With strong government finances, a large domestic market, and strong research and development capabilities, the United States has the economic power to capture a large share of global investment in targeted industrial sectors. The U.S. shift toward protectionism and a desire to shift trade to "like-minded" friends has fueled concerns that U.S. markets will be closed to Asian exports unless U.S. demands for common standards and supply chain configurations are met.
The CHIPS and Science Act passed by the US Congress in 2022 spells out Washington’s “reshoring” intentions and its impact on trading partners. The bill aims to "restore" domestic semiconductor manufacturing, currently concentrated in Asia, by providing a series of subsidies, tax credits and domestic content rules to promote domestic research, development and manufacturing. Bipartisan support for the funding comes from semiconductors' central role in civilian and military technology, as well as concerns about the geopolitical vulnerability created by shifting manufacturing to China and Taiwan.
The CHIPS Act subsidizes inbound investment in semiconductor manufacturing, promising $39 billion in manufacturing incentives on top of a 25% investment tax credit. These incentives appear to have attracted major semiconductor manufacturers and their suppliers to invest in the United States.
According to the Semiconductor Industry Association, from the introduction of the 2020 CHIPS Act through June 2023, the United States announced 67 new projects and expansion of existing facilities in areas such as research and development, intellectual property, chip design, semiconductor manufacturing and manufacturing equipment, supplies, and materials . This new activity contrasts with the steady decline of the U.S. share of global semiconductor manufacturing, which fell from 19% in 2000 to just 12% in 2020.
Assessing how many projects were attracted to the United States as a result of CHIPS Act subsidies is difficult. The distribution of these funds has not yet occurred, and some of these investments may have already been made. But U.S. export controls on advanced chips and the equipment and supplies needed to produce them have undoubtedly influenced decisions within the industry because they limit the materials that can be sent to China for manufacturing.
The CHIPS Act explicitly withdraws investment from global semiconductor companies to the United States, triggering concerns that U.S. industrial subsidies will hollow out technology industries in other regions. East and Southeast Asia is home to 10 of the 16 semiconductor exporters and the top six suppliers, accounting for 84% of global exports in 2021.
While U.S. subsidies are clearly a response to this regional concentration, the expansion of U.S. capacity will impact the markets these exporters currently serve. On the one hand, U.S. chip-related activities may reduce U.S. chip imports from some Asian suppliers. But they may also expand trade in materials, equipment and labor-intensive activities such as testing and packaging.
How the industries and markets for Asian semiconductor-related exporters develop in the future also depend on the actions of other countries. In response to the CHIPS Act, the European Union, Taiwan, Japan, and South Korea have all launched or extended their own subsidy programs.
In 2022, the European Union launched the "European Chip Act" to relax government funding rules for semiconductor factories. In August 2023, TSMC announced plans to spend $11 billion to build a chip manufacturing plant in Germany. The deal reportedly included up to $5.5 billion in government subsidies. The UK also announced a 20-year strategy for its domestic semiconductor industry, acknowledging its inability to compete with huge subsidies from the US and EU and focusing on areas where it is already competitive.
Although the new players' production costs are expected to exceed those in more established regions, the high level of intervention in the industry has raised concerns about an impending semiconductor glut and falling world prices. If this happens, the government will be inclined to protect subsidized manufacturers behind import tariffs or provide subsidies to customers based on domestic content requirements.
The U.S. shift toward such restrictions is evident in the passage of the Inflation Reduction Act in August 2022, which provides subsidies for buyers of electric vehicles assembled in the United States. Asian suppliers would face a clear threat if the subsidy race chokes off semiconductor export markets and lowers world prices.
Another concern for Asian suppliers could come from U.S. demands to reduce China's involvement in supply chains. So far, Washington has not made such a request directly, but the CHIPS Act’s investment tax credits are conditional on recipients not making significant new investments in Chinese manufacturing facilities. This shows that the United States intends to reduce its ties with Chinese industries.
The impact of this ambition is unclear. Silicon is produced in a handful of countries, but by far the largest supplier is China. Pressure to find alternative sources will become an issue across the industry. Even if the United States removes China entirely from the supply chain serving domestic chipmakers, it will still rely on imports of mature process chips from foreign partners.
Through ongoing negotiations, driven in part by the Indo-Pacific Economic Framework’s new Supply Chain Council, Asian exporters may be able to moderate the negative spillovers of the emerging semiconductor subsidy race and carve out space to participate in the expanding U.S. industry. The Council is expected to meet at least once a year and will be tasked with exploring options for diversifying centralized sources of supply in sectors and commodities of common interest. Member states can work to avoid duplication, maintain open trade among members, and gradually adjust the procurement of critical materials.
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