Economic Watch: Hidden consequences of U.S. chips act-Xinhua

Economic Watch: Hidden consequences of U.S. chips act

Source: Xinhua

Editor: huaxia

2022-08-26 22:18:00

by Xiong Maoling, Matthew Rusling

WASHINGTON, Aug. 25 (Xinhua) -- The Chips and Science Act recently signed into law in the United States is purportedly aimed at promoting "re-shoring" of semiconductor manufacturing to the country by providing subsidies and tax credits to chipmakers.

For all the excuses, such a protectionist act is Washington's latest attempt to reverse the trend of globalization. As economists and observers said, it violates international trade rules, and will disrupt global supply chains and reduce the global competitiveness of semiconductor companies.

Meanwhile, by implementing the chips act, Washington is shooting itself in the foot as less competitiveness and lower efficiency could lead to higher production costs, pushing up inflation pressure and government deficits, and thus adding burdens to its own consumers and taxpayers.


In the process of globalization, the chip industry has established a complex and highly interdependent global value chain, which has made decades of industry advancements possible. The goal of promoting "re-shoring" of chip manufacturing to the United States runs counter to that.

According to the White House, America today only produces about 10 percent of the world's supply, while East Asia accounts for 75 percent -- including most of the top-tier chips.

The chip industry has a natural tendency to form "highly concentrated clusters, based on talent and resource availability," consulting firm Deloitte said in a report released in December, 2021. Analysts said even if Washington successfully lures companies to set up factories in the United States, workforce could be a challenge.

Noting that the chips act creates incentives for production within the United States, Brad Martin, director of Institute for Supply Chain Security at RAND Corporation, told Xinhua that "it's only a start."

"Issues such as labor force development will take years and concerted effort to resolve," Martin said.

"It'll definitely create supply chain inefficiencies," Boston Consulting Group analyst Matt Langione said, as quoted by CNET, a U.S. news website that focuses on technology and consumer electronics.

In addition, the act contains provisions forcing companies to pick sides and trip rivals up to get ahead, a counterproductive policy that will distort the global semiconductor supply chain and disrupt international trade.

"The 10-year ban on investments in more cutting-edge facilities in China has been particularly controversial, with firms arguing that it would make them less competitive globally and ultimately set the United States back in a race against Chinese competitors," said a recent report by The New York Times.


The U.S. government, under the act, will provide over 52 billion U.S. dollars for American semiconductor research, development and manufacturing, and also offer a 25 percent investment tax credit for capital expenses.

"Billions of dollars in reckless spending and corporate welfare, the CHIPS-Plus Act throws fuel on the fire of inflation and places the burden on American families," said Adam Brandon, president of grassroots advocacy organization FreedomWorks.

It is the American taxpayers who need not be responsible for padding the pockets of corporations by way of billions of dollars "giveaway," Brandon said.

The chips act might play a role in boosting semiconductor production in the United States, according to Desmond Lachman, senior fellow at the American Enterprise Institute. However, "it is likely to do so at an increased cost to the U.S. consumer and taxpayer," Lachman said.

"The five biggest semi-conductor companies that will likely receive the lion's share of this taxpayer handout, Intel, Texas Instruments, Micron Technology, Global Foundries and Samsung, made 70 billion dollars in profits last year. Does it sound like these companies really need corporate welfare?" Senator Bernie Sanders said in a recent statement.

The Congressional Budget Office recently found that the act would boost spending by 55 billion dollars over 10 years, while reducing tax revenue by 24 billion dollars, which means taxpayers would see U.S. deficit rise by 79 billion dollars.


The chips act is part of the United States' efforts to weaponize trade and economic tools to advance its interests.

"The United States is intent on creating its own supply chains for advanced semiconductors in order to compete with China," Jeffrey Sachs, economics professor at Columbia University, told Xinhua.

But decoupling with China on the semiconductor industry would not only disrupt the global supply chains, but also bring damage to the U.S. own interests.

According to an analysis by the Boston Consulting Group, U.S. companies could lose 18 percentage points of global share and 37 percent of their revenues over the same period if the United States completely bans semiconductor companies from selling to Chinese customers.

"We need more diplomacy and cooperation between China and the U.S. to ensure that the technology competition remains fair, peaceful, and mutually beneficial, rather than being weaponized," said Sachs.

U.S. unilateral actions against China on exports of technology to China and attacks on China's high-tech companies work against this kind of peaceful cooperation, he added.

"It is time to step up diplomacy to set new and mutually acceptable rules of competition," Sachs said.