.

Senator Rob Portman, an Ohio Republican who helped write the Senate bill, has acknowledged that it runs counter to the free-market philosophy he usually prefers. But, Portman explained at the Aspen Ideas Festival last month, "if we are continuing with blinders on to follow a political philosophy that seems to make sense generally but doesn't work in the practical world, I think we end up with a much less competitive economy and a national security risk."

Biden and his top aides agree. "We are now in a very dangerous situation in which we are utterly reliant on Taiwan for the vast, vast majority of our most advanced semiconductors, which are the exact kind of semiconductors you need for military equipment," Commerce Secretary Gina Raimondo told me. "You cannot be a global superpower if you don't make any of these."

What China wants

Why, then, haven't the Senate and House agreed on the bill?

House Democrats added provisions to the Senate bill that Republicans did not like, such as additional money for worker retraining. House Democratic leaders seem willing to remove most of these from the final bill, but it remains unclear whether the two parties can agree on a compromise.

McConnell — despite being one of 19 Senate Republicans who voted for the original bill — also appears to be wavering. He sent a tweet on June 30 suggesting that he might block a semiconductor bill if Democrats continued trying to pass a separate bill, on climate change and drug prices, that Republicans oppose.

McConnell may have been posturing, hoping to intimidate House Democrats into dropping the provisions in its version of the semiconductor bill. On the other hand, his history suggests that he might be willing to defeat a policy he would otherwise favor for the sake of making a Democratic president look weak.

To help the bill's chances, Chuck Schumer, the Senate Democratic leader, held a classified briefing for all senators yesterday. At it, Raimondo and Avril Haines, Biden's director of national intelligence, discussed the U.S. military's current dependence on Taiwan. Major corporations are also lobbying for the bill, as my colleague Catie Edmondson notes. "So many powerful industries badly want this bill to pass, from the chip makers to defense contractors to manufacturers," she said.

There is still one vocal opponent of the bill: the Chinese government. Its state media has criticized the idea as "bullying" and part of a "Cold War mentality." In recent decades, no country's share of semiconductor manufacturing has increased as rapidly as China's.