The U.S. House of Representatives passed legislation on Thursday to subsidize the domestic semiconductor microchip industry in a bid to compete with the Chinese and other foreign manufacturers. The final vote was 243 to 187, and with 24 Republicans backing 218 Democrats in support. Now the bill is off to the White House where President Biden is expected to sign it into law.
The Senate passed the “Chips and Science” act on Wednesday. The bill approves $52 billion in government subsidies for U.S. production of semiconductors, which are used in everything from cars and trucks to computers and video games. It also includes an investment tax credit for chip plants worth $24 billion.
The semiconductor chip shortage began in 2019 at the start of the COVID-19 pandemic when demand began to outstrip supply.
Semiconductor chips are used in almost every sector as well as in multiple daily products. The materials required include silicon, and are absolutely essential in the building of integrated circuits or microchips that drive most modern devices.
The chip shortage came about due to four reasons:
- The automobile sector: computer chips show up in most modern automobiles, including their security systems and computerized panels. As the industry moved away from the ‘dumb’ versions involving some wiring and an internal combustion engine, the demand for these computer chips rose considerably.
- General rise in demand for electronics: We’re in the age of the computer and that means microchips. It means integrated circuits. The advent of the COVID-19 pandemic shut down many factors involved in microchip production while at the same time people bored under lockdown wanted to play video games and had to work from home on computers made with microchips. The decreasing amount of factories meant a decrease in the supply of chips while the rise in the amount of computers being taken off shelves and plugged in at home meant an increase in the demand for chips.
- A broken supply chain: The pandemic caused considerable disruptions in the supply chain, which we still haven’t quite recovered from. Shipping ports that reopened as restrictions were lifted came back to work with new freight restrictions and as a result, plenty of people are left without packages.
- Political concerns: Some 80 per cent of advanced microchips are made in Taiwan and China has been doing its utmost to ensure that it swallows Taiwan whole. The United States (and Canada) doesn’t exactly have the greatest relationship with the People’s Republic of China, owing to the trade war and Canada’s treatment of Hauwei CFO Meng Wanzhou. China is busy working on building its own chip production and the US is doing the same.
The legislation also includes an extra $200 billion over 10 years to help the United States scientific research to better compete with China, even if congress would still be required to pass appropriations legislation to fund those investments.
It’s not particularly common for politicians in the United States to support sizable subsidies for private businesses, but there is an inherent geopolitical trade conflict, and they recognize that China and the European union have been awarding billions to their chip companies. Add to that issues of national security and a huge and thoroughly snarled supply chain that’s curtailed global manufacturing of these integral microchip components, and it begins to make sense.