Why America’s industrial policy emphasizes semiconductors

Thanks for tuning in this Saturday morning. Today we’re talking industrial policy – a question that’s generated heated debate for the past 50 years. We’ll dive right into it.

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America cannot endure without semiconductors. They’re necessary components in smartphones, computers, TVs, medical equipment, military weaponry, and dozens of other categories of essential goods.

In 1990, the United States produced 37% of the world’s semiconductors. Today we produce 12%. According to the Federal Reserve Bank of Richmond, China now leads with 24% of the market and Taiwan contributes another 21%.

China is not a trusted American partner, and relying on China for semiconductors threatens American security. China also wishes to reclaim Taiwan. A world in which an adversary accounts for 45% of the global production of a critical good is not ideal.

So, naturally, the United States is endeavoring to reshore semiconductor manufacturing.

North Carolina will benefit from this policy focus, and in fact has been a player in semiconductor manufacturing for decades. In a recent paper on semiconductor industrial policy, the Richmond Fed credits the Microelectronics Center of North Carolina (MCNC), a 1980s creation of the General Assembly, with helping establish the industry.

“The effort paid dividends at the time,” the Richmond Fed says, “as Mitsubishi Electric Semiconductor chose northern Durham County as its American headquarters and wafer fab soon afterward.”

In the years since, though, semiconductor manufacturing largely left American shores, just like other industries. Congress and the Biden administration seek to change that through billions of dollars in tax incentives, subsidies, and other programs contained the in CHIPS and Science Act. North Carolina, with its history in the industry and its sterling reputation for business friendliness, is in the mix.

Wolfspeed is of course constructing a $5 billion facility in North Carolina, and will likely receive some CHIPS Act funding. And just this month, NC State announced it will receive $39.4 million in CHIPS Act funding to lead a regional innovation hub for wide bandgap semiconductors.

Semiconductor manufacturing and supply chain resilience may be the legislation’s primary goal, but it’s not anywhere near the only goal. The sweeping policy uses semiconductor manufacturing as an entrée to local and regional economic development plus a host of other domestic policy priorities.

Per the Richmond Fed, firms applying for CHIPS Act funds must “explain how they plan to hire, train, or retain workers; provide transportation and housing assistance as well as child care for facility workers and builders; and consult and coordinate with a range of partners when it comes to establishing pay and benefit structures.”

Skeptics argue such a massive federal government-centered initiative is simply impossible – that the law of gravity will cause the undertaking to collapse under its own bureaucratic weight. The country is too big, and the federal government too far away, to spur these types of local economic growth.

A successful government-led program must be nimble, narrowly focused, attainable, goal-oriented, and expertly led. In other words, the opposite of the federal government’s brand.

And semiconductor policy is but one of several new industrial policies the federal government is undertaking simultaneously:

• Clean energy and climate change mitigation ($369 billion in the Inflation Reduction Act);
• Highways, public works, and “green” projects ($600 billion in the Bipartisan Infrastructure Law);
• Dozens of other industrial-policy measures are in the National Defense Authorization Act plus ongoing projects with the Department of Energy, National Science Foundation, and National Institutes of Health.

As The American Prospect, a left-leaning public policy magazine, argues, “It’s hard enough to make industrial policy work in a single agency. The new enhanced industrial policies involve coordination across multiple federal agencies; several levels of government (federal, state, county, municipal); multiple technologies; and the intense involvement of the private sector.”

The piece is excellent and properly grapples with this tension: Reshoring sensitive industries may well be the right policy goal, but doing so requires a manufacturing base that fled America because production here is so expensive. Setting in place temporary funding incentives (with strings) doesn’t exactly solve that long-term problem.

The contradictions seem obvious: We will lure advanced manufacturing back to America and reinvigorate unions and solve childcare problems. Companies will construct multibillion-dollar facilities and undertake yearslong environmental reviews.

These interests cannot coexist. One or the other must give.

Indeed, Goldman Sachs estimates it’s 44% more expensive to build and operate a chip manufacturing facility in America than in Taiwan. That’s why the investment firm predicts the CHIPS Act will only increase America’s market share of global chip capacity by less than 1%.

It’s possible the federal government will move to eliminate some of the regulatory burdens that increase costs. Congress did exactly that for the Mountain Valley Pipeline. But it’s difficult to see any change in the Biden administration’s stance on policies that impact labor costs.

As all of this plays out at the federal level, North Carolina continues to establish itself as a top player in domestic economic competition. Its semiconductor and EV industries are only growing, and state-funded R&D initiatives like NCInnovation should help churn out more homegrown commercial research applications. Meanwhile, only time will tell if the federal government can execute its ambitious industrial policies.