In the summer of 2022, the Biden Administration, together with Congress, passed The CHIPS and Science Act. This federal statute provides approximately $280 billion of funding, meant to boost domestic research and manufacturing of semiconductors in the United States. This program was clearly a direct response to the semiconductor supply chain issues that plagued the global economy in the time since the pandemic began.
But there is much more to this story than just procuring chips. The process of economic globalization has been going on for more than a century. In fact, some academics point to three separate eras of globalization, and we would argue that the CHIPS Act may signify an end to the third era. Economists love teaching the benefits of comparative advantage and as transportation and logistics technology has improved over the years, businesses have latched on to this concept to maximize profits.
The results have been nothing short of amazing from a global economic growth perspective. But like anything, this growth has had unintended consequences. There are the obvious consequences: Chinese and Indian economies grew because of cheap labor, US companies profit margins expanded significantly because of outsourcing, and global consumption levels of nearly everything increased. But there are also some unintended consequences of that growth. Political egos grew, global military spending exploded, and demand for goods of all sorts lead to shortages of important things.
There was also a surprising set of consequences to consumer prices…at first, the benefits of comparative advantage meant deflationary pressures on technology, but as shortages developed after the pandemic, access to technology grew in importance and we saw inflation for the first time in decades. The confluence of these events has the US consumer and the US government worried that we do not have control of our own technology. Companies like Intel, Broadcom, AMD, Applied Materials, Nvidia, Micron, etc. may have massive intellectual property, but if other countries do not respect the rules that govern the ownership of that IP, then accepting foreign manufacturing using this IP gets very difficult.
This brings us back to the CHIPS Act. $280B is a big number. But like anything sponsored by the government, it comes with pretty significant guardrails. Who can use what, what can be sold to whom, what parts of the government should benefit from these dollars, etc. 7 months after the passing of the CHIPS Act, many of the would be beneficiaries are now starting to understand what the guardrails are and we’re starting to see the first signs of pushback on the program itself. Rest assured, this is political jawboning at its best.
At the genesis of the CHIPS Act is a fear that we do not have control if China were to invade Taiwan. No political figure wants to be seen hurting US companies or leaving the country vulnerable to a newly formed economic superpower. We expect to see many exceptions and exemptions issued in coming months and years to further the build of manufacturing capacity here on US soil.
The dividends from this plan are already starting to pay out. Intel, one of the world’s largest and most important chip companies is making the largest single investment in the history of the state of Ohio as they build their massive fabrication facility (“fab”) in the suburbs of Columbus, Ohio. Austin, Texas and Phoenix, AZ are also seeing increased investments from the likes of Texas Instruments and Samsung. But the chips themselves are just the beginning. Manufacturing of many types is returning to the US or at least to near shore places like Mexico or Canada. Driving costs lower can be achieved with better technology and logistics, and companies are finally receiving financial incentive to invest in the US. Comparative advantage still exists, but the United States has entered a period of retrenchment and there are many opportunities to be captured across asset classes.