US moves to expand domestic chip making capability

As global commercial Balkanisation ramps, countries are seeking to make themselves as self-sufficient as possible.

The coronavirus pandemic, and the consequent global shortage of things like personal protective equipment, has brought into focus how dangerous it is to be reliant on other countries for essential kit. The mounting hostility between the US and China, coupled with the fact that much of the world’s manufacturing takes place in China, has served to further stoke anxiety.

Now we have reports that the US government is in talks with two of the world’s biggest semiconductor manufacturers – Intel and TSMC – to build new fabs in the US. Intel has confirmed it’s in discussions with the Defense Department about improving domestic technology sources, while TSMC has confirmed it has been chatting to the Commerce Department, but not what they discussed.

Intel has fabs in ten different locations, five of which are already in the US and only one of which is in China. As the name Taiwan Semiconductor Manufacturing Company implies, most of TSMC’s fabs are located in Taiwan, but it does have a couple in China and one in the US. In the case of Intel, the US government seems to want a fab that it can call upon to ensure supply of chips in the worst-case scenarios.

The TSMC angle is more intriguing. On a practical level it’s the world leader mobile chip manufacture, an area in which Intel has shown impressively consistent ineptitude. As smartphones have become the single most important smart device, a major interruption to their supply chain would be a significant blow to consumers, businesses and governments alike.

But the really juicy aspect concerns China’s relationship with Taiwan, which it insists is part of China. The Taiwanese people and government beg to differ and the country is a consequently key pawn in many of the geopolitical games China and the US like to play with each other. Persuading TSMC to significantly expand its presence in the US would be a major symbolic victory and seriously antagonise the Chinese Communist Party, which President Trump may consider to be reason enough alone.

The Balkanisation megatrend this would appear to be following raises at least a couple of major issues. Firstly a lot more redundancy looks set to be built into supply chains, as companies and countries wean themselves off just-in-time imports. Secondly the West seems set to adopt an ‘if you can’t beat em, join em’ approach with respect to Chinese subsidising of domestic companies to give them significant advantages over foreign ones.

While these actions will improve supply chain security, they will also raise prices as companies pass on the additional cost of having to make more stuff themselves and no longer being able to import wage deflation from China. They also seem to herald a permanent enlargement of the state through a greater involvement in the private economy. The cost of this ultimately has to be borne by taxpayers, so it looks like the cost of living is set to be significantly higher for the foreseeable future.