US CHIPS Act Poses Threat to Deplete Asian Semiconductor Industry

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As the United States embraces industrial policy and reshoring, concerns arise among its Asian trading partners regarding the implications for their economic development. The shift towards protectionism and the desire to favor ‘like-minded’ trading partners raise fears of the US market closing to Asian exports unless common standards and supply chain configurations are met. The CHIPS and Science Act, enacted in 2022, reflects this reshoring trend, particularly in the semiconductor industry. With subsidies, tax credits, and domestic content rules, the act aims to bring back semiconductor manufacturing to the US.

The CHIPS Act, offering $39 billion in manufacturing incentives, has attracted major semiconductor fabricators and suppliers to invest in the US. Since its introduction in 2020, 67 new projects and expansions of existing facilities have been announced, contrasting the previous decline in the US share of global semiconductor manufacturing. However, the full impact of these investments remains to be seen as the funds’ allocation has not occurred yet.

The fear is that US industrial subsidies will draw investment away from global semiconductor companies, potentially hollowing out tech industries in other regions, particularly in East and Southeast Asia. While US chip-related activities may reduce chip imports from some Asian suppliers, they could also expand trade in materials, equipment, and labor-intensive activities. The evolving industry and market for Asian semiconductor exporters depend on the actions of other countries.

In response to the CHIPS Act, the European Union, Taiwan, Japan, and South Korea have initiated or extended subsidy programs for semiconductor plants. This high level of intervention raises concerns about a potential glut of semiconductors and falling world prices. Governments may resort to protectionist measures or customer subsidies conditioned on domestic content requirements. Additionally, US demands to reduce Chinese involvement in supply chains, indicated by the CHIPS Act’s conditions, pose challenges for Asian suppliers.

The Indo-Pacific Economic Framework’s Supply Chain Council, through ongoing consultations, aims to address these concerns and create space for Asian participation in the expanding US industry. The Council, meeting annually, explores options to diversify supply sources, avoid duplication, and modify critical material sourcing gradually. The outcome of these discussions will shape the future landscape of the semiconductor industry and global trade dynamics.