US Semiconductor Industry Explained | Supply, Production, Trade

How did the pandemic affect the semiconductor supply?
Fernando Leibovici, senior economist at the St. Louis Fed, describes the complex and vital semiconductor industry. The shortages during the pandemic underscored and exacerbated concerns about U.S. dependence on foreign-made semiconductors that were raised during the U.S.-China trade war. Semi-conductor production requires significant investments in time, capital, and workforce, as well as fast-paced development of new technology.
The supply chain is also complex. New laws and potential new policies may change U.S. dependence on foreign-made semiconductors by subsidizing domestic pro-duction. One consequence could be that their costs and ultimately their prices could increase, given American workers have higher wages than workers in China, Malaysia, and Taiwan, where most semi-conductors are produced now. The views expressed in this video do not necessarily reflect those of the St. Louis Fed or the Federal Reserve System.
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00:00 - Why are semiconductors important?
00:53 - U.S. reliance on foreign semiconductors
01:38 - Effects of shoring up semiconductor production
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Transcript:
I'm Fernando Leibovici, and I'm a senior economist at the St. Louis Fed.
OK, so what are semiconductors? Semiconductors are a key input that control the functioning of many of the goods that we've come to rely on. So beyond computers, semiconductors are a key to the functioning of modern cars, electronics, phones, and they're also a key input in the functioning of the machinery involved in manufacturing.
But what makes semiconductors so special? First, there's no close substitutes for semiconductors. Second, producing semiconductors requires large investments that take a long period of time. Third, semiconductors are part of an industry that requires a lot of innovation and R&D expenditures. So firms that produce semiconductors need to keep up very closely with their competitors.
Fourth, and finally, semiconductors are produced in a very concentrated fashion. They're produced by just a few firms in a few locations. Semiconductors originally began as an American technology. However, today, they're largely produced in places like China, Taiwan, or Malaysia.
Now, before the pandemic the U.S.-Chi-na trade war already raised questions about the reliance on other countries for access to these critical goods. Now, during the pandemic, this was heightened when we saw the unprecedented demand for electronics and the slow adjustment of supply in the production of semiconductors.
Now, relying on other countries to get a hold of goods is not necessarily a bad thing. Specialization based on comparative advantage is at the cornerstone of our global trade system. However, in the face of growing geopolitical risks, relying on other countries to get a hold of critical goods like semiconductors raises questions about the potential for disruptions.
Policymakers have been trying to figure out how to make the U.S. economy more resilient to shocks coming from abroad like the semiconductor shortages that we've experienced in the past couple of years. Two new laws have been enacted in 2022. One is the Inflation Reduction Act and the second is the CHIPS Act.
Now, the goal of these policies has been to increase production of semiconductors in the U.S. by increasing incentives to do so--basically, subsidizing production. Now, given that the production of semiconductors is a very complex multi-stage process, many questions are raised and unanswered.
First is, well, should we be subsidizing specific parts of this process or should we be subsidizing the whole production chain? Second, how big should the subsidies be, and how should they evolve over time in the face of technological change? And finally, how should the U.S. deal with the lack of access to some key raw materials that are necessary to produce semiconductors?
Now, at the end of the day, there's a trade-off between efficiency and resiliency, and the U.S. has to decide how to balance out these two forces. Now, one cost of increased resiliency may be higher prices for semiconductors due to the higher cost of American workers. Now, this may be a price to pay from reducing our dependence and our exposure to shocks coming from other countries, particularly for such key inputs.
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