The United States is in competition with a hostile country. This is a new kind of conflict in which technological leadership is vital. Our opponents learned from us that such an advantage provides influence and authority in international affairs, and it is crucial for military strength. They seek the technological leadership that we have held, and there is a real risk that the United States could lose its edge.
China has one clear advantage in that it is willing to spend money. China is not like the sluggish Soviet Union. Even if it was more like the old Soviet Union, the United States no longer makes the federal investments needed for competition. We spend much less now than during the golden age of American technological leadership. In contrast, the research and development investments by China reached $550 billion in 2018, more than that of Japan, France, Germany, South Korea, and the United Kingdom combined. It is unrealistic to be in a competition with China without increased spending.
Semiconductors are the strategic industry of the modern era. They power our economy and our weapons. China knows this, which is why it plans to spend over $58 billion on national investments in semiconductors, including a corporate tax exemption lasting a decade for firms producing advanced chips and a pledge of another $60 billion from local governments, as well as other policies aimed at improving and expanding the production of chips. Other policies aim to strengthen the workforce, expand research and development, and incentivize foreign companies to relocate to China, which has been hiring away engineers and engaging in espionage to bolster its efforts and to end reliance on American suppliers.
The measures the United States has taken for semiconductors are defensive. Export controls on manufacturing equipment, restrictions on sales of chips made on American equipment, and blocking of Chinese acquisitions of American firms can slow Beijing, but such measures do not build a strong industry. The Huawei experience is a warning of the cost of not supporting a strategic industry. American companies once led in making communications infrastructure. Now there are no American companies left.
Federal investments in strategic industry should not be off limits. Let us start by noting that the United States used industrial policy to win its global conflicts. The technology base built for the Cold War is the foundation of our national wealth today. Silicon Valley was built on those federal investments, but they were made decades ago. The United States is coasting on spending in science, research, and technology that dates to the 1980s. To defend ourselves, federal investment in technology is again necessary.
Arguments against federal investment are that subsidies distort the market and the semiconductor industry does not need funding. These arguments, however, do not recognize today’s competition with China and the use of subsidies by many other nations. Countries compete to attract semiconductor labs and fabrication plants for integrated circuitry to their countries; while China spends the most, it is not the only government to do so. There is fierce competition among a dozen nations to attract the next fab. These subsidies affect both “reshoring” (e.g., moving supply chains back to the U.S.) and tech leadership, as they make it more expensive to build a fab in the U.S. than in other countries.
A good way to think about semiconductor funding is to compare it to other defense expenditures. A fab costs almost as much as a new aircraft carrier, but there are crucial differences. Aircraft carriers do not enable other key industries. Nor is the cost of a fab borne solely by the government. China’s government does not have to worry about tax-weary voters and elections, of course, but a strong case can be made to American voters that tech investments provide both security and economic benefits that outweigh the costs. America spends more than other countries on its military, but if it does not learn to spend on technology, it will fall behind.
The Creating Helpful Incentives to Produce Semiconductors for America Act provided strong support for the semiconductor industry; Congress, however, pared back its funding significantly. Defense Production Act funds are not a substitute. If all of the DPA funds currently available went to semiconductor incentives, China still would outspend the United States by 20 to one. Some critics argue that the American chip industry does not need federal support. This would be true in a perfect world where no other country used such subsidies, and China does not have any intention to end its subsidies.
America has always been willing to spend what is needed for defense. Investment in technology is what is needed now. We spent perhaps $6 trillion over the last 18 years fighting wars in Iraq and Afghanistan. Investing a fraction of this in our technology base would immensely bolster our ability to compete with China. Passing the Creating Helpful Incentives to Produce Semiconductors for America Act as part of the National Defense Authorization Act was a milestone in recognizing the requirements of this new conflict, but failing to fully fund it yields the advantage back to China.
James Andrew Lewis is an expert for technology and senior vice president and program director at the Center for Strategic and International Studies.
