US eyes $25bn plan to counter China chip surge at the expense of globalisation

It is increasingly becoming an ‘us or them’ situation, with tit-for-tat policies creating a fragmented ecosystem; an eye for an eye makes the whole world blind and no-one wins.

Proposed by Senators John Cornyn of Texas and Mark Warner of Virginia, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act would earmark $25 billion to stimulate and supercharge the semiconductor industry in the US. It does appear to be an answer to the Made in China 2025 strategy, both of which are seemingly designed to counter globalisation trends.

“Semiconductors underpin nearly all innovation today and are critical to US communications and defence computing capabilities,” Cornyn said. “This legislation would help stimulate advanced semiconductor manufacturing capabilities domestically, secure the supply chain, and ensure U.S. maintains our lead in design while creating jobs, lowering our reliance on other countries for advanced chip fabrication, and strengthening national security.”

“Unfortunately, our complacency has allowed our competitors – including adversaries – to catch up,” said Warner. “This bill reinvests in this national priority, providing targeted tax incentives for advanced manufacturing in the US, funding basic research in microelectronics, and emphasizing the need for multilateral engagement with our allies in bringing greater transparency and attention to security and integrity threats to the global supply chain.”

As part of the initiative, a $10 billion federal match programme would be created, with incentives offered to companies who build semiconductor fabs with advanced manufacturing capabilities. $2 billion would be directed towards the Electronics Resurgence Initiative, $3 billion would be used to create semiconductor basic research programmes at the National Science Foundation, $2 billion would create a similar programme in the Department of Energy and $5 billion to establish an Advanced Packaging National Manufacturing Institute under the Department of Commerce.

The issue which has been raised in recent years has been the alleged support which has been afforded to Chinese companies by the Government. Through subsidies and low-interest loans, critics has suggested this gives an unfair advantage to Chinese companies in the international markets, while foreign companies attempted to secure fortunes in China are hindered by cumbersome regulations.

Recently, Parallel Wireless CEO Steve Papa attacked Huawei and called on US politicians to champion federal support for the US semiconductor industry. Papa suggested the support from the Chinese Government would tilt the playing field, offering an advantage to Chinese technology companies which would reduce investment capital formation in western markets in turn. This would result in a widening gap between the Chinese semiconductor industry and everyone else, meaning eventually there would be not viable alternative to Chinese companies.

This scenario would be deemed worst case scenario for the US which has justified its vilification of and aggression towards Huawei on the grounds of national security. There is a link, defence systems are reliant on advanced semiconductor components, but some have also questioned whether the ultimate objective is to halt the progress of China’s economy, which Standard Chartered Bank has forecast to overtake the US’ in 2020.

What we have seen over the last 18-24 months is conflict between the US and China as the worlds’ two superpowers trade blows in an increasingly dangerous game of one-upmanship. It seems the industry and the world is heading towards another international conflict where a line in the sand will have to be drawn. There have been numerous direct and indirect statements from the US directing allies towards a binary choice; work with China or work with US. This would be a disaster for the global economy.

Should tensions between the two nations continue to rise, it would surprise few to see the creation of two independent ecosystems. The Western market could be controlled by the US and the Eastern by China. Worst case scenario would be zero overlap, with vendors, customers and governments being forced into a choice.

The idea of a globalised economy is by no-means perfect, but if offers the opportunity for companies to scale operations, while R&D efforts are compounded as innovators can stand on the shoulders of other innovators. The way the world is heading undermines this, it is a path of fragmentation which splits the world in two; the Bill introduced by Cornyn and Warner is another step in this direction.

If the US can cut all ties of reliance to China, it isolates the country. China will most likely retaliate, accelerating the separation of powers.

Some might suggest the Chinese tendency to offer its domestic champions a leg-up is an unfair advantage, but what the US is attempting to do here is exactly the same. State-sponsored industries would acceleration the concentration of wealth in the US, to the detriment of its allies. The US might suggest this is a move to combat the Chinese threat, but if it is simple compounding its own strength while weakening allied economies and societies, is it a sensible route forward?

Another very interesting element to this debate is whether the US is ‘cutting off the nose to spite the face’. Let’s not forget, the US economy has probably benefited more than any other from globalisation trends.

Over the last few decades, US corporations have entrenched themselves with dominant positions in markets all over the world. McDonalds, Coca Cola, Google, Facebook, Ford, Amazon, General Electric, American Express, Microsoft; the list is ridiculously long. A challenge to the progress of globalisation is one which would build a glass ceiling above these companies.

But as with everything in politics, we suspect this has not been considered. The entirety of the focus will be on the splash in the economic pond. The ripples, or the Laws of Unintended Consequences, which have the potential to grow into catastrophic waves, have once again been ignored.

There should of course be some sort of global effort to counter detrimental strategies from the Chinese Government, but this is not the answer. An eye for an eye makes the whole world blind.

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