What does it take to get U.S. Democrats and Republicans to stand on a stage together these days? When that stage is not built for a debate, it seems like not much, but countering China continues to be a topic that bucks that trend. In December of 2022, the Taiwan Semiconductor Manufacturing Company (TSMC) announced a $30 billion dollar investment in a second factory in Arizona, and the announcement ceremony was flooded with people from both sides of the political aisle and from the business world. Democratic President Joe Biden, the former Republican Governor of Arizona Doug Ducey, both of Arizona’s Senators, and even Apple’s Tim Cook were all in attendance.
This $30 billion investment was in addition to the $10 billion already announced for the construction of an original factory to be completed in Arizona in 2024. The new factory announced in December 2022 will produce 3 nanometer (nm) chips, which are currently the most advanced in the world, when completed in 2026. In the semiconductor industry, innovation is measured by the size of the chips, with the smaller chips being the most advanced. These 3nm chips — one nanometer is equal to one billionth of a meter — are far more advanced than the 7nm chips made by Intel, which are currently the most advanced produced on U.S. soil.
This comes just months after the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed through Congress in August with bipartisan support. The CHIPS portion of the bill, which is part of the broader CHIPS and Science Act, sets aside $52 billion to subsidize semiconductor production in the United States. While the total amount of subsidies for the second TSMC Arizona plant have not yet been announced, the passage of the CHIPS Act was an integral part in luring the company to produce some of their most advanced technology on American soil.
TSMC and the Silicon Shield
TSMC is the crown jewel of Taiwan’s “silicon shield”: the idea that Taiwan’s robust semiconductor industry is its greatest asset in deterring a Chinese invasion, since the global economic costs of disrupting this industry would be far too high. Taiwan accounts for half of the global semiconductor market, and this dominance grows more extreme when considering the cutting edge technology of the industry: TSMC alone accounts for 90% of the world's production of super-advanced computer chips.
This concentration of production of a good as valuable as semiconductors has American national security experts worried, and this drove the support for and the passing of the CHIPS Act. One striking statistic that was delivered to lawmakers in a closed-doors national security briefing reportedly helped move the needle on votes for the CHIPS Act: 98% of the chips purchased by the Department of Defense are tested and packaged in Asia. With warnings of a looming war between China and Taiwan continuously on the rise, the idea of a supply chain for a good integral to the U.S. economy running entirely through a potential future theater of conflict is cause for concern.
Is U.S. production feasible?
There are significant challenges with moving production to the United States. While the U.S. pioneered the semiconductor industry, they have fallen well behind in production capabilities. TSMC has had trouble recreating the business ecosystem in America that took years to build in Taiwan. The cost of making chips in Arizona is estimated to be 50% higher than in Taiwan. The production plants themselves need to be staffed with professionals who hold doctorates because of the high-degree of technical knowledge needed. TSMC has struggled to find talent to staff its U.S. factories, and those that have been hired often need to be sent to Taiwan for at least a year of training.
However, through subsidies and influence exerted through TSMC’s often overlooked mutual reliance on the U.S., — the U.S. imported 70% of the chips made by TSMC in the third quarter of 2022 — the U.S. government has been able to persuade TSMC to overlook these barriers and increase their investment in production capabilities in Arizona.
The semiconductor issue is ultimately just one arena of the U.S.’s greater push to restrict Chinese access to key technologies. This push extends to all fields, from telecommunications with Chinese firm Huawei to companies potentially connected to the Chinese military and intelligence community. The Biden administration has appeared keen to continue the Trump administration’s pivot away from globalization and has continued to raise economic barriers with countries that are seen as national security threats. This economic competition in conjunction with national security interests will continue to define U.S. foreign economic policy as competition with China rises.