In a previous article, I discussed the semiconductor industry and Taiwan’s supremacy in manufacturing microchips, the foundry portion of the semiconductor supply chain. Now let’s look at the U.S. perspective on the semiconductor industry and its relationship to Taiwan. In order to do that, we have to talk about the CHIPS+ Act

Congress passed a bipartisan bill, the CHIPS and Science Act in July, after a year of negotiations in committee. President Biden signed the act into law on August 9 and the CHIPS Act Implementation Strategy was launched on September 6 through an executive order. CHIPS, or “Creating Helpful Incentives to Produce Semiconductors,” is a $250B initiative that incentivizes businesses to bring semiconductor manufacturing, research and innovation back to the U.S., the one-time leader in the industry.

The CHIPS Act also dis-incentivizes building factories in China. The act was a provision in the William M. (Mac) Thornberry National Defense Authorization Act (NDAA) for Fiscal Year 2021 (Pub. L. No. 116-283), which outlines U.S. defense budget, projects, and policies for the year.

The CHIPS Act is a multi-pronged approach to ensure the U.S. semiconductor supply chain is secure and not reliant on countries that are antagonistic to the U.S., namely China. Additionally, the act is a long-term plan to promote research and development and recruit talent to the U.S.

Europe also has a “Chips Act” that addresses semiconductor supply chain vulnerabilities, and several European countries have changed course on using Chinese telecommunications products.

Why chip production is a national security issue

When we talk about “semiconductors,” we are really talking about microchips. Microchips are in everything from cars to cell phones to missiles. Having the fastest and most powerful microchips is essential for military advantage.*

In a previous article on Taiwan and semiconductors, , I discussed the fabless business model that distributes the three main phases of semiconductor production across multiple companies. In 2020, we had a first-hand look at just how dependent the U.S. is on Asia for its microchip supply.

Beijing has long had the goal of incorporating Taiwan into the “one country, two systems” model of governance that Hong Kong had experienced until the passage of the National Security Law. Furthermore, Xi Jinping’s zero-Covid policies show that the Chinese Communist Party is willing to sacrifice its economy for political gain.

Taiwan, however, operates as a de facto country and its citizens see themselves as distinctly Taiwanese. Taiwan has increasingly been courting and aligning itself with other democratic nations, like the U.S. and Japan. And these nations are happy for Taiwan, and its semiconductor industry, to be on their side.

This is where Taiwan comes in and its strategic partnership with the U.S. Currently, Taiwan’s TSMC and South Korea’s Samsung lead the world in advanced chip fabrication. They have the equipment and facilities to manufacture 5nm chips, although the equipment comes from other countries, including the Netherlands’ ASML, which has the monopoly on extreme ultraviolet lithography. Artificial intelligence algorithms (i.e., machine learning) require 12nm or smaller microchips, otherwise, it would require too much computing time and power. Most of China’s foundries can only make 28nm chips, meaning China is dependent on other countries to make chips that are competitive, both commercially and militarily.

The U.S. has a vested interest in courting TSMC to take part in the CHIPS Act and to build a foundry in the United States. Taiwan, for its part, would be glad for the U.S.’s military aid. The U.S. is willing to give military aid because it does not want China taking over Taiwan and obtaining information on U.S. microchip technology that it uses in defense systems. And Taiwan does not want to forcefully be subsumed into the People’s Republic of China. According to journalists at the New York Times, reporting from Taiwan,

TSMC will also receive American chip subsidies linked to pledges not to further expand in China under the recently passed CHIPS and Science Act of 2022. Taiwanese officials have been receptive to a new U.S.-proposed Chip 4 alliance, which seeks to unite the American chip supply chains with those of Taiwan, South Korea and Japan — at the exclusion of China.

Paul Mozur, John Liu, and Raymond Zhong, “Eye of the Storm: Taiwan Is Caught in a Great Game Over Microchips” at New York Times (August 29, 2022)

The complexities of decoupling from China

Most analysts agree that truly decoupling U.S. and European supply lines from China would be impossible. But there are ways to mitigate dependence on a country whose government has been accused by several countries, NGOs, and the UN of committing crimes against humanity and whose values are at odds with most democratic nations. This is the impetus behind the CHIPS Act.

As former intelligence officer Klon Kitchens points out, the CHIPS Act helps the U.S. offensively because it forces those who receive grants and tax credits to decouple from China and pushes those companies to work with the U.S. and other, mostly democratic countries. This helps protect taxpayer money from indirectly funding Chinese companies and create partnerships with other businesses that have more similar values.

The act has already spurned construction of additional foundries in the U.S. Intel is the only U.S. company that is an integrated device manufacturer, meaning it houses all stages of the semiconductor supply chain from design to fabrication to assembly, testing, and packaging. Intel and other U.S. chip companies lobbied Congress to pass the CHIPS and Science Act in hopes of receiving needed funds and tax credits. Once the act passed, Intel started construction on a new manufacturing facility in Ohio.

Aside from the U.S.’s Intel, Taiwan’s TSMC will be building a new manufacturing plant in Arizona and Samsung will be building a facility in Texas. Doug Ducey, governor of Arizona, met with President Tsai in a show of solidarity for producing what President Tsai calls “democracy chips” in new facilities in Arizona:

What the critics are saying

Several critiques of the CHIPS Act have been offered. Analysts are concerned that the act does not address security issues, such as the Chinese government’s heavy subsidies as well as state-sponsored cyberespionage and IP theft. Foundries, located in the U.S. may still rely on cheap parts from Chinese companies that are subsidized by the government. Additionally, Chinese businesses and state actors have stolen intellectual property in the past and then sold their products at a cheaper rate. According to Derek Scissors, senior fellow at American Enterprise Institute, several security provisions to prevent technology theft were dropped from the CHIPS and Science Act while the bill was being debated in committee. This was largely due to lobbying from universities that wanted to use the CHIPS funds under fewer restrictions.

In a broader sense, there are implications for ethical business practices that have been simmering under the surface for some time. The pandemic, the Russian invasion of Ukraine, and increasing tensions between the U.S and China have exposed supply chain vulnerabilities due to shifting geopolitics. Leaked documents and the Beijing Olympics have brought to the public’s attention businesses that may have forced labor in their supply chains. And, apart from China, European economies that rely on Russian natural gas have been strained since Russia cut off one of the biggest pipelines to Europe and may struggle once the winter months hit.

This raises the question of whether and how to do business with countries whose values are very different from our own, have not upheld some of their international agreements, or have engaged in business practices that violate human rights.

*Historically, the military with the best technology tends to have the advantage, e.g., the longbow.

You may also wish to read these pieces by Heather Zeiger on Taiwan vs. China and the chips industry:

Pelosi’s visit to Taiwan matters to China. And to your computer. China staged an impressive display of military firepower at U.S, lawmaker Nancy Pelosi’s visit Taiwan — prominent in the globally crucial semiconductor “chips” industry. China has strong economic and political motivations for signaling its intentions of pursuing “reunification,” that is, taking over Taiwan and the chips industry.

and

Taiwan has bet its uncertain future on advanced microchips. An increasingly belligerent China has long claimed to own Taiwan, which manufactures 90% of the world’s advanced microchips. Taiwan has protected its independence from China via worldwide microchips dominance; that’s really why House Speaker Nancy Pelosi’s visit outraged China.