Protectionism isn’t the answer to securing the US semiconductor supply chain

It’s the strategic industry that makes other industries strategic: semiconductors. They are the brains of every gizmo that helps us work from home, and relieve the boredom, during the pandemic. And that’s the problem: There’s a shortage of semiconductors right now, and this is hurting industries from autos to 5G. President Biden issued an executive order calling for a review of the U.S. semiconductor supply chain, looking to see if something can be done. There’s no quick fix, but protectionism is not the answer.

The push to “re-shore” semiconductor manufacturing has been gaining momentum for some time. President Trump urged the industry to bring home more fabrication plants, or fabs, and coaxed Taiwan Semiconductor Manufacturing Company into building a $12 billion fab in Arizona. Trump also banned the sale of chips to Huawei, and slapped Section 301 tariffs on Chinese semiconductors and manufacturing equipment, much to the dismay of U.S. vendors. This isn’t the way forward.

More usefully, the House and Senate introduced bills last June, cleverly titled “Creating Helpful Incentives to Produce Semiconductors for America Act,” or CHIPS. The bills create a $10 billion federal grant, investment tax credits and a variety of research and development funds. There is much to like about CHIPS. The Boston Consulting Group (BCG) estimates that a failure to match government incentives on offer by countries like Singapore, South Korea and Taiwan explains 40-70 percent of the U.S.’s cost disadvantage in semiconductors. Still, getting into a spending war with these countries, let alone with China, isn’t viable in the long run.

For its part, Beijing also wants to become more self-sufficient in semiconductors. Chips are central in Beijing’s “Made in China 2025” industrial policy, the goal being to supply 70 percent of the country’s chip needs domestically. This would be a remarkable feat, given that China has a mere 5 percent share of global production. Starkly, BCG estimates that the American chip industry has far more to lose from U.S. protectionism than from any successes that “Made in China 2025” could hope to sponsor.

CHIPS need DIP, which is to say the CHIPS Act needs a Defense of Intellectual Property Act. The emphasis should be on “trade secrets,” including technical information, confidential business information, and “know-how.” Internationally, the World Trade Organization (WTO) was the first agreement to require countries to protect trade secrets, but the action has since moved to preferential trade deals. More can be done, including under U.S. bilateral investment treaties.

Trade secrets are a big deal. The Semiconductor Industry Association reports that they account for as much as 80 percent of the value of a company’s intellectual property portfolio. Indeed, intangible assets, like trade secrets, account for more U.S. investment than tangible assets. As a result, trade secrets need to figure prominently in all U.S. commercial pacts, from trade deals to investor rights agreements.

Domestically, Section 337 of the 1930 Trade Act, which is getting a workout these days as a check against the theft of American intellectual property, should be made as trade secrets-friendly as possible. This would help American semiconductor firms better protect themselves from corporate espionage, for example, including of the state-sponsored type. It would also be useful to build up Section 337’s “mediation” function, so that U.S. owners of trade secrets could more fully negotiate in the shadow of stronger enforcement.

Semiconductor supply chains are complex. A chip’s components can travel 25,000 miles before final assembly. Manufacturing equipment is dominated by a single Dutch company, and assembly, testing and packaging is too costly to re-shore unless more fully automated. The half-life of a chip is a matter of months, and innovation hinges on close contact between those who make them and those who put them in their products. Nothing about this complexity suggests that protectionism can possibly be the answer to securing the U.S. semiconductor supply chain.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.