Technological innovation has been a driving force for U.S. global leadership and economic prosperity for over a century. This legacy of innovation largely stands on the foundation of a key component: semiconductor chips, found today in almost all electronic products. Semiconductors are an integral component of various consumer products across industries, including cars, smartphones, and household appliances. But semiconductors can also be used in dual-use goods—products that have both military and civilian applications—such as air guidance systems for both civilian and military aircraft. The tension between economic gain and security risk inherent within dual-use semiconductor goods is heightened in fields with national security implications, such as supercomputing and artificial intelligence (AI). How the government and private sector manage the global value chains (GVCs) of chips will directly affect U.S. global competitiveness and national security going forward.
The past two years have underscored the importance of semiconductors to the U.S. economy and its national security interests. Pandemic-induced spikes in consumer demand boosted semiconductor demand by 17 percent between 2019 and 2021. Global sales reached $555.9 billion in 2021, 26.2 percent more than the year before. Although China remains the largest market in the world for semiconductors, sales in the Americas represented the largest region for industry growth in 2021. However, this spike in demand, along with stagnating investment, inadequate input supplies, and logistics breakdowns, has led to an unprecedented shortage of semiconductors that has reverberated throughout the roughly 200 downstream industries that depend on chips. In the automotive industry alone, it was projected that global semiconductor shortages were responsible for $210 billion in lost revenue as of September 2021. Short-term supply chain disruptions for the semiconductor industry are compounded by long-term geopolitical challenges and the need to rethink what constitutes both secure and resilient supply chains. While China is a top customer for the semiconductor industry, the perception of China has shifted in recent years from potential partner to existential threat. This shift has led companies and countries alike to rethink their dependency on China as both partner and customer. In particular, the Biden administration has sought policies that attempt to accelerate progress and prolong the United States’ innovative edge, while simultaneously dampening China’s influence throughout the semiconductor marketplace. Countries around the world have begun thinking about ways to reduce dependencies on China, enhance supply chain resiliency, and keep costs down.
In the United States, this confluence has manifested in calls for nearshoring and “friend-shoring.” As Treasury Secretary Janet Yellen said in April 2022 remarks, “friend-shoring means . . . that we have a group of countries that have strong adherence to a set of norms and values about how to operate in the global economy and about how to run the global economic system, and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.” The key difference between onshoring and friend-shoring is that friend-shoring is not restricted to domestic production, but rather seeks to move production to allied partners.
220802_Reinsch_SemiconductorsTo read the full report from CSIS, please click here.