America has to invest in advanced chipmakers or lose battle to China

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The United States is in the fierce competition with the hostile country of China. This is a new kind of conflict in which technological leadership is critical. Our opponents learned from us that such an advantage provides influence and authority in international affairs, and this is vital 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 today than during the golden age of American technology. In contrast, research and development spending by China reached $550 billion back 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 more 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 investments for semiconductors, including this corporate tax exemption lasting one decade for firms that make advanced chips and a pledge of another $60 billion from local governments, as well as other policies aimed at improving the production of chips. These other policies aim to bolster the workforce, expand research and development, and incentivize foreign companies to relocate to China, which also hires away engineers and engages in espionage to fuel its efforts.

The United States has taken defensive measures. The export controls on manufacturing equipment, restricted sales of chips made with American equipment, and blocking of Chinese acquisitions of American firms can slow down Beijing, but such measures do not build a great industry. The Huawei experience is a warning of the cost of not supporting a strategic industry. American companies had once led in making communications infrastructure. Now there are no American companies left.

Federal investments for strategic industry should not be off limits. Let us note that the United States used industrial policy to win its 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 decades ago. The United States is coasting on spending over science, research, and technology that dates to the 1980s. So to defend ourselves, federal investment in technology is needed again.

The arguments against federal investments are that subsidies distort the market and the semiconductors industry does not need spending. These arguments, however, do not account for such competition with China and the use of subsidies by other countries, which attract the laboratories and fabrication plants for integrated circuitry. While China spends the most, it is not the only government that does so. There is fierce competition with a dozen countries to attract the fabrication plants. Such subsidies affect our technological leadership because they make it more expensive to build a fabrication plant in the United States than in other countries.

One great way to think about funding of semiconductors is to compare it to national defense spending. Fabrication plants cost almost as much as new aircraft carriers but there are differences. An aircraft carrier does not enable other industries, nor is the cost of a fabrication plant borne solely by the government. China of course does not have to worry about voters and elections, but a strong case can be made to voters that investments in technology provide security and economic benefits that outweigh the costs. The United States spends more than other countries on its military, however, it will fall behind if it does not spend on technology.

The Creating Helpful Incentives to Produce Semiconductors for America Act provided support for the industry, but Congress reduced its funding. Defense Production Act funding is not a substitute. If all of such funding currently available under that law went to incentives for semiconductors, China still outspends the United States by 20 times. Several critics argue the American companies do not need federal support. This would be true in a perfect world where no other country used such subsidies, but China certainly does not have any intention to end its subsidies.

The United States has always been willing to spend what is needed for defense. Indeed, investment in technology is what is needed now. We spent around $6 trillion over the last 18 years fighting wars in Iraq and Afghanistan. Investing a fraction of this in our technology base would bolster our ability to compete with China. Passing the Creating Helpful Incentives to Produce Semiconductors for America Act was one critical milestone for gearing up for this new global conflict, but failing to fully allocate funding for 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.

Tags Business China Economics Government International Production Technology

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