The unintended consequences of nationalism

By Scott Sumner.

"Today’s Bloomberg has two stories that illustrate the unintended consequences of increasing nationalism in US policymaking.  Both relate to the chip industry, but look at different aspects of the problem.

During the Trump administration, the US cracked down on the immigration of skilled STEM workers from overseas.  Here’s one consequence of that decision:

Taiwan Semiconductor Manufacturing Co. cut its annual outlook for revenue and postponed the start of production at its signature Arizona project to 2025, twin setbacks for a chipmaking linchpin struggling with geopolitical tensions and a deep market slump.

TSMC’s surprise cut in 2023 revenue projections sent a warning to investors that the global electronics slump may persist for some time despite a boom in AI development. And the delay in the US — a consequence of both a lack of skilled American workers and ballooning costs — underscores the difficulties in making chips there despite Washington’s insistence to reduce a global reliance on Asian facilities.

I recently had some problems with my air conditioning system.  The technician told me that the unit is too big, and is trying to force too much air through a relatively narrow duct.  That’s basically the problem with programs combining massive subsidies for chip making with various restrictions on the domestic chip industry.

The Biden administration has enacted protectionist measures aimed at hurting China while boosting our chip industry.  An article by Dave Lee points to some unintended consequences:

One problem with US limits on non-US companies, notes Emily Kilcrease, senior fellow with the Center for a New American Security, is that international businesses now have an incentive to design out US components to avoid being subject to these rules.

Meanwhile, China has begun introducing small disruptions to the market. Citing “relatively serious” national security concerns over Micron, the Boise, Idaho-based memory chip maker, Beijing in May said the company’s components shouldn’t be used within vital infrastructure. Micron said the loss of business represented a “low-double-digit percentage” of overall global revenue. The ban benefits South Korean competitors Samsung and SK Hynix, who also make memory chips.

As a result, US companies may choose to move production elsewhere.  Unfortunately, a country that cuts itself off from the rest of the world can easily end up falling behind:

If they confront their worst-case scenario, in which their sales to China cease altogether, US chip companies could lose $83 billion annually, at a cost of 124,000 jobs, the US Chamber of Commerce estimates. R&D spending would fall by $12 billion per year. This can be mitigated by a diversified supply chain that shifts that business to other regions, but such transitions take time, and would open the door for empowered international competitors to increase their Chinese market share.

They could then use the fruits of that success to plow more resources into creating next-generation cutting-edge chips, weakening US leadership over these vital innovations.

There is also a risk that these actions further hurt the US if they lead China to retaliate by cutting off exports of key “rare earth” metals used in chip manufacture."