A Tale of Two Industries

By JOEL D. JOSEPH

We are now in the midst of a desperate shortage of lifesaving pharmaceuticals and semiconductors. The US pharmaceutical and semiconductor industries were leading the world 20 years ago. Now, they are lagging behind because of foreign tax breaks and subsidies. These two industries are critically necessary for the health and welfare of the United States. People are actually dying because of a lack of prescription drugs. The auto industry cannot make enough cars because of a shortage of computer chips. The defense industry is also suffering from a lack of semiconductors that are necessary for guided missiles, tanks and other military equipment.

The Decline of the American Pharmaceutical Industry

Twin events decimated the US pharmaceutical industry. Until 1996, many American drug manufacturers set up shop in Puerto Rico because Congress passed a law in 1976 that granted drug companies tax-free status for profits made in Puerto Rico. In 1996, Congress phased out the law. In 1999, Ireland reduced its corporate tax rate from 32% to 12.5% and soon became the favored tax haven for most US drug companies. Johnson & Johnson now employs 3,000 workers in Ireland, Pfizer 3,300 in seven Irish locations. Lilly, Bristol-Myers Squibb, Abbot, Biogen and Baxter all have major factories in Ireland. Those factories make mostly patented drugs.

On top of these two world-changing tax law changes, China and India have moved into the generic drug industry. Eighty percent of generic drugs are now imported from China and India where the Food & Drug Administration has trouble even locating where the factories are.

What Happened to the US Semiconductor Industry?

Unlike many pharmaceutical giants, the semiconductor industry is relatively new. Major drug companies were founded more than 100 years ago: Pfizer in 1849, Lilly in 1876 and Johnson & Johnson in 1886. Microchip technology was invented by Americans Jack Kilby and Robert Noyce in 1959. (Kilby was awarded the Nobel Prize in Physics for his microchip work.) Noyce, along with Gordon Moore (of Moore’s Law) and Andrew Grove started Intel in 1968. Intel has been dominant, powering most computers of last century. Qualcomm was formed in 1985 and grew to be a major semiconductor designer for cellphones and other devices, but Qualcomm does not actually make chips. Neither does Nividia.

Taiwan established a government-sponsored industrial policy to develop a high-tech electronics industry in 1973. At that time, Taiwan had virtually no high-tech infrastructure. By 2007, the Taiwanese semiconductor industry overtook that of the United States. Taiwan now dominates the semiconductor manufacturing market. Its manufacturers accounted for more than 60% of total global semiconductor revenue last year, according to data by Taipei-based research firm TrendForce. As chipmaking production has shifted to Taiwan in recent years, the US share of global semiconductor manufacturing capacity has plunged from 37% in 1990 to 12% currently.

How Did Taiwan Do It?

Taiwan’s high-tech infrastructure building began with the founding of the Industrial Technology Research Institute (ITRI) in 1973. The Taiwanese semiconductor industry got its start in 1974. In 1976, RCA transferred its semiconductor technology to Taiwan. The Hsinchu Science-based Industrial Park (HSIP) was founded in 1980. This park provides tax breaks and other incentives for the high technology companies within its borders and nurtured the semiconductor industry. In addition to tax breaks, the Taiwanese government has provided government research and development to its private companies.

How the US Government Should Respond

The loss of market share and manufacturing capacity in the pharmaceutical and semiconductor industries was caused by foreign government intervention in the marketplace. The US cannot allow foreign governments to destroy our industries and our ability to be self-sufficient.

Concerning how to combat Ireland’s creation of a tax haven, Janet Yellen’s proposal to establish a global minimum income tax is not enough. Her proposal is just a proposal that may never be realized. We must take direct action and impose direct sanctions on Ireland until it raises its corporate income to 21%, making it equivalent to the US corporate tax rate. The sanctions could include tariffs on a wide range of products. The US can also pressure the European Union to assist, as Ireland is an EU member nation. The EU also wants Ireland to raise its corporate tax rate because it not only has taken business from the United States, it has caused other European companies to relocate to Ireland.

Turning to semiconductors, President Joseph Biden signed an executive order under which the federal government will review supply chains in the chip industry, in order to find ways to alleviate global shortages – a move hailed by chip firms. Intel seeks to fill some of this demand by producing more chips. Intel announced on July 26, 2021, that its factories will start building chips for San Diego’s Qualcomm as it expands a new foundry business to catch rivals such as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics by 2025.

Biden’s executive order is not enough. It only calls for a review of the supply chain for semiconductors. As demonstrated by Taiwan’s successful semiconductor program, the US must develop an industrial policy like Taiwan did. We may need to subsidize Intel and other microchip manufacturers in the United States until we rebuild the semiconductor industry back to where it should be. The United States created the microchip industry and once again we should lead the world in its development.

Joel Joseph is chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@gmail.com.

From The Progressive Populist, January 1-15, 2022

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