The Feb. 8-14, 2021 roundup of major trade developments
The weekly trade report with LC
The shortage of semiconductor chips needed for automobile production is causing an estimated $61 bn. loss of sales for the auto industry. The shortage is also impacting other industries that are dependent on semiconductors: cellphones, computers, electronic games, household appliances, telescopes, you name it.
The shortage stems from a simultaneous demand shock and supply shock. Both shocks had their origin in the Wuhan virus pandemic. Lockdowns and the shift to working from home caused a massive increase in demand for computers, tablets, computer games, and other semiconductor-dependent leisure devices. At the same time, the pandemic caused shutdowns and cutbacks on the industry side, the supply chain. The initial collapse in auto sales caused semiconductor manufacturers in South Korea and Taiwan to switch production lines to satisfy the surge in demand on the consumer electronics side. But with the Trump and now Biden administration handing out helicopter money indiscriminately to both the needy and non-needy, auto sales have been booming again as the non-needy rush to do something fun with the free money.
The supply shock was heightened by a structural change that had taken place in recent years in the US semiconductor industry. CNBC explains:
Many of the top [US] semiconductor companies are now “fabless,” which means that they only design the chips and the technology in them. Other companies, known as foundries, are largely contracted to actually make the chips.
The foundries are run by companies like TSMC in Taiwan or Samsung in South Korea — and as it turns out, they were already making chips as fast as they could. If a company cut orders in the early days of the pandemic, they had to get back in line.”
The chips “have extremely long lead times due to their complexity,” another CNBC article reports.
Market forces or government subsidies?
Supply and demand shocks will work themselves out fairly quickly if just left to market forces without government involvement. But a large section of the US population is under the delusion that if there’s a problem, only government can fix it.
So the Biden administration is developing a plan to solve the semiconductor shortage. The White House says to expect an executive order soon. It’s likely that the shortage will be used by the administration to justify more Buy American rules and other efforts to re-shore manufacturing. This is in keeping with general Biden administration policy to preserve Trump’s bad policies (protectionism) and throw out the good ones (pipelines, no Paris agreement, favorable energy policies, etc.).
Efforts to assure supply chains and adequate domestic supplies have led to a resurgence of interest — not just by the US — in government subsidization and industrial policy. This emerged earlier in the pandemic in the form of government responses to shortages of medical goods. It remains to be seen how the global trading system reacts to the mounting use of government subsidies by major economies.
Psaki default reply: executive order t.b.a.
White House spokesperson Jen Psaki was asked about the chip shortage. At her February 11th briefing she said, “[T]he President will sign [an executive order] in the coming weeks to undertake a comprehensive review of supply chains for critical goods. [It] will be focused on identifying the immediate actions we can take, from improving the physical production of those items in the US, to working with allies to develop a coordinated response to the weaknesses and bottlenecks that are hurting American workers.”
A reporter asked why, given the expressed urgency, did the White House decide to conduct a review that could take months instead of more immediate action. Regarding the anticipated executive order, sources told reporters it will direct the White House National Economic Council and National Security Council to undertake a 100-day review of critical supply chains, looking at semiconductor manufacturing and advanced packaging, critical minerals, medical supplies and high-capacity batteries (e.g., for electric cars). Other supply-chain assessments may come later, the sources said, looking at materials, technology, and infrastructure important for defense, public health, telecom, energy and transportation. Presumably, this would be linked to the administration’s expected broader initiatives on infrastructure.
Tech industry weighs in
Separately this week, the Semiconductor Industry Association, in a letter signed by the 21 CEOs of major tech companies (Intel, Micron Tech., AMD, Qualcomm), called on the president to help the industry through major legislation he is planning on economic stimulus or infrastructure. The letter said it should include “substantial funding for incentives for semiconductor manufacturing, in the form of grants and/or tax credits.” It noted that the US share of global semiconductor production fell from 37% in 1990 to 12% now, “largely because the governments of our global competitors offer significant incentives and subsidies to attract new semiconductor manufacturing facilities, while the US does not.”
The letter warned:
As a result, the US is uncompetitive in attracting investments in new fab[rication] construction, and our technology leadership is at risk in the race for preeminence in the technologies of the future, including artificial intelligence, 5G/6G, and quantum computing…. Working with Congress, your administration now has an historic opportunity to fund these initiatives to make them a reality. We believe bold action is needed to address the challenges we face. The costs of inaction are high. We stand ready to work with you to achieve our shared goals.
UAW concerned
The United Auto Workers union also weighed in with a statement on the chips shortfall, which has led to auto plant closings and job losses. The statement supported the re-shoring push: “While we are searching,” the UAW said, “for short-time solutions to this immediate problem, we also call on the Biden administration and Congress to develop trade and policy solutions that ensure that advanced technology that has been off-shored is brought back and produced by UAW workers here in the US.”
The US isn’t currently the main location for semiconductor manufacturing, with companies buying their chips heavily from Taiwan Semiconductor Manufacturing Co. and South Korea’s Samsung Electronics Co. This fact has led to strong bipartisan support in Congress for government assistance to the semiconductor industry, which is adding to the pressure for administration action.
But it’s not clear why, even had semiconductor chips been fabricated in the US rather than abroad, the US manufacturers wouldn’t have shifted to consumer chips for market reasons at the outset of the pandemic, just as the South Korean and Taiwanese companies did. Thus, the present shortage of chips for the auto industry would as likely have had a “Made in USA” label on it as “Made in East Asia.”
The national security case
A stronger case can be made from the national security standpoint. According to Semiconductor Engineeering,
Intel and U.S. foundries are lagging in process technology against their Asian rivals in TSMC and Samsung. China is also closing the gap. Second, the U.S. has seen a sharp decline in new fabs and capacity.
The U.S. isn’t behind in all manufacturing segments. But chip manufacturing is critical for maintaining technical leadership, both from a supply chain and economic perspective, as well as for security reasons.
…
Having leading-edge processes onshore is essential for the U.S. Department of Defense and military/aerospace companies, as well as for business competitiveness. “You dominate chips and you dominate the defense, technology and intelligence industries,” said Robert Maire, president of Semiconductor Advisors, in a recent presentation.
…
[S]everal Asian nations supported their domestic chip companies with tax breaks and incentives. This fueled a fab boom in China, Korea, Taiwan and Singapore. “Government policies have been a major factor in this strong growth in Asia…”Those investments have paid big dividends. Taiwan is the leader in terms of worldwide fab capacity, with a 22% share in 2020, followed by South Korea (21%), Japan (15%), China (15%), the U.S. (12%), and Europe (9%).”
Allies or autarky?
Taiwan and South Korea, however, are US allies, and the shipping lanes from there to the US are open unless the Biden administration drops the ball – as the Obama administration did in letting China militarize the South China Sea atolls. Some would consider South Korea and Taiwan more reliable allies than Google and some other Silicon Valley firms.
But the underlying issue to subsidization is where do you stop before you destroy an industry through excess protectionism – as the US destroyed its shipping industry by means of the Jones Act and its agriculture industry by means of “temporary, emergency” FDR farm relief programs that are still with us?
National defense arguments, if justified, are compelling. But “Buy America” at the expense of reliable allies is a fools’ program.
Harm of anti-dumping duties
As one vivid example of self-inflicted harm from protectionism, the PIIE’s Chad Bown and three co-authors have written a study titled, “Trade protection along supply chains: The negative effects of tariffs on downstream sectors.” According to the summary, “In a world in which production processes are fragmented across countries, the effects of tariffs propagate along supply chains, with firms in downstream industries suffering from protection upstream. This [paper] studies the effects of US antidumping [“AD”] duties applied against China – its most frequent target – over 1988-2016 on US firms in downstream sectors. It finds that tariffs have large negative effects on downstream industries, increasing production costs and decreasing employment, wages, sales, and investment.”
While this conclusion won’t surprise most economists, nor many in the private sector, the authors show rigorously the inevitable negative effects of AD duties – the most commonly used trade barrier. “Our evidence is that tariffs have large negative effects on downstream industries.”
The authors show that beyond the impact on employment, “tariffs have negative effects on other key economic outcomes,” significantly decreasing “the growth rate of wages, sales, and investment in downstream industries” as the duties “decreased US imports of targeted products from China and increase prices, thereby increasing production costs for downstream industries.”
This is an important analysis for the Biden administration to heed. It might move away from Trump’s unilateral tariffs but continue to tout the importance of another kind of tariff, the unfair-trade duties.
L.C. reports on trade matters for business as well as Founders Broadsheet.
3/19/2021, correction in the labeling of the photo: the abbreviation of Taiwan Semiconductor Manufacturing Company is TSMC, not SMIC, which is that of its main Chinese competitor.
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