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Martina Bernardini

U.S. governmental incentives on semiconductors are central to Great Power Competition

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Photo by Laura Ockel on Unsplash

Microchips, also called semiconductors or integrated circuits, can be thinner than a human hair and smaller than a postage stamp, but their power can be immeasurable. They play a significant role in the advancement of the consumer technologies sector and, most importantly, in the development of more sophisticated branches of technology with potentially significant implications for national security, such as Artificial Intelligence (AI) and quantum computing. Therefore, although domestic and foreign policy might not always be connected, in the case of the U.S. semiconductor industry, domestic decisions are vital both for U.S. national security and for the evolution of great power relations in general, and U.S.-China relations in particular.

The largest chipmaker in China, the Semiconductor Manufacturing International Corporation (SMIC), was added to the U.S. Entity List by the Trump administration in late December 2020 as a final move of the toughest measures taken towards Beijing, fearful that the Biden administration would soften the policy towards China. Biden, however, has not only dismantled such tough decision on the technology front, but his administration is also working on domestic measures around the semiconductor industry that will be central to U.S.-China technological competition.

In September 2020, the National Defense Authorization Act for Fiscal Year 2021 (NDAA) came into law, authorising investments in both domestic chips manufacturing incentives and in advanced microelectronics research and development. Soon after Biden took office, the Semiconductor Industry Association (SIA) followed up by stressing the need for the new U.S. administration to prioritise funding to such provisions. This came in light of the sharp decline in the U.S. share of the global chip manufacturing, which can affect the U.S. ability to produce newly advanced technologies vital to strengthen both U.S. military capabilities and its great power status overall. In fact, although the United States is the currently the global leader in semiconductors, owning around 47% of the global chips market share, U.S. chips manufacturing has been decreasing, and this might affect the American leadership in the sector already in the medium run. According to SIA, while in 1990 the United States accounted for the 37% of the global chip manufacturing, in 2020 this share has fallen to 12%. By contrast, China’s share has increased from 2% to 15% between 1990 and 2020, and it is expected to grow up to 24% in 2030, surpassing both South Korea, Taiwan, and Japan. In the same period, the American allotment in global chip manufacturing is expected to decline to 9% if governmental intervention will not be put in place.

This shift is the result of both lower incentives for the U.S. semiconductor sector and tougher measures towards China undertaken under Trump. The Covid-19 pandemic has further aggravated the situation, eventually bringing chips under the spotlight in U.S. government. The high increase in demand for consumer technologies – mainly laptops and smartphones – during the pandemic has led to a critical chips supply shortage in the U.S., leading Biden to sign an executive order that received bipartisan support in Congress in late February. The order authorised the use of $37 billion to foster the American manufacturing of semiconductors, and has furthermore launched a 100-day review on the status of supply chains in four areas that are essential to American competitiveness: semiconductors; key minerals and materials extracted from rare earths; pharmaceuticals; and advanced batteries. The order was signed the day after U.S. Senate Majority Leader Chuck Schumer declared to have directed lawmakers to draft a package of an additional $100 billion as part of a bipartisan bill to implement the NDAA by fostering research and investment in U.S. manufacturing in key high tech areas – not only semiconductors but also Artificial Intelligence and quantum computing - in order “to out-compete China and create new American jobs”.

The crucial passage to rebalance the geopolitics of semiconductors and strengthen American technological competitiveness face to China, thus, lies in American domestic politics. The review launched with Biden’s signature of the executive order is aimed at diversifying and fortifying supply chains, and the SIA insisted particularly upon increasing American chips manufacturing through the mobilisation of federal incentives. About 44% of U.S.- headquartered firms are located in the United States, but the cost to build and operate a front-end fabrication facility (fab) in the U.S. is 25% - 50% more expensive than in other alternative locations. Singapore, for instance, which hosts the majority of U.S. chips fabs based abroad (17%), has introduced hiring credits and a reduced tax rate in the semiconductors manufacturing sector, while American incentives of this kind are almost non-existent. For this reason, the measures announced by Biden and Congress play a very important role in increasing U.S.-made chips and thus fortifying American leadership in the sector by avoiding a shortfall of the U.S. share in the global chip manufacturing at a time when China’s will surely increase as a result of the plan to reach the self-sufficiency in semiconductors outlined in China’s 14th Five Year Plan.

This turn in the American semiconductor policy, however, should not be analysed through a ‘new Cold War’ lens, as China is not only the biggest U.S. competitor in chips manufacturing, but it is also a top costumer of the U.S. semiconductor industry. According to a report from the Boston Consulting Group, prohibiting U.S. chips sales to China could cause the loss of around $80 billion to the U.S. semiconductor industry, compromising the U.S. long-standing leadership position with a loss of about 18% in the American global market share of microchips. For the U.S., the solution to face the challenges posed by China on the high-tech side is found not only in a tougher policy towards Beijing, but in the U.S. semiconductor policy, which will in turn have important side effects on U.S.-China policy. As the Biden administration is likely to adopt a tough but multilateral approach to China – not only on technology but also on a variety of transnational challenges – the oculate application of the resources recently announced by the U.S. government on chips manufacturing can be pivotal both to the maintenance of the U.S. power status and to the re-definition of great power competition.

Why Biden Will Not Get Soft with China

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by Martina Bernardini

President-Elect Joe Biden, then in his capacity of Vice President, walks with Chinese President Xi Jinping, shortly after his arrival at Andrews Air Force Base during a 2015 visit to the United States (Image credit: AP Photo/Carolyn Kaster)

The election of Joe Biden as President of the United States is meaningful for several reasons, but foreign policy stands out as one of the most important. While the wars in Iraq and Afghanistan and the subsequent crisis in Transatlantic relations challenged the resilience of U.S. hegemony, the widespread enthusiasm to Biden’s election demonstrates that the U.S. historic allies still want – and require – an engaged United States on their side. Taking the reins of U.S. foreign policy in this particular moment in the history of the international system, however, is not an easy task. The biggest challenge lies in re-affirming the U.S. position in world affairs, a grand strategy that will contribute to building a strict balance between Washington and Beijing, to show that the absolute decline of U.S. power has not occurred.

During his presidential campaign, outgoing U.S. President Donald J. Trump argued that Biden allowed China to become a threat to the United States by supporting China’s entrance into the World Trade Organization in 2001. Such assumption indicated that for Trump, if Biden became President of the United States, he would get soft with China. The recent history of U.S. foreign policy, however, dismisses this thesis. In 2000, in fact, together with eighty-two U.S. Senators and 237 members of the House of Representatives, Joe Biden did vote in favour of the China Trade Bill, which authorised ‘the extension of nondiscriminatory treatment (normal trade relations treatment) to the People’s Republic of China, and to establish a framework for relations between the United States and the People’s Republic of China.’

The approval of such a bill by the U.S. Congress accompanied U.S. support for China’s accession to the WTO. At the dawn of the 21st century, this move represented - at least to U.S. policymakers - China’s official embrace of a world order based on the American-led ideals of free trade and democracy, a trend that was set in motion by President Richard Nixon and George H.W. Bush. China’s entry into the WTO was indeed positively welcomed both by Democrats and Republicans - by Presidents Clinton as well as George W. Bush - because it was seen as the coronation of a grand strategy aimed at bringing China into a pan-American trade regime. Consequently, Biden’s vote in favour of the China Trade Bill does not mean that, as President of the United States, he will adopt a concessionary China policy. Incidentally, the exact reasons for his support of China’s integration into the global trade system increase the probability that Biden’s foreign policy towards China will not be accommodating.

Biden’s vision of the United States in the world reflects the American exceptionalism that drove the United States towards superpower status by spreading the American soft power and democratic ideals abroad from the Spanish-American war (1898) to Obama’s presidency (2008-2016). For Biden, this means that the U.S. has the duty to lead and inspire the other powers of the international system. In this framework, his administration’s foreign policy plan is to lead the United States to re-establish such a relationship with the international community after four years of isolationism under Trump.

This foreign policy approach will consequently bring Sino-American relations back to the Obama years, when Washington recognised that China represented a challenge for U.S. power that had to be addressed firmly, without undermining the bilateral relationship nor the stability of the international system, of which the United States intends to be the guarantor. In the last phase of his presidential campaign, Biden anticipated how he is likely to approach Beijing. For example, he criticized Trump for not having acted on the issue of human rights in the Xinjiang region, but at the same time, he talked about working with China on climate-related matters and the COVID-19 pandemic. That is to say, that open hostilities are unlikely to break out, but Biden will want the U.S. to take a firm stance against China in the key fields where the U.S. leadership among its allies and its great power status are at stake.

The most delicate grounds for Sino-American relations in the near future are two: trade and technology. Biden will inherit the trade war that Trump launched during his years in office as an attempt to reverse the course of the growing U.S. trade deficit with China. When he was Vice President from 2009 to 2017 under Obama, the United States pursued a multilateral economic strategy to reach the goal of re-balancing the U.S. balance of payments with China. Today, this approach is no longer an option, mainly because Biden will face a bipartisan consensus for toughening the U.S. China policy.

As David Shambaugh explained, the Democrats might not have fully agreed on the utility of tariffs for U.S. national security, but they were not against Trump’s tough China policy overall. A cross-party general indisposition and the willingness to take effective action towards China have risen in U.S. Congress because China challenges the U.S. power on many fronts, and exactly because Biden recognised the need of rebalancing the economic relations with China already during his Vice-Presidency, he is expected to be determined to reach such goal. For now, Phase One of the Economic and Trade Agreement between the U.S. and China that was signed this year remains in place, and Biden declared that he is not intentioned to cancel such agreement, at least not immediately. The first step for the Biden administration’s China policy will thus be to get a sense of where the historical U.S. foreign policy partners stand vis-à-vis their commercial relations with China.

Alliances are likely to be the starting point for a firm stance on the technology front as well. ‘The United States does need to get tough with China. If China has its way, it will keep robbing the United States and American companies of their technology and intellectual property,’ Biden wrote in Foreign Affairs last spring, adding that the best way to confront the Chinese technological challenge is to build a ‘united front’ with allies. Much has been said about the U.S. semiconductor sector as at risk of being exploited by China, which led the U.S. Department of Defense to finally add Semiconductor Manufacturing International Corporation (SMIC) - the largest chipmaker in China - to the U.S. Entity List on December 18, 2020.

The list in question, which is run by the U.S. Bureau of Industry and Security, contains the names of foreign persons, governmental organisations, and companies that are subject to specific license requirements for the import of items from American suppliers. Consequently, any operation held with one of the subjects present in the Entity List is considered at risk by the U.S. government, and will therefore be closely monitored. The move comes as the final act of the most vigorous measures that the outgoing Trump administration implemented towards Beijing before Biden takes office on January 20, 2021, fearful that the incoming administration would soften the line.

This, however, is not likely to happen, because Biden’s vision of the U.S. in the world will merge with the clear bipartisan support of a hard line with China coming from Congress. The incoming Biden administration will thus aim to bring the tensions on the commercial and technological fronts to a higher strategic level especially by working on reinvigorating Transatlantic relations. Biden’s overall approach to foreign policy will be guided by his vision of the U.S. in the world, which, on the one hand, is strictly related to the historical conception of American exceptionalism, but, on the other hand, must resiliently adapt to the shape of the 21st Century’s international system, which demands a cooperative approach on climate change, migration, and global health. This means that the world will not enter a ‘new Cold War’ – a misleading term that is very often overused to describe Sino-American relations – but that Biden’s foreign policy towards Beijing will contribute to a redefinition of the terms of great power competition in a globalised world, which is not necessarily an easier scenario.

Martina is a PhD Candidate at the Department of War Studies at King’s College London. She has been awarded the Leverhulme Scholarship ‘Interrogating Visions of a Post-Western World: Interdisciplinary and Interregional Perspectives on the Future in a Changing International Order.’ Her research focuses on the history of U.S. foreign policy towards China, particularly on the role of China in U.S. President George H.W. Bush’s Grand Strategy for a post-Cold War World Order. She is an alumna of the School of Politics founded by former Italian Prime Minister Enrico Letta, and she holds a first-class honors Master’s degree in International Studies from Roma Tre University, where she also completed her BA in Political Science and International Relations.