Building Global Supply Chains: US Strategy to Mitigate Risks with China

Building Global Supply Chains: US Strategy to Mitigate Risks with China
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If the Biden administration is successful, many more electronic chips will be produced in factories located in, say, Texas or Arizona. These chips will then be shipped to partner countries like Costa Rica, Vietnam, or Kenya for final assembly and global distribution, powering everything from refrigerators to supercomputers.

These places aren’t the first that come to mind when you think of semiconductors. But administration officials are trying to transform the global chip supply chain, and they’re negotiating hard to make that happen.

Key elements of the plan include convincing foreign companies to invest in U.S. chipmaking and finding other countries to set up factories to do the work. Officials and researchers in Washington call it part of the new “chip diplomacy.”

The Biden administration argues that producing more of these tiny electronic brains in the United States will help make the country more prosperous and safe. President Biden boasted about his efforts in an interview with ABC News, where he mentioned convincing South Korea to invest billions of dollars in chip production in the United States.

But a crucial part of the strategy is unfolding beyond America’s borders, where the administration is seeking to work with partners to ensure that U.S. investments are more durable.

If this emerging effort goes forward, it could help the administration achieve some of its broader strategic goals. Among them is easing security concerns about China, which is ramping up its chip production, threatening Taiwan, a global tech hub. It also aims to reduce the risks of disruptions in the chip supply chain, risks that have become apparent during the coronavirus pandemic and the war in Ukraine, which have disrupted global shipping and manufacturing.

“The goal has been to do everything we can to expand capacity across a diverse set of countries to make those global supply chains more resilient,” said Ramin Toloui, a Stanford professor and former assistant secretary of the Bureau of Economic and Business Affairs at the State Department, who is at the forefront of diplomatic efforts to establish new supply chains.

The administration aims to achieve this goal not just for chips, but also for green energy technologies such as electric vehicle batteries, solar panels and wind turbines. China is by far the largest player in those sectors.

Biden and his advisers say the dominance of Chinese companies poses a national security and human rights concern, given that some manufacturing takes place in Xinjiang, a region of China where officials force members of some Muslim ethnic groups to work in factories.

According to Toloui, during the three years of the Biden administration, the United States has attracted $395 billion in foreign investment in semiconductor manufacturing and $405 billion in green technology and clean energy manufacturing.

Many of the companies investing in this type of manufacturing in the United States come from Asian countries known for their tech industries, such as Japan, South Korea, and Taiwan, and from Europe. One of those is SK Hynix, a South Korean chipmaker that is building a $3.8 billion factory in Indiana. The State Department says the project is the largest investment in the state’s history and has the potential to create more than 1,000 jobs in the region.

Secretary of State Antony J. Blinken mentioned the plan in a speech last month at a conference in Maryland aimed at promoting foreign investment in the United States. He said he hoped the legislation signed by Mr. Biden would attract foreign investment in high-tech manufacturing in the United States by “modernizing our roads, rails, broadband and electric grid.”

Policy efforts, he added, aim to “strengthen and diversify supply chains, boost domestic manufacturing, and stimulate key industries of the future, from semiconductors to clean energy.”

The Commerce Department has also played a significant role in efforts to strengthen the chip supply chain, providing $50 billion to American companies and organizations for chip research, development, and manufacturing.

Commerce Secretary Gina Raimondo conducted an in-depth study of global chip supply chains to identify vulnerabilities and worked with foreign governments to discuss additional investment opportunities abroad.

That topic was the focus of Ms. Raimondo’s trip to Costa Rica last spring, when she met with local officials and executives at Intel, which runs a factory there. (Mr. Toloui spoke at a semiconductor manufacturing conference in Costa Rica in January.) She also discussed diversifying the semiconductor supply chain during trips to Panama and Thailand.

But restructuring global supply chains to make them less dependent on East Asia will be a challenge. East Asian chip factories offer more advanced technology, a larger pool of talented engineers, and lower costs than U.S. factories.

Taiwan produces more than 60 percent of the world’s chips and nearly all of the advanced chips used in computers, smartphones and other devices.

By comparison, according to various estimates, the U.S. semiconductor industry could face a shortage of about 90,000 workers in the coming years.

Governments in China, Taiwan, South Korea and other countries are also aggressively subsidizing their own chipmaking industries.

Still, billions of dollars in new U.S. investment are expected to shift global supply chains somewhat. The U.S. share of global chip production is expected to rise to 14% by 2032, from 10% today, according to a May report by the Semiconductor Industry Association and Boston Consulting Group.

Some administration officials have adopted a more coercive form of chip diplomacy to prevent China from developing versions of U.S. technology. That approach has focused on convincing a handful of countries, notably Japan and the Netherlands, to block companies from selling certain chipmaking tools to China.

Alan Estevez, head of the Commerce Department’s Office of Export Control, visited Japan and the Netherlands last month to try to persuade those countries to block the sale of certain advanced technologies to China.

Instead, Mr. Toloui and his aides have traveled the world to identify countries and companies that might want to invest in U.S. industry and set up factories that would be the end point of the supply chain. Mr. Toloui said his office’s work was part of Mr. Biden’s recent passage of legislation to create more manufacturing jobs in the United States, including the Infrastructure Act and the CHIPS and Science Act.

The CHIPS Act includes $500 million in annual funding for the administration to create secure supply chains and protect semiconductor technology. The State Department is using that money to identify countries for supply chain development. Officials are conducting studies in several countries to see how infrastructure and workforces can be raised to standards that ensure seamless chip assembly, packaging and shipping.

Countries now in the program include Costa Rica, Indonesia, Mexico, Panama, the Philippines, and Vietnam. The U.S. government is bringing Kenya into the fold.

Vocational training is a priority in building this supply chain, Mr. Toloui said. He has spoken to Arizona State University about partnering with foreign institutions to develop training programs. One such institution is the National University of Vietnam in Ho Chi Minh City, which he visited in May.

Martijn Rasser, executive director of Datenna Inc., a China research firm, said this network of alliances represents a strategic advantage for the United States over China.

For the United States, trying to do it all alone would be too expensive, he said. And doing it alone would fail to acknowledge the reality that technology is now much more globally distributed than it was a few decades ago, with more countries playing major roles in the chip supply chain.

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Jhon W. Hasvest

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