The semiconductor industry has recently come under the spotlight as a gap between demand for and supply of semiconductors chips caused automotive and technology companies to suspend manufacturing. The strategic importance of semiconductors has pushed both the U.S. and China to shore up domestic capabilities in the industry. Under President Trump, semiconductors were a key area of competition in the U.S.-China relationship and will likely continue to have importance in the future.
This briefing provides background information on the semiconductor industry and how it fits in the U.S.-China relationship, and overview of policy considerations, and an outline of government perspectives and relevant legislation, including:
This briefing includes:
3 bill summaries
42 additional links
Semiconductors chips are tiny electronic devices that enable nearly all modern industrial and technological activities. Grouped by functionality, the types of semiconductor chips are memory chips, which store data; microprocessors, which contain one or more central processing units (CPUs); standard chips or commodity integrated circuits (ICs), which are used for performing repetitive processing routines; and complex systems-on-a-chip (SoCs), which can contain entire systems on a single chip. Semiconductors have traditionally been supplied for consumer products such as smartphones. Therefore, as demand for smart devices has rapidly risen, the semiconductor industry has scrambled to increase supply.
A key challenge for this industry is the complex global supply chain. The supply chain has many stages (chip design, manufacturing, assembly, and testing), all of which are dominated by different companies, markets, and countries. For instance, U.S. companies account for 48% of the world’s chip sales, but the Taiwan Semiconductor Manufacturing Company (TSMC) has 52% of the foundry, or manufacturing, market.
The weaknesses along the semiconductor supply chain became apparent during the current global chip shortage. The pandemic resulted in a boom in demand for electronics, which in turn strained the global supply chain and has had ramifications across a range of industries. The effects have been especially notable for the automotive industry, as companies have announced they will be suspending manufacturing due to the shortage.
U.S.-China Relationship and Semiconductors
Semiconductors are a crucial component to vital economic and national security interests in both the U.S. and China. However, the two countries have very different standings in the global semiconductor industry. The U.S. dominates many parts of the supply chain, such as chip design, and is a top exporter. On the other hand, China imported $350 billion worth of chips in 2020. Semiconductors have become an important layer of geopolitical competition and has driven technological investments within both countries to maintain competitiveness in the industry. Gaining an edge in semiconductors could provide an advantage in emerging technologies like AI, quantum computing, and the “internet of things.”
China Actions on Semiconductors
Concerned about its reliance on foreign semiconductors, the Chinese government has rolled out several strategies to grow the domestic semiconductor industry.
In June 2014, China released its National Guidelines for Development and Promotion of the Integrated Circuit (IC) Industry. The government set a five-year investment target of about $19 billion and adopted a more market-based investment approach by giving local private-equity firms responsibility for allocating public funds.
In 2015, China launched a “Made in China 2025” initiative to upgrade Chinese industry. Key components of this initiative are to raise domestic content of core components and materials by 75% by 2025 and advance priority sectors including advanced information technology, automated machine tools and robotics, and biopharma and advanced medical products. The initiative also set a goal of 70% self-sufficiency in semiconductor production, but it has only met one-third of this goal thus far. According to a report by Foreign Policy, despite significant investment, China is unlikely to achieve independent semiconductor manufacturing abilities in the next five to ten years.
A key player in the U.S.-China relationship on semiconductors is the Taiwan Semiconductor Manufacturing Corporation (TSMC). TSMC specializes in manufacturing the industry’s smallest and most advanced chips and is a leader in the foundry market. TSMC supports both American and Chinese firms but its ability to do so has come under pressure as tensions between the U.S. and China have risen. For instance, following the U.S. placing Huawei on the Entity List for national security concerns, including alleged violations of sanctions on Iran, TSMC severed ties with the Chinese company. However, U.S. some policymakers are also not content with the concentration of manufacturing and the potential of supply chain disruptions.
Trump Administration Actions on Semiconductors
Under the Trump administration, the semiconductor industry was an increasingly important area of competition in the U.S.-China relationship. Trump’s policies focused on strengthening U.S. industry and weakening Chinese companies by:
Engaging in dialogue with TSMC that led to an announcement for plans to build an advanced chip foundry in Arizona, which is scheduled to start producing chips in 2024.
The Department of Commerce announcing that it would restrict Huawei, a Chinese telecom company, from using U.S. technology to design and manufacture semiconductors, by placing it on the Entity List.
Placing the Chinese company Semiconductor Manufacturing International Corp. (SMIC) on the Entity List, which restricts exports of U.S. technology to listed entities.
Signing the National Defense Authorization Act (NDAA) for FY21 into law, which included federal programs to promote semiconductor manufacturing and research.
For more background information, check out these links:
Brookings Institute. Lagging but Motivated: The State of China's Semiconductor Industry. Jan. 7, 2021.
McKinsey. A New World Under Construction: China and Semiconductors. Nov. 1, 2015.
Center for Strategic and International Studies. Made in China 2025. Jun. 1, 2015.
Los Angeles Times. The Most Important Company You've Never Heard of is Being Dragged Into the U.S.-China Rivalry. Dec. 17, 2020.
CRS. Semiconductors: U.S. Industry, Global Competition, and Federal Policy. Oct. 26, 2020.
Foreign Policy. Semiconductors and the U.S.-China Innovation Race. Feb. 16, 2021.
Cision. Semiconductor Industry Calls for Bold Federal Policies to Sustain U.S. Leadership in Chip Technology, Harness Transformative Technologies of the Future. Apr. 3, 2019.
Lincoln Network. Answering the China Chip Challenge. Dec. 17, 2020.
Biden has not outlined a specific plan targeting the semiconductor industry, but he is expected to loosen some of Trump’s export controls against China, such as removing some companies from the entity list. Additionally, in response to the current chip shortage, the White House Press Secretary has announced that Biden will sign an executive order in the coming weeks to initiate a comprehensive review of supply chains for critical goods.
For more information on Biden and semiconductors, check out these links:
Semiconductors have been top of mind for some Members of Congress in relation to U.S. national competitiveness, domestic manufacturing, and technological innovation. Representative Michael McCaul (R-TX), the Republican Leader of the House Foreign Affairs Committee urged Congress to examine how the U.S. can maintain its dominance in the semiconductor industry. Senators Mark Warner (D-VA) and John Cornyn (R-TX) introduced the CHIPS for America Act (summarized below), stating that semiconductors are crucial to the U.S. economy and innovation.
On Feb. 23, Majority Leader Chuck Schumer (D-NY) directed Senate Committees to craft legislation to strengthen the U.S. semiconductor industry and combat China’s “predatory practices.” In his statement on the directive, Sen. Schumer established three goals for the new legislation: enhance American competitiveness with China, invest in strategic partners and alliances, and expose, curb, and end China’s predatory practices. The centerpiece of the legislation would be the Endless Frontier Act (summarized below), which was introduced in the 116th Congress. Senators will also be looking to provide emergency funding for the semiconductor programs included in the NDAA for FY 2021.
As the Biden administration and new Congress consider bolstering the domestic semiconductor capabilities, there are many political avenues to cement U.S. leadership and secure supply chains in this crucial industry. Some considerations include:
Investing more in R&D to develop global competitiveness on advanced chips.
Creating tax credits or grants to incentivize domestic manufacturing.
Bolstering U.S.-Taiwan relationships through forums such as the Economic Prosperity Partnership Dialogue.
Evaluating bottlenecks and vulnerabilities in the semiconductor industry.
Protecting U.S. semiconductor companies from potential technology transfers by using export controls and restricting foreign direct investment or acquisition of semiconductor firms.
According to Sen. Chuck Schumer (D-NY), the Endless Frontier Act would have expanded the National Science Foundation (to be renamed the National Science and Technology Foundation (NTSF)). The bill would have also provided $100 billion in funding to a newly created Technology Directorate within NTSF. An additional $10 billion would have been authorized to designate 10 regional technology hubs.
A summary of the bill can be found here.
A companion bill was introduced by Rep. Ro Khanna (D-CA), H.R.6978.
According to Sen. Mark Warner (D-VA), the CHIPS for America Act would have “restore[d] semiconductor manufacturing back to American soil by increasing federal incentives to stimulate advanced chip manufacturing.” The bill would have created a 40% refundable income tax credit for qualified semiconductor equipment and a $10 billion federal match program for state and local incentives to build a semiconductor foundry.
A companion bill was introduced by Rep. Michael McCaul (R-TX), H.R.7178.
According to Sen. Tom Cotton (R-AK), the American Foundries Act would have “support[ed] the production and development of microelectronics in the United States.” The bill would have authorized the Department of Commerce to award $15 billion in grants to states to assist in constructing microelectronics fabrication or research, authorized the Department of Defense to award $5 billion in grants for commercial facilities producing microelectronics or conducting research, and authorizing another $5 in R&D spending.