When the Chips are Down, We Need an Industrial Policy

The semiconductor shortage and its impact reveals the need for much better coordination of trade, industrial, national-security, and supply chain policy.

By ROBERT KUTTNER

Anyone who doubts the importance of the US getting control of its supply chains should take a close look at the latest knock-on effects of the semiconductor shortage.

Computer chips are used in virtually all products, other than what you can buy at a farmers’ market. And the dislocations of the pandemic have produced a massive shortage of chips.

Modern cars are heavily computerized. One effect of the chip shortage, among many, is that automakers have had to sharply cut production of new cars.

That, in turn, has made used cars a second-best substitute. Panic buying has pushed up average used-car prices by an astonishing 45% relative to a year ago.

That price hike, in turn, factors into the Consumer Price Index, which gives Republicans (and their Democratic allies, such as Larry Summers) talking points to the effect that President Biden and his public investments are responsible for spikes in inflation.

Note, of course, that the hike in used-car prices has nothing whatever to do with economic stimulus and aggregate demand. It is the result of a supply bottleneck in one sector.

A similar mistake was made in the 1970s when a supply shock in the price of oil was confused with general demand-driven inflation, leading the Fed to artificially create a recession by raising interest rates to 20%. Let’s not repeat that. But I digress.

Note also that the remedy is more government intervention in the economy, the opposite of Republican policies. We need more management of our supply chains, so that this doesn’t keep happening.

Here’s where the story gets complicated. Of the three largest companies that produce the most advanced semiconductors, only one is American—Intel. The other two are TSMC, based in Taiwan; and Samsung, based in South Korea.

There are other US-based chip companies, such as Micron, Qualcomm, and Broadcom, but for the most part they don’t make the most advanced chips (not every product, of course, requires state-of-the-art chips).

Most of the actual chips are fabricated offshore. While US-based companies still operate 20 state-of-the-art fabrication facilities, the US share of global chip production has fallen from 37% in 1990 to about 12% today.

Semiconductors is the rare advanced industry where China is struggling to catch up. China actually imports about $300 billion worth of semiconductors from the rest of the world, and some 25 percent of US semiconductor sales go to China. And here’s where national-security policy meets industrial policy.

Despite offshore manufacturing, the US still leads in semiconductor design.

The company that produces the most advanced equipment for making semiconductors is Dutch-owned by the company ASML, using technology largely designed in the US.

The machinery took decades to develop and costs $150 million to purchase. In 2019, the Trump administration requested the Dutch government to prohibit exports of this advanced chip-making machinery to China.

America desperately needs an industrial policy for semiconductors to figure out all these moving parts. The White House released a comprehensive report on supply chains in June, with an excellent chapter on semiconductors. But key questions remain to be answered.

Given the sensitivity of semiconductors in advanced weaponry, how to connect chip policy to national-security policy? Where do export controls directed against Beijing fit into our overall China policy and our overall semiconductor policy?

And since the WTO prohibits export subsidies and calls for imports to get equal treatment with domestic products, how does industrial policy for semiconductors intersect with trade policy? Should we be subsidizing the technology so that America remains the technology leader, apart from where chips are fabricated? And how self-sufficient in advanced chips do we need to be?

There is a bill sponsored by Sen. Chuck Schumer, the US Innovation and Competition Act, which passed the Senate but is bogged down in the House. Among other provisions, it includes a semiconductor program with $52 billion of subsidies, details to be worked out.

The June report on supply chains asks all the right questions; the challenge is carrying it out. Someone very senior in the administration needs to be looking at the big picture.

But as far as I can tell, responsibility for these and related questions is scattered across the government. There is no industrial-policy czar, and no government-wide coordinator of semiconductor policy.

Clearly, the administration needs to sort all of this out, before Democrats are rightly accused of just throwing money at the problem, with one hand not knowing what the other is doing, and different agencies of government pulling in different directions.

According to the GAO, there are 58 separate federal programs involved with manufacturing in several agencies that don’t talk to each other, and no single White House official in charge. As I’ve previously reported, Rep. Marcy Kaptur of Ohio and Sen. Amy Klobuchar of Minnesota, with Republican co-sponsors, introduced legislation to create a high-level office of Manufacturing and Industrial Innovation at the White House. This was included as part of the Schumer bill.

The right place to lodge this is in the National Economic Council, and it needs to be run by a very senior person with direct access to the president and the ability to coordinate policy across Cabinet departments. It remains to be seen if this will be done.

Speaking of supply chains, a long overdue shout-out to our prescient friend Barry Lynn, who has gone on to be a leading advocate of more robust competition policy at his indispensable Open Markets Institute. In 2006, Barry wrote a prophetic book, “End of the Line,” warning of the coming vulnerability of global supply chains.

Enthusiasts of globalism found Lynn’s argument hard to take seriously. Today, they are bidding to purchase $20,000 clunkers.

Robert Kuttner is co-editor of The American Prospect (prospect.org) and professor at Brandeis University’s Heller School. Like him on facebook.com/RobertKuttner and/or follow him at twitter.com/rkuttner.

From The Progressive Populist, August 15, 2021

Populist.com