From sanctions to semiconductor resilience and security

March 24, 2022 10:21
Photo: Reuters

To be effective, economic sanctions depend on multilateral coordination. Freezing the Russian central bank’s holdings and kicking Russian banks out of the SWIFT financial messaging system for international payments in response to Russia’s invasion of Ukraine are groundbreaking moves. But such measures will be successful only if there are no (or at least very few) ways to circumvent them. Their implementation and enforcement must be truly multilateral, extending beyond NATO and the transatlantic community.

The unprecedented multilateral response to Russia’s war is an opportunity for the United States and its allies to strengthen their collaboration on a wide range of shared security and economic issues. Consider the semiconductor industry, which is crucial for today’s economy and for national security. The sanctions limiting Russian access to semiconductors depend on support from TSMC in Taiwan and Samsung in South Korea, the leading global producers of both commodity chips and the more advanced chips used in many weapons systems.

Policy collaboration in the semiconductor sector can and should extend beyond the sanctions. There are many promising opportunities for collaboration among the economies that form the core of today’s complex semiconductor supply chain: the US, the European Union, Japan, South Korea, Taiwan, Israel. All are investing significant public funds and deploying industrial, research, training, trade, and cross-border investment policies to increase their semiconductor producers’ capabilities.

Multilateral policy coordination in the semiconductor industry should aim to ensure a competitive, resilient, secure, and sustainable (CRSS) supply of semiconductors to meet the significant increase in global demand over the next decade. Given the global dispersion of research, production, talent, and knowledge, this goal cannot be accomplished through technological autarky or isolationist self-sufficiency.

The concentration of chip production in Asia – where China accounts for a growing share – poses a long-term threat to CRSS. The solution is to invest significantly more in US and European semiconductor production capabilities, particularly for the most advanced chips. This need not exclude Asian companies and Asian allies. For Asian producers, locating some production facilities in the US and Europe would provide protection against regional supply-chain shocks.

There are several important issues to consider in moving toward more multilateral policy collaboration in the semiconductor industry. For starters, proposals for policy interventions in Europe and the US come in many forms depending on the national context. Among the options are competitive grants, capital subsidies, tax credits, and funding for research and development.

The challenge will be to ensure that these policies increase investments in production capabilities rather than fund wasteful zero-sum competition among governments to attract private investment that would have occurred anyway. Competing national industrial policies, however well motivated, can quickly lead to counterproductive bidding wars of the sort we have seen before among US states and European countries. Government interventions should come with clear conditions and metrics on business performance to counter the incentives for private companies to exploit promised subsidies for their own benefit and that of their shareholders.

Assuring competitive markets for commodity and advanced chip production is important in its own right. But chip fabrication and production also provide leverage throughout the semiconductor supply chain – from equipment, materials, and design to integrating customers’ future plans and needs into the development of new products. Maintaining a competitive edge in fabrication is thus crucial for developing the equipment and materials needed for ongoing innovation throughout the supply chain. The US and Europe have strong competitive positions in these areas; however, those positions need to be defended and strengthened.

That will take time and substantial investment. Construction of a new fabrication facility is estimated to require 3-5 years, at a cost of $10-20 billion. Congress is currently considering legislation that would allocate $52 billion (mainly in the form of grants) to catalyze US-based fabrication by both domestic and foreign firms. That is a large number, representing about three times more than what the US government spent to support COVID-19 vaccine development and manufacturing. But it is a small fraction of the capital investment needed to build and operate fabrication facilities required to meet US military and commercial needs over the next two decades.

A second consideration is that building and operating competitive new fabrication capacity in the US and Europe will call for more than capital investment. It will also require regulatory support to facilitate environmental reviews and permitting of high-tech production facilities, as well as complementary investments in infrastructure, including energy, water, and transportation networks.

Third, semiconductor companies (both domestic and foreign-owned) will base their decisions about where to build on access to talent, skills, and university research. Revitalizing US semiconductor production thus requires both physical and human capital. In the medium term, that means issuing more visas for highly skilled and experienced foreign workers; and, over time, it means increasing the number of Americans graduating from college with engineering degrees.

The ability to prototype, produce, and scale up innovations can be severely hampered by “lab to fab” gaps in funding and talent along the innovation pathway. Multilateral collaboration among the US and allied governments to create and fund joint pre-competitive research programs, including shared R&D facilities, can fill these gaps, accelerate innovation, nurture the development of new companies, and maintain technological leadership throughout the supply chain.

Finally, joint research programs involving companies, universities, and government partners can be designed to address other shared challenges like climate change (semiconductors are critical inputs in solar, wind, and other forms of alternative energy), security vulnerabilities, and the risks associated with artificial intelligence. Such programs will require agreements among participants on intellectual-property rights, trade, and cross-border investments.

Russia’s war in Ukraine has highlighted an essential feature of the semiconductor industry. The technology and trade sanctions come at a moment when the US, Europe, and other key nodes in the semiconductor supply chain are planning large investments to address both economic and national security concerns. There is no better time to collaborate in developing a CRSS global supply of semiconductors.

The article is co-authored by John Zysman, Professor Emeritus of Political Science at the University of California, Berkeley.

Copyright: Project Syndicate
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a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at The Rock Creek Group.