Why Biden’s chips policy is backfiring

The Biden administration has decided to give away one of our best advantages: the dominance of American companies in microchips. 

For all the anxiety in the West about our dependence on Chinese manufacturing, you’d think we would appreciate when China is dependent on us for key components. But the Biden administration has decided to give away one of our best advantages: the dominance of American companies in microchips. 

Biden’s industrial policy has put chipmaking front and center, dumping more than $50 billion on building new fabrication plants (“fabs”) in the U.S. and imposing export controls that have cut China off from most of the world’s supply. Protectionists and Dark Brandon memers may rejoice, but all this has done is push the Chinese Communist Party to make its own $48 billion investment in chip making.

As the Economist reports, China’s investments account for more than half of all planned expansion in the world’s chip manufacturing, and “Bosses of Western chip firms privately grumble that the coming glut of Chinese semiconductors will put downward pressure on prices both in China…and elsewhere.” 

Not only has Biden cut off a major market for chip exports and reduced China’s dependency on American manufacturing, but he has also incentivized China to distort the global market, harming our chipmakers further. 

The U.S. semiconductor industry directly and indirectly employs over 1.8 million Americans in at least 44 states and generates $264 billion in revenue, according to industry reports. Cutting off the Chinese market (which will be as large as France, Germany and Italy’s consumer markets combined by next year) and forcing the taxpayer to make up the difference through subsidies puts these jobs at risk.

Diminished investment, wages and jobs are bad enough for any American industry. Biden’s export controls forcing the CCP to build their own chips is a also great power giveaway. If American companies continue to dominate the market, Americans get to set global industry standards. The demand for supercomputing will only grow with the global middle class and its consumer demands. Shouldn’t the U.S. be in the driver’s seat for this boom?

To be clear, China is not yet capable of making the high-end chips that Western firms specialize in, although it is only a matter of time if they are unable to import them. For now, they make “mature chips” for products like toys and cars, not cutting-edge components for high-level computing. China is dependent on these chips to manufacture and export the products that have made them the world’s second-largest economy. 

But this presents another problem: It reduces Chinese dependency on Taiwan, which currently dominates the mature chip market, while forcing Taiwanese high-end manufacturers to exit the mainland.

Taiwan has long relied on the so-called “silicon shield” of its chipmaking dominance to deter Chinese aggression. So long as China depends on Taiwan to produce both mature and advanced semiconductors, any invasion of the island would destroy its fabs, crippling the Chinese economy. It would then be extremely expensive for the CCP to rebuild this infrastructure, especially if the native talent has all been evacuated to the U.S. to staff our fabs. This is a major deterrent to a Chinese invasion.

But if China becomes self-sufficient in mature chips, enough to supply its manufacturing base and maintain its exports, that deterrence is lost. By cutting China off from Taiwanese chips, Biden has put the island in greater danger.

Biden’s chips policy has backfired. It has weakened American companies exporting to China, diminished American dominance of the technology supply chain and reduced deterrence of a Chinese invasion of Taiwan. Instead of overplaying our hand as the global leader in technology, the administration should embrace trade that cements American hegemony.

James Erwin is the federal affairs manager for telecommunications at Americans for Tax Reform and executive director of Digital Liberty.