Chipping Away at Dependence: Why the U.S. Must Accelerate Semiconductor Subsidies

By: Kathleen Morton

DOI: 10.57912/28701665

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The United States has fallen behind in global semiconductor production, dropping from 37% in 1990 to about 10% in 2024. In the age of advancing technology, these chips are used in electronics that underpin transportation, communication networks, and medical devices. While there is agreement for increasing domestic semiconductor production, there are two divergent approaches to ensure production stays in the United States. While some officials have emphasized subsidies for domestic semiconductor manufacturers, others have pushed tariffs on foreign producers to steer consumers to American-made semiconductors. If Washington wants to bolster semiconductor production, it must continue subsidizing U.S.-based manufacturers and expand efforts to support innovations into the next generation of semiconductors. 

In August of 2022, U.S. President Joe Biden enacted the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act into law, marking the most significant effort the U.S. federal government has ever undertaken to support the reshoring of critical semiconductor chips. The plan supports about $400 billion dollars towards tax credits, grants, and loans to increase development in semiconductor chips. In November of 2024, the U.S. pledged an additional $8 billion under the CHIPS Act for Intel to build semiconductor chip facilities domestically.  The law signaled growing bipartisan support to bring back and support the manufacturing of semiconductor chips in the United States. 

Semiconductors have become a central focus in the great power competition between the United States and China, with both countries vying to grow their control and reduce their reliance on other nations for these chips to produce the most advanced commercial and military technology. Both nations currently heavily rely on Taiwan which produces 60% of the world's semiconductors and 92% of the most advanced semiconductor technology through companies like the Taiwan Semiconductor Manufacturing Company (TSMC). These advanced semiconductor chips are used for Artificial Intelligence and next-generation weapon systems, both critical technologies in the fight for global dominance.  It is critical for the U.S. to reduce its dependence on Taiwan, as any significant disruption in the supply chain could lead to a 59% increase in prices for semiconductors in the United States. The U.S. has already seen the effects of overreliance on Taiwanese chips, with the global chip shortage due to COVID-19 lasting for years and contributing to inflation. Because of this, there has been bipartisan sentiment to expand the U.S. semiconductor manufacturing base to become less dependent on Taiwan and the rest of Asia. The CHIPS and Science Act has invested hundreds of billions of dollars towards developing U.S. chips and chip manufacturing plants. 

When U.S.-based manufacturers are subsidized, the U.S. can increase the supply of semiconductors and make them more accessible for companies to produce final goods. Due to the CHIPS Act, it is estimated that U.S. manufacturing capacity is projected to increase by 203% by 2032, a tripling of U.S. capacity. This creates easier supply chain management among other technology industries, such as the car and electronics industries, allowing them to produce more products. However, one misstep of the CHIPS Act is that it has subsidized TSMC and other non-U.S. firms to build their own facilities in the United States. This bolsters Taiwanese firms and fails to allocate resources to U.S.-based firms that increase domestic market power. By subsidizing U.S.-based firms to operate in the United States, they can reduce Taiwan’s market power over the chip industry while reducing reliance in the event of a geopolitical crisis in the South China Sea. 

An alternative to subsidies has been to levy tariffs on foreign semiconductor manufacturers. President Biden announced in May 2024 that he would be raising tariffs on Chinese Semiconductors from 25% to 50% by 2025. President Trump has fervently supported this approach, proposing that tariffs are the solution to America's semiconductor problem. President Trump has signaled that tariffs will be the main strategy for producing more semiconductor chips domestically. This policy shift away from subsidies weakens America’s semiconductor industry for two reasons. 

First, America currently doesn’t have the infrastructure to meet the influx of demand if foreign semiconductor prices are significantly raised. Even if the tariffs steer consumers to buy American chips, the U.S. lacks the infrastructure to take on the heavy lifting required to produce enough semiconductors for key industries like electronics, vehicles, and technology. Without the necessary manufacturing sites and employees (funded through subsidies), the U.S. can’t ramp up production immediately. This will cause significant supply chain issues and price increases. Secondly, tariffs on semiconductors also threaten to drive away U.S. manufacturing in advanced technology sectors that rely on semiconductor technology. If bipartisan attitudes are shifting toward steep tariffs on semiconductors, technology manufacturers may be forced to produce in nations with no tariffs. 

The United States should expand the CHIPS Act to increase investment for U.S.-based firms and invest in R&D to weaken Taiwan’s monopolistic control of the world’s most advanced semiconductor chips. Taiwan’s monopoly on these semiconductor chips allows them to restrict supply and in turn, drive up prices. They can produce less and earn more profit per unit. This causes prices to shift up above the equilibrium price, where price and quantity intersect at market values. U.S. companies that use semiconductors to make their final products, spend more on semiconductor chips and send the bill to U.S. consumers. This causes inflation of goods that contain semiconductor chips. When new firms enter the market, in this case, new U.S. companies producing semiconductors, it causes prices to fall because firms continuously try to undercut other firms' prices until they fall back to equilibrium or the going market price. Additionally, expanding R&D for the most advanced semiconductor chips allows U.S. companies to weaken Taiwan’s leverage on U.S. markets. R&D produces new jobs and infrastructure to carry out these projects, stimulating the economy and gaining a comparative advantage over the semiconductor market.

If the United States can produce more of the most advanced semiconductor chips for cheaper with subsidies coming from expanding the CHIPS Act, it will lower costs for companies producing final goods. Resorting to tariffs alone would be a misstep in U.S. economic policy, and increase the price of a vast amount of vital goods.  If the goal of the United States is to reduce its dependency on semiconductors in East Asia, continue to support the development of advanced technology, and capitalize on the positive growth of American manufacturing and jobs, the United States must continue the progress the CHIPS Act started.