Administration Urges Congress to Fund Semiconductor Production Amid New Data on Shortages

A “major supply and demand mismatch” pervades the semiconductor industry, the Commerce Department concluded in a report released on Tuesday. Identifying specific supply chain bottlenecks as well as shortfalls that the market is ill-equipped to solve in the short term, Commerce’s findings will fuel congressional debates about government investment in domestic semiconductor production.

Over the past two years, demand for semiconductors — the essential components of computer chips found in all modern electronics — has jumped 17 percent, and producers cannot keep up despite operating at full capacity, Commerce noted. The “most acute shortages” remain in chips used in a wide variety of products, from cars to medical devices, warned Commerce Secretary Gina Raimondo. No “apparent short-term solutions,” she added, are in sight for the problems related to production of wafers, thin slices of semiconductor material upon which chips are built.

Chip shortages have hindered manufacturing output across many industries, contributing to higher prices for finished goods and further fueling inflation. For example, because chip consumers have been unable to ensure that their inventory lasts more than a couple days, temporary disruptions to semiconductor production cause ripple effects, leading to shutdowns in automotive factories and other sectors. Some economists estimate that chip shortages could cause a 1 percent drop in U.S. GDP.

Calling this issue an “economic and national security imperative,” Raimondo urged Congress to pass pending legislation that would provide $52 billion to boost domestic chip production over the long-term and help address fragility and risk in the supply chain. The White House is similarly pressing Congress to “catalyze more private-sector investments and continued American technological leadership” in the semiconductor industry.

As if heeding the call, also on Tuesday, House Democrats introduced the America COMPETES Act, a companion to the Senate’s U.S. Innovation and Competition Act, which passed last year with bipartisan support, in part because of concerns about China’s investment in and ability to manipulate critical industries such as semiconductors. While the bills differ, they both contain the $52 billion. That money would fund a federal grant program created by the CHIPS for America Act, designed to increase semiconductor research, development, and manufacturing. The White House endorsed the COMPETES Act on Tuesday.

Assuming lawmakers in the two chambers can reach a consensus and send a unified bill to the president’s desk, the Commerce Department will need to implement the CHIPS Act in a way that ensures funding is allocated to deal with the specific risks in the supply chain that the market cannot otherwise address. Both the White House and Raimondo have applauded recent announcements from producers and consumers regarding their efforts to work together to resolve supply chain issues, with the secretary noting that “the private sector is best positioned to address bottlenecks.”

To understand how best to allocate resources, Commerce is seeking input from industry and the public on the design of programs to “incentivize investment in semiconductor manufacturing facilities and associated ecosystems” and to “accelerate research, development, and prototyping.”

A successful policy will also retain and expand U.S. and allied advantages in the sector. For example, even as the majority of semiconductor fabrication is done overseas — by U.S. partners and also by China — America retains a dominant position in semiconductor design, a high-value component of the supply chain and one critical for ensuring adversaries do not insert backdoors or vulnerabilities. Western firms also develop and build the unique manufacturing equipment needed to fabricate the most advanced semiconductors.

While the proposed $52 billion pales in comparison to China’s investment in the semiconductor industry over the past decade, it presents a real opportunity to address future problems in the supply chain as well as long-term geopolitical concerns about critical technology dependencies on China.

Annie Fixler is the deputy director of the Center on Cyber and Technology Innovation (CCTI) at the Foundation for Defense of Democracies (FDD), where Trevor Logan is a cyber research analyst. For more analysis from the authors and CCTI, please subscribe HERE. Follow Anne and Trevor on Twitter @afixler and @TrevorLoganFDD. Follow FDD on Twitter @FDD and @FDD_CCTI. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.