Bringing semiconductor chip manufacturing to the US might be the biggest economic boost in many decades, at least.

 July 19, 2022

Bringing semiconductor chip manufacturing to the US might be the biggest economic boost in many decades, at least.

Ahead of House Speaker Nancy Pelosi's visit to Taiwan in August, around the work the House is doing on the CHIPS Act, I want to highlight an episode of the Sinica podcast where Kaiser Kuo interviews Paul Triolo from Denton Global Advisors ASG (Albright Stonebridge Group). The topic is an overview of the semiconductor economy and supply chain.

I want to stress right off the bat that the CHIPS Act and the broader conversation about semiconductors supply chains is not about the pandemic. It's a much more lengthy discussion that involves national security and the status of Taiwan, which exists right amid one of the most fraught geostrategic relationships in the world: the trilateral relationship between the US, Taiwan and China. The dominant role that Taiwan plays in semiconductor manufacturing and the overall electronics sector is an essential part of Taiwan's national security, in its alliance with the US in our "great power competition" with China. This is very true, but it's not sufficient to fully explain the semiconductor issue to a layperson.

And secondly, the semiconductor supply issue is not really about export-import issues and certainly not about any one company being added to one of these "entity lists" of Chinese companies doing business with the Chinese army. Very much not so. For example, this assertion that this "listing" of Huawei "caused" the chip shortage is not fully explanatory of what happened. Only a fraction of the shortage could really be attributed to protectionist measures. The supply chains for semiconductors are so complex that they can't be explained away by that rhetoric. The collateral effects of these protectionist rhetorics have been unexpected and not as predicted. For instance some stuff happened in Southeast Asia that no one expected.

And the reason that the semiconductor industry's supply lines are so complicated is that the manufacture of semiconductors is, in itself, very complicated. Semiconductors need to be very precisely manufactured out of very pure materials and very pure water. Most semiconductor manufacturers are simply not able to create the semiconductors that are high-quality and advanced enough for the electronics that we need. Most of the manufacturing facilities can't turn out a semiconductor capable of being used in, for instance, a computer, an iPad, or an iPhone. It takes a highly advanced semiconductor foundry to create the semiconductor wafers that can be used to create the semiconductor chips used in most personal computing devices. Taiwan-based TSMC is one of the largest foundries making these wafers. They can make wafers up to the specifications of nearly any request, because they have that expertise.

It is important to note that a semiconductor wafer such as what TSMC makes is distinct from a finished semiconductor chip. The chip has electronics attached to the silicon wafer, and a wider range of manufacturers can make the wafers into chips. To make the silicon substrate out of which chips are made, however, takes much more expertise and specialization. TSMC is a natural monopoly on the manufacture of the silicon wafers, which is their core business. They have the long expertise and the capability to maintain high quality. But the chips that are made out of these semiconductor wafers are what there is a shortage of.

Taiwan does make semi-conductor chips as well (out of the wafers) but only for the most advanced applications. Most of the chips are made in less advanced manufacturing centers in China or Southeast Asia, that don't have to be as stringently precise as a wafer foundry. The shift to other countries to host manufacturing centers for the chips, made from the wafers that TSMC creates, does have something to do with the "trade war" between the US and China.

And this is where there is a huge opportunity for the US to enter into the manufacturing and production of these essential and fundamental electronics components: the semiconductor chips. There's two main benefits from this. First, it addresses the chip shortage in the United States in a way that also creates American jobs for American workers in an essential industry. Second, it maintains economic pressure on China, preventing it from doing any geopolitical shenanigans, like South China Sea or Belt-and-Road-type stuff. China won't be able to fully concentrate on that, if they are struggling to keep up on the electronics manufacturing front, and can't match up to the West and its allies on computing power.

Now, let's be clear. Focusing on integrating the chip manufacturing that could happen in the Rust Belt US with auto manufacturing is the right first step to integrate it into the local economies of that region. It is a need that can be quickly addressed, and a vulnerability in the automotive supply chain that can be shored up quickly with domestic manufacturing. However, there is a lot of other market need that can be addressed with US semiconductor chip manufacturing. Like a lot of policy issues, this comes down to "should we do a lot, or just a little?" But it's clear that we have to create a lot of economic opportunity and jobs out of this initiative. It will create a lot of good jobs for American workers in an industry that actually reflects where the world economy is right now. It will shore up our cyber capabilities in national defense. And it will give us an advantage in global trade relative to our main competitors. However – and this is sensitive - the reality of the situation is that this will put the US in direct market competition with China, which has longer experience in the sector. The ace in the hole in this competition is the US partnership with Taiwan. Taiwan does make chips – only the most advanced chips, and the newest applications, and over time they devolve the manufacture of those chips to other places that make larger batches. There's no reason that chip-manufacturing expertise has to go to China from Taiwan. In fact, it has been going to other places lately, in Southeast Asia, India, and so on. It's reasonably in Taiwan's interest to develop that relationship with the US, which would benefit US strategic interests too.

There's no lack of desire on the part of US workers to work a meaningful job creating things. And this is where the future is. Younger blue–collar workers see this as meaningful to their lives. We should embrace this occupation and craft in the US, not only on the level of entrepreneurship and design, but at the level of labor and education too.

US labor can bring a higher quality to the manufacturing of semiconductor chips, and the industry can bring much-needed jobs and economic opportunity to the US, especially the Rust Belt Midwest. Some have remarked that the quality of the chips manufactured of late in China have been of much lower quality than perhaps desired. And here is where US labor has an advantage, because nothing compares to the quality of a product made by a worker who has a high quality of life and workplace representation.