The US Chip Act threatens to hollow-out Asia’s semiconductor industry

While America’s trading partners in Asia share similar concerns about economic security and resilience, they wonder what Washington’s new industrial policies will mean for their own development.

U.S. President Joe Biden speaks at Viasat Inc., in Carlsbad, near San Diego, California, U.S. November 4, 2022. Speaks during a campaign event on the benefits of CHIPS and the Science Act (Photo: Reuters /Kevin Lamarque).

With its strong government finances, large domestic market, and strong research and development capabilities, the United States has the economic clout to capture a large share of global investment in targeted industrial sectors. The US turn towards protectionism and a desire to shift trade to “like-minded” friends has raised concerns that US markets will be closed to Asian exports unless US 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 promote domestic research, development and manufacturing by providing a range of subsidies, tax credits and domestic content rules to “revive” domestic semiconductor manufacturing, which is currently concentrated in Asia. Bipartisan support for the funding comes from the centrality of semiconductors to civilian and military technology and concerns about the geopolitical vulnerabilities created by the shift of manufacturing to China and Taiwan.

The CHIPS Act provides subsidies for domestic investment in semiconductor manufacturing, promising $39 billion in manufacturing incentives on top of the 25 percent 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, between the introduction of the CHIPS Act of 2020 and June 2023, the United States announced 67 new projects and existing facility expansions in the areas of research and development, intellectual property, chip design, semiconductor manufacturing and manufacturing equipment, supplies and materials. This new activity contrasts with the steady decline in the U.S. share of global semiconductor manufacturing, from 19% in 2000 to just 12% in 2020.

Assessing how many projects have been attracted to the United States as a result of CHIPS Act subsidies is difficult. The allocation 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 decision-making within the industry, because they limit the materials that can be sent to China for manufacturing.

The CHIPS Act explicitly repatriates investments by global semiconductor companies to the United States, raising concerns that U.S. industrial subsidies will hollow out the tech industry elsewhere. East and Southeast Asia are home to 10 of the 16 semiconductor exporting countries 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 affect the markets these exporters currently serve. On the one hand, U.S. chip-related activity could 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 of Asian semiconductor-related exporters develop in the future also depends on the actions of other countries. In response to the CHIPS Act, the European Union, Taiwan, Japan, and South Korea have all started or extended their own subsidy programs.

In 2022, the European Union introduced the European Chip Act to relax rules on government funding for semiconductor plants. In August 2023, TSMC announced plans to spend $11 billion to build a chip manufacturing plant in Germany, a deal that 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 massive subsidies from the US and EU and focusing on areas where it is already competitive.

While production costs for new players are expected to exceed those in more mature regions, the high level of intervention in the industry has raised fears of an impending surplus of semiconductors and falling world prices. If this happens, the government will be inclined to protect the subsidized manufacturers behind the import tariffs, or provide subsidies to customers based on domestic content requirements.

The U.S. shift toward such restrictions was evident in the Inflation Reduction Act passed in August 2022, which provides subsidies to buyers of electric vehicles assembled in the United States. If the subsidy race hampers the semiconductor export market and lowers world prices, there is a clear threat to Asian suppliers.

Another concern for Asian suppliers could come from U.S. demands to reduce China’s involvement in the supply chain. To date, Washington has not made such a request directly, but the CHIPS Act’s investment tax credit is contingent on recipients not making significant new investments in Chinese manufacturing facilities. This shows that the United States intends to reduce its links with Chinese industries.

The impact of this ambition is unclear. Silicon is produced by a handful of countries, but by far the biggest supplier is China. The pressure to find alternative sources will become a problem for the entire industry. Even if the United States completely removed China from the supply chain that serves domestic chipmakers, it would still rely on imports of legacy chips from foreign partners.

Through ongoing consultations, driven in part by the Indo-Pacific Economic Framework’s newly established Supply Chain Council, Asian exporters may be able to mitigate negative spillovers from the emerging semiconductor subsidy race and open up space to participate in the expanding U.S. industry. The Council, which is expected to meet at least once a year, will be tasked with exploring options for diversifying concentrated 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 key materials.