Today’s Bloomberg has two stories that illustrate the unintended consequences of increasing nationalism in US policymaking. Both relate to the chip industry, but look at different aspects of the problem.
During the Trump administration, the US cracked down on the immigration of skilled STEM workers from overseas. Here’s one consequence of that decision:
Taiwan Semiconductor Manufacturing Co. cut its annual outlook for revenue and postponed the start of production at its signature Arizona project to 2025, twin setbacks for a chipmaking linchpin struggling with geopolitical tensions and a deep market slump.
TSMC’s surprise cut in 2023 revenue projections sent a warning to investors that the global electronics slump may persist for some time despite a boom in AI development. And the delay in the US — a consequence of both a lack of skilled American workers and ballooning costs — underscores the difficulties in making chips there despite Washington’s insistence to reduce a global reliance on Asian facilities.
I recently had some problems with my air conditioning system. The technician told me that the unit is too big, and is trying to force too much air through a relatively narrow duct. That’s basically the problem with programs combining massive subsidies for chip making with various restrictions on the domestic chip industry.
The Biden administration has enacted protectionist measures aimed at hurting China while boosting our chip industry. An article by Dave Lee points to some unintended consequences:
One problem with US limits on non-US companies, notes Emily Kilcrease, senior fellow with the Center for a New American Security, is that international businesses now have an incentive to design out US components to avoid being subject to these rules.
Meanwhile, China has begun introducing small disruptions to the market. Citing “relatively serious” national security concerns over Micron, the Boise, Idaho-based memory chip maker, Beijing in May said the company’s components shouldn’t be used within vital infrastructure. Micron said the loss of business represented a “low-double-digit percentage” of overall global revenue. The ban benefits South Korean competitors Samsung and SK Hynix, who also make memory chips.
As a result, US companies may choose to move production elsewhere. Unfortunately, a country that cuts itself off from the rest of the world can easily end up falling behind:
If they confront their worst-case scenario, in which their sales to China cease altogether, US chip companies could lose $83 billion annually, at a cost of 124,000 jobs, the US Chamber of Commerce estimates. R&D spending would fall by $12 billion per year. This can be mitigated by a diversified supply chain that shifts that business to other regions, but such transitions take time, and would open the door for empowered international competitors to increase their Chinese market share.
They could then use the fruits of that success to plow more resources into creating next-generation cutting-edge chips, weakening US leadership over these vital innovations.
There is also a risk that these actions further hurt the US if they lead China to retaliate by cutting off exports of key “rare earth” metals used in chip manufacture.
READER COMMENTS
Thomas L Hutcheson
Jul 21 2023 at 3:06am
Policies to reduce the risk of supply disruptions of strategic inputs makes some sense. Doing so by trying to promote production of those items only in the US does not.
Jose Pablo
Jul 23 2023 at 1:32pm
Policies to reduce the risk of supply disruptions of strategic inputs makes some sense
Yes, indeed … when adopted at a company level.
The supply manager has to have a contingency plan in place to cope with potential disruptions in the supply of key components.
At this level he/she has all the information required to properly manage this problem and to analize the trade offs between risks in the supply chain and cost of goods
Trying to “manage inputs” at a “country level” is total nonsense. Furthermore, it is a harmful idea since what you really mean by “Policies to reduce the risk of supply disruptions of strategic inputs”, is the introduction of rules and regulation that further restricts the options available to the supply manager, in order to manage this problem, that can only result in worst (less reliable and more expensive) contingency plans.
MarkW
Jul 21 2023 at 7:33am
Agreed. But now that both parties are thoroughly protectionist and in favor of nationalist industrial policy, I’m afraid I don’t see US policy reversing course until the bad effects are pervasive enough to become clear to the naked layman’s eye. And maybe not even then.
Michael Sandifer
Jul 21 2023 at 1:18pm
Yes, while there might be cases to be made for restricting the exportation of certain, very specific sensitive technologies, and/or incenting domestic production of some technologies, it’s probably best in general to err on the side of free trade.
Trump’s trade wars were a ridiculously blunt instrument, with no coherent justification. Biden’s broad industrial policies have more coherent justifications, but those justifications don’t reflect reality. They are pretty dumb policies.
Felix
Jul 24 2023 at 11:03pm
Policy makers seem to forget that fences have two sides and work both ways. When we build a fence to keep China out of the US, we also keep the US out of China.
Trade barriers are also one-shot weapons. Sanctioning Russia and China may have severe short-term effects on them, but besides those fences having two sides, they also encourage those countries to develop workarounds, and that has a long-term effect on us.
Tristan Yates
Jul 25 2023 at 1:33pm
This is where the so-called free traders lose me – the fact that they can’t see that there is something morally grotesque about a democracy voting to send its manufacturing jobs to an authoritarian country whose citizens can’t vote on anything and then giving that country “most favored nation” trading status. If the people you are trading with aren’t free, if they are virtual slaves and prisoners, then how on earth can it be free trade? There are vast e-waste graveyards in China where the water is undrinkable, crops won’t grow, and residents have sky-high levels of toxic metals in their systems, and that’s fine, but trade restrictions that would redirect global manufacturing to countries with some baseline level of human rights and environmental protections, those are atrocities. Let’s not lose sight of the big picture.
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