The CHIPS Act won’t solve the chip shortage

“On its face, the idea of increasing semiconductor manufacturing in the US seems like it would help address the global supply crunch for computer chips, which has made it harder to buy everything from cars and laptops to sex toys and medical devices during the pandemic. Senate Majority Leader Chuck Schumer (D-NY) has even suggested that the funding package could help fight inflation, presumably by making these goods cheaper.

But while it’s certainly fair to call the legislation a victory for bipartisanship, this plan is primarily focused on keeping up with China’s growing investment in its own domestic chip industry — not solving the present issues with the tech supply chain. The chip factories produced by this package won’t be complete for years, and the bulk of the funding won’t necessarily go toward basic chips, also known as legacy chips, which account for much of the ongoing shortage. And that shortage may be nearing its end anyway.”

Biden Expands Dubious Subsidies for Manufacturers

“For nearly 90 years, the Export-Import Bank of the United States has subsidized foreign purchases of goods produced by politically connected American businesses. Now it will start loaning money to U.S. companies that do little or no business overseas.

In April, the Ex-Im Bank’s board of directors voted unanimously to launch a new “Make More in America” initiative aimed at subsidizing American manufacturers instead of their foreign customers. Rather than unwinding and abolishing the Ex-Im Bank, as some fiscal conservatives have been trying to do for years, this new program is likely to further entrench the bank’s role in federal industrial policy.

“This is worse than mission creep,” says Sen. Pat Toomey (R–Pa.), the top Republican on the Senate Banking Committee and a longtime skeptic of the Ex-Im Bank. “There is no reason that taxpayers should have to back domestic financing when we live in a highly developed market economy in which promising businesses have access to capital on competitive terms.”

Toomey submitted a series of questions to Ex-Im Bank President Reta Jo Lewis about the new program. The answers he received are telling.

In response to Toomey’s request for evidence that a new domestic loan program is needed, Lewis wrote that “it is difficult” to identify a financing shortage, noting that “U.S. capital markets are deep and liquid.” Where there are “gaps,” she said, they exist among “non-investment grade or unrated borrowers.”

Applicants for the new loans, Lewis said, “will need to demonstrate that the required financing is not otherwise available from the private sector.” In other words, these loans will go to projects that private capital markets have deemed too risky to finance.

The Ex-Im Bank’s low-interest loans to overseas buyers of American goods have long benefited companies like Boeing, which can undercut foreign competition with the U.S. government’s help. But there is little evidence that the Ex-Im Bank has actually boosted American exports.

From 2014 to 2018, the bank was effectively shut down when conservatives in Congress temporarily suspended its lending authority. American exports nevertheless grew from $2.3 trillion to a then-record $2.5 trillion during that period.

Former President Donald Trump signed a bill reauthorizing the bank in 2018. President Joe Biden now plans to expand its mandate. Having failed to prove its worth in the global marketplace, the Ex-Im Bank will waste taxpayer money here at home.”

Don’t Give U.S. Chipmakers a $76 Billion Government Handout

“The current legislation has swelled to a total cost of more than $400 billion. The core of the bill is $76 billion in direct funding for domestic semiconductor manufacturing through a variety of grants and tax credits. The rest of the money, beyond doubling the budget of the notoriously silly spenders at the National Science Foundation, is predictably a billion here and a billion there for vaguely named programs with even more ambiguous purposes. For example, as the Wall Street Journal editorial board pointed out, “The Commerce Department gets $11 billion, most of which it intends to plow into creating 20 new ‘regional technology hubs,’ which will somehow expand ‘U.S. innovation capacity.'””

“Proponents of the legislation would have you believe that the U.S. is overly reliant on foreign, unreliable suppliers of semiconductors, particularly those under threat from China. Semiconductors are unbelievably important components in practically countless goods relied on every day, but that’s no excuse to ignore the fact that the domestic semiconductor industry is, per a 2020 report by the Semiconductor Industry Association, “on solid footing.” U.S.-based semiconductor firms hold nearly half of the global market share, and 44 percent of that production already occurs in the U.S. Moreover, these figures don’t even capture firms based in allied countries such as South Korea and Taiwan that are currently spending billions of dollars to open semiconductor manufacturing facilities in the U.S.—without the need for funding.”

America is trying to fix the chip shortage one factory at a time

“Making chips is an intricate process, but building a factory that can do this type of manufacturing is even more complicated. For one thing, fabs can’t go just anywhere. They need to be close to a reliable source of electricity, since they can use as much energy as 50,000 homes in a single year (they release a lot of carbon emissions, too). These factories also need to be near a large body of water, which they use to clean and cool down their equipment, which, in turn, produces wastewater that needs to be treated. And it’s better if they’re not particularly close to any airports or geological fault lines; seismic activity can disrupt the incredibly precise machinery they use.

Then there’s the matter of the supply chain. Beyond the fab, making a chip can involve 70 different border crossings and more than 1,000 steps, and a single disruption in one country or during a particular step can throw the entire process off course. That’s because there are usually very few, if any, other options for supplies when something goes wrong. For example, just one company in the Netherlands, ASML, makes the specialized, $200 million lithography tools that many advanced chip fabs rely on. And just two firms, both based in Ukraine, supply about half of the specialized neon gas that fabs throughout the world use to control these lasers. Of course, securing all this equipment has gotten even more difficult during the pandemic.”

“concern is based, in part, on fears that China may invade Taiwan at some point and attempt to take control of its chip-manufacturing capacity. But there are other reasons to be worried about the state of US semiconductors. The US doesn’t currently make very many of the most basic, or legacy, chips, which are typically produced where they can be made for less. These are the chips that became unavailable during the pandemic, and that made lots of technology hard to find and drove up car prices. The US will also need to manufacture more chips to maintain its hold on the auto industry, since EVs will likely need at least twice as many chips as their gas-powered counterparts do.”

The chip shortage has a silver lining

“Manufacturers haven’t overcome the worldwide semiconductor shortage. Gaming consoles like the PlayStation 5 are still scarce, automakers are delivering cars with missing features, and Apple may end up producing 10 million fewer iPhones in 2021. For a few companies, however, these supply chain woes may have an unexpected upside.

The manufacturing delays abroad and relentless demand for consumer electronics have turned into a windfall for some chipmakers in the United States. Even lesser-known American manufacturers with aging or secondhand equipment have seen a surge in sales for the legacy chips, or microcontrollers, they produce. These parts are inexpensive to make but are a critical component for many devices, and as supply chain troubles have affected larger companies that focus on more advanced technologies, demand for the more basic chips has grown. Flush with customers, the companies that make these microcontrollers are now on a spending spree to boost their overall manufacturing capacity.”

Supply chain havoc is getting worse — just in time for holiday shopping

“Gadgets are particularly vulnerable to shortages because they include many different components. Consider all the parts that go into a PlayStation 5 or a new laptop, including their chips, outer shells, and screens. Many of these components require their own specialized manufacturing facilities, which are typically in different factories and often in different countries. For a device to be delivered on time, all of these parts need to be made in sync. Right now, that’s not happening.”

“Demand for these components has run up against efforts to contain Covid-19 in the countries where the production and assembly of many goods actually take place. Amid a recent delta variant outbreak and nationwide lockdown in Malaysia, the government designated electronics manufacturers critical businesses so that production could continue. In May, Vietnam directed vaccines directly to factory workers, while urging smartphone manufacturers working in the country, like Samsung, to do the same. (Vietnam’s Covid-19 challenges haven’t gone away: This past weekend, tens of thousands of workers fled the country’s commercial center after the government, which is still struggling to access vaccines, lifted pandemic lockdown restrictions.)”

““What will happen is that a phone will be delayed because they’re waiting on their plastic supplier, and the plastic supplier is waiting on the ingredient,” Penfield, the Syracuse professor, said. “It just takes one supplier — and it could be the base ingredient supplier — to fully screw up your supply chain.””

“All these problems mean that consumers are seeing rising prices and shipping delays for a wide range of products. So those looking ahead to the holiday shopping season might want to get an early start, and not just on consumer electronics.”

No, the supply chain mess is not a war on Christmas

“these shortages and delays are the product of many cross-cutting problems that have existed for years, including the Covid-19 pandemic, rising consumer demand, and a global and highly optimized manufacturing network that doesn’t adapt to change quickly.”

“What the pandemic did do was cause factories to shut down, usually because there weren’t enough workers, and that created shortages of products and components. Those shortages led to bottlenecks and delays in product manufacturing (if factories don’t have the parts to build something, it doesn’t get made and doesn’t get shipped).

As more shortages lead to more bottlenecks, the disruption causes problems in other parts of the supply chain, creating even more shortages, new delays, and higher prices. For example, automotive manufacturers haven’t been able to make cars and trucks, because they can’t get their hands on enough computer chips. Ikea can’t ship furniture parts from its warehouses to its stores thanks to the trucker shortage. A supply crunch for petrochemicals has driven up the cost of making anything that includes plastic, including children’s toys.”

“US companies have been moving more and more manufacturing abroad for decades, which means a growing amount of the stuff American consumers want to buy needs to be imported. Meanwhile, worsening conditions for truck drivers in the US have made the job incredibly unpopular in recent years, even though the demand for drivers has gone up as e-commerce has become more popular. That means that as Americans relied more on online shopping during the pandemic, getting goods from ports to doorsteps has been challenging.”

“Covid-19 has also affected consumer demand — namely, which products they want to buy and how much — creating constant changes that the supply chain just hasn’t been able to keep up with, especially lately.”

“This record number of imports is slowing down product deliveries. Cargo ships carrying holiday merchandise are waiting to unload their stock along the California coast, but there aren’t enough port workers to do the job. Those delays mean there are fewer containers available for manufacturers trying to send more products to the US, which only sets the supply chain back even more.”

“Pushing the Port of Los Angeles to operate 24/7 is Biden’s most direct action to date, and it’s supposed to ensure that an additional 3,500 cargo ships are unloaded each week. The Port of Los Angeles and the Port of Long Beach, which expanded its operations last month, are responsible for 40 percent of the containers brought into the US, so expanding their operations is supposed to speed up shipping nationwide, the White House says.”

“it’s not clear what Biden can do to fix the bottlenecks occurring higher up in the supply chain, like manufacturers running low on components and factories getting shut down abroad. While the White House has convened task forces to address these underlying problems, those efforts probably won’t bear fruit in time for the holidays.”

“In the long run, it’s possible that the US government can change policies that contributed to this situation in the first place. Politicians could shift their approach to trade, which has historically encouraged US companies to manufacture products abroad. Improving labor standards might boost working conditions for truckers and factory workers to make those jobs more appealing — boost global vaccine manufacturing and ensure that workers in other countries are safer from Covid-19 outbreaks. Admitting more people into the US could address a shortage of delivery and port workers.”

How to supercharge vaccine production for the next pandemic

“But it’s one thing to come up with a vaccine, and entirely something else to manufacture it on a mass scale. That’s where the world has stumbled and where concerted planning now can make sure we’re prepared for the future. If we’re to have a better chance to fight the next pandemic — and there will be a next one — the US needs to build on these vaccine tech innovations and make investments to establish permanent facilities producing mRNA and adenovirus vaccines.”

“that slack won’t arrive naturally.

Weber, the former assistant secretary of defense for biodefense, has pushed for what he dubs a “10 + 10 Over 10” plan to prevent biological threats in the future. It is essentially a big government investment that could enable the kind of infrastructure necessary to have gotten to full vaccine availability in the US in, say, one or two months, not five.

The plan calls for $10 billion in additional annual funding for the Department of Defense, and another $10 billion per year for the Department of Health and Human Services, devoted to anticipating pandemic and other biological risks, for at least 10 years.

With that funding, government could finance the infrastructure for year-round vaccine manufacture.”

“The key is that these facilities need to be active during non-pandemic times, otherwise their expertise and readiness could deteriorate.”

“Pharmaceutical companies are not going to go this big on their own, and there’s no guarantee that the government will fund them sufficiently without pressure. In 2020 — during the pandemic — the Trump administration cut the DOD’s chemical and biodefense programs by 10 percent, with much of the cuts going to the vaccine component of the budget. To set this vision in motion, the US needs to not just reverse cuts like that but spend much more, in line with Weber’s $20 billion per year proposal.”

Biden’s Manufacturing Plan Is $700 Billion Worth of Protectionism

“The claim that we need a national industrial policy because U.S. manufacturing is in decline is usually based on two trends: the fall in both U.S. manufacturing employment and the sector’s declining share of total U.S. economic output (measured by gross domestic product). Each of these trends, however, started decades ago. And neither tells you anything about the productive capacity of the nation overall or the vitality of the industries being targeted by the industrial policy.

As Lincicome shows, the reduction in manufacturing employment is occurring in every industrialized nation, including those countries with economies more centered on manufacturing than the United States. It’s also occurring in nations with longstanding trade surpluses in goods, and even in those countries that already have aggressive industrial policies. The real reason for a decline in manufacturing employment is mostly due to labor-saving technologies that raise worker productivity. In fact, anyone who wants to understand this reality ought to visit contemporary steel mills. They look nothing like mills of the past, as they’re automated, clean and employ highly skilled and well-paid workers.

The decrease in the share of GDP generated by manufacturing is mostly the result of the fact that our modern economies are increasingly service economies. That’s consumers’ choice. This trend, too, exists in all developed countries.”

“U.S. manufacturing continues to be at or near the top of most categories, including output, exports and investment. Industrial capacity is also growing, and industry-specific data show strengths where it counts (durable, high-value-added goods).”