History

The First Semiconductor Trade War

What Reagan's tariffs in the '80s can teach us about today's foreign-made semiconductors

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Faced with the prospect of an Asian nation overtaking the United States as the world's preeminent manufacturer of vital technology, the president struck a nationalist pose. "The health and vitality of the U.S. semiconductor industry are essential to America's future competitiveness," he said, announcing huge new tariffs and setting the stage for subsidies to domestic microchip makers. "We cannot allow it to be jeopardized by unfair trading practices."

This was not President Joe Biden or former President Donald Trump taking a stand against China. It was President Ronald Reagan responding to the growing technological prowess of Japan in 1987.

A year earlier, the Reagan administration had reached a deal that was supposed to limit Japanese companies' sales of computer chips to America. Unsatisfied with the results, Reagan decided to escalate the trade war in 1987 by slapping 100 percent tariffs on all semiconductors imported from Japan. One year later, Congress approved a $500 million industrial policy to subsidize American chipmakers, but the effort largely fell flat.

Nearly 35 years later, semiconductors are once again at the center of trans-Pacific trade tensions, and American politicians are fretting about global supply chains for computer chips. Taiwan is now the world's leading manufacturer of semiconductors—the tiny, thin wafers of silicon that power computers, smartphones, cars, and many household appliances. But it is China that is rankling American politicians by spending huge sums to stoke domestic production.

While the circumstances are not identical, China's growing technological prowess is triggering the same American political reactions that Japan's did 30 years ago. If policy makers are not careful, they will end up repeating some of those wasteful mistakes.

The levies Reagan imposed made TVs and personal computers more expensive but did little to curb Americans' appetite for those products. Some tariffs were lifted just a year after they were imposed, while the rest were quietly yanked by President George H.W. Bush in 1991.

The more interesting lesson for policy makers is the failure of Sematech (a portmanteau of "semiconductor manufacturing technology"), a public-private consortium created by 14 American chip manufacturers in 1987 and partially funded by the federal government. Sematech's creation coincided with the -publication of a Pentagon report that declared "it is simply no longer possible for individual U.S. semiconductor firms to compete independently." The report warned that government inaction was "a direct threat to the technological superiority deemed essential to U.S. defense systems." A year later, Congress authorized $500 million (about $1.2 billion in today's dollars) in subsidies for Sematech to be spread over five years. The 14 member companies agreed to kick in 1 percent of their semiconductor sales revenue, up to $15 million a year.

The combination of public funding and private investment was supposed to help Sematech build a "world-class" semiconductor fabrication facility in Austin, Texas. Research, development, and manufacturing know-how launched from there would be shared among the members, allowing American companies to once again surpass those in Japan.

America did soon reclaim its place as the world's most prolific chipmaker, but not because of anything the consortium did. "A close look at Sematech confirms all the darkest suspicions of industrial-policy critics," Brink Lindsey, now a vice president at the Niskanen Center, wrote for Reason in 1992, around the time that Sematech was asking Congress for five more years of funding. The Austin facility was churning out chips that were anything but cutting-edge. Even though Sematech was able to essentially borrow the best ideas from its member companies, it never did anything more than "reproduce manufacturing results that other private companies had achieved years before," Lindsey wrote.

Later reviews of Sematech were equally harsh. The federal government's -investments in the consortium "do not induce more semiconductor research than would otherwise occur," trade historians Douglas Irwin and Peter Klenow concluded in a 1996 paper published by the National Academy of Sciences. They found that the subsidies caused member companies to cut their own spending on semiconductor R&D.

Despite Sematech's obvious shortcomings, American semiconductor manufacturing boomed during the 1990s, and the panic over Japan's technological advances dried up. "U.S. firms prospered because of their ability to innovate and compete effectively, not because of such techno-nationalist or protectionist measures," says James L. Schoff, a senior fellow at the Carnegie Endowment for International Peace, a foreign policy think tank.

In a 2020 paper looking back at the U.S.-Japan semiconductor conflict, Schoff argued that cooperation and integration, rather than insular protectionism, allowed both the U.S. and Japan to strengthen their competitiveness in the diversifying global market. By 1996, in fact, Japanese companies were joining Sematech, which had by then been cut off from government funding and was focused primarily on facilitating the sharing of ideas.

Politicians pushing semiconductor industrial policy today are living in an alternate reality where foreign-made semiconductors are a threat. Earlier this year, Senate Majority Leader Chuck Schumer (D–N.Y.) successfully pushed a bill to provide $52 billion in new subsidies for American chipmakers by arguing that government action is necessary "to preserve our competitive edge" and warning that nothing less than America's "economic and national security" was at stake.

Republicans, formerly more skeptical of government intervention in industry, have been eager to line up behind the cause as a way of demonstrating their anti-China hawkery. Sen. Tom Cotton (R–Ark.), a supporter of Schumer's subsidy plan, says government intervention is necessary because "the United States has fallen behind and given the Chinese -Communist Party dangerous leverage over our nation's future." And so the cycle begins again.

Policy makers should be skeptical of these technonationalist ideas, not least because they are based on an inaccurate understanding of the global marketplace. Yes, most semiconductors used in America are manufactured overseas. But U.S.-based companies control 47 percent of the global industry, according to the Semiconductor Industry Association.

Those American companies do not need government aid. Revenue for global chip manufacturers was up 10 percent in 2020, despite a pandemic-induced slowdown in demand, The New York Times reported in May. Equity investors fell over one another to dump more than $12 billion into the industry last year.

As the Sematech saga demonstrates, the nationalist approach also suffers when the crucible of competition is replaced by the potential windfall from lobbying. In a 1996 paper, Irwin noted that Robert Noyce, a co-inventor of the integrated circuit and chairman of Intel, spent 20 percent of his time in Washington, D.C., during the early 1980s. It is unlikely he was there because major technological breakthroughs were happening in the nation's capital.

Meanwhile, the best chips made in China are several generations behind those made in America and Taiwan, and closing the gap will be difficult, especially now that the U.S. has banned the sale of semiconductor manufacturing equipment to China. But politicians rarely let a good panic get interrupted by inconvenient facts.

While semiconductors have changed since the 1980s, the rules of economics have not. Nationalist policies such as tariffs against foreign competitors and subsidies for domestic producers are not likely to be any more successful today than they were three decades ago, because there is no reason to think the federal government has gotten better at picking winners and losers.

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  1. Look, elk hunting with 9 volt batteries may not be ideal but all we got are 9 volt batteries so we’re going to stand here and throw 9 volt batteries at the elk even if they are 1500 yards away on the other side of the valley. The only alternative to that is not to go elk hunting at all and that would just be silly, you can’t just sit here and not go elk hunting.

    1. Sounds like we are stuck in a rut due to a lot of bull. As long as we avoid having a cow.

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    2. Let the chips fall where they may.

  3. Closing the gap isn’t that difficult. The chinks literally steal all of the tech they have. Their cost for r and d is $0. And retard proggies give them designs for free.

  4. Side note to Eric, being anti China now is equivalent to being anti Nazi in 1942, well after they started genocide. You can’t pretend the CCP are good, or that their citizens are good.

  5. Look out, China: hear comes Biden!

  6. These subsidies are ridiculous and should be abolished.

  7. Everyone knows that nobody can compete with China because of all their government investment in the economy. It’s not fair. The only possible way to compete is to levy tariffs on imports and have the government invest in domestic technology. If China is kicking our ass on the world stage, we need to do what they’re doing. Jeez.

  8. Meanwhile, try to open a new chip fab in the US, and see how many years you spend in EPA reviews.

    1. good point Reagan was correct and the rest of government regulated our industries out of the market.

      1. Micron has a fab in Boise, and Intel one near Albuquerque. Are there any others in the US of any appreciable size?

        1. Hillsboro, OR and Chandler, AZ have immense facilities. Texas has some.

          The California and Massachusetts ones have been shuttered for obvious reasons (cost), but I believe GlobalFoundries was building something in upstate New York… not sure that actually went anywhere, though.

  9. China out competing the US is not something I worry about, what does is the fact that the company that makes most of the worlds advanced micro chips is a few hundred miles away from China and China has made it clear they plan on absorbing said country whether they like it or not. Consider what would happen if China attacks Taiwan, don’t think TSC would keep exporting all those chips. Two things need to urgently happen, one is to convince TSC to open a second plant outside Asia and the second, that has no chance of happening under Biden is to recognize Taiwan as a sovereign state in the US and in the UN and move some of our forces there. Enough to hopefully give the ChiComs pause before they attack.

    1. War with china might go nuclear which might be okay since we need a world reset.

    2. That should be everyone’s worry. I don’t see the ChiComs being competitive long term in chip making. They can steal technology better than anyone else, but they really can’t innovate. It’s not that they can’t intellectually (though they ethically maybe aren’t the best there), but their form of government doesn’t properly reward technical innovation, and maybe worse, it rewards being sloppy. And maintaining the bleeding edge in ICs rewards just the opposite.

      We are seeing the problems with an IC shortage. For example, chip manufacturers are way behind with deliveries to auto manufacturers, which translates into a restricted supply of new cars, and massive price increases in the used car market. It’s not only there though, of course. It permeates the economy. My kid works in laser spectroscopy, and they are having problems there too. New graphics cards are having problems too. Etc. so, what happens when the ChiComs, who purchased the Biden family a couple years ago for a billion dollar investment fund to be managed by their wayward son, when he comes down from the cocaine he does, decide that the US isn’t likely to respond promptly to an attempt by them to retake Taiwan? Biden is noticeably sliding away, and their possible window of opportunity may not stay open long. This last week or so, they have significantly increased the frequency and blatentency of their intrusions into Taiwanese airspace. At a minimum, a shooting war between those two countries is likely to disrupt the IC industry, and all those industries downstream from them. Probably massively disrupt.

      Scary thought.

      1. ” chip manufacturers are way behind with deliveries to auto manufacturers”

        According to the automakers, since they desperately want everyone to believe they’re the victims here. In reality, customers buy wafer capacity with semiconductor foundries quarters in advance and if that capacity is available, someone will buy it.

        What happened here is the auto industry sensed softness in the market from COVID, cut their orders… and computer and phone companies bought the now-excess capacity they had stuck the semiconductor companies with. So when the carmakers realized their predictions were insanely pessimistic and wanted to buy back in… they were shut out by people who were already giving semi-companies very lucrative amounts of cash with less stringent quality demands, and the semicos were now in no rush to push out cheerful, well-paying customers for surly pouting babies with a tendency to throw them under the bus at any public setback.

        I’m in the industry and embarrassed at the lack of pushback from my own management on these idiotic subsidies, but that doesn’t mean I buy into the automakers’ PR bullshit when I know damned well that’s not how it happened.

  10. 500 million?
    No wonder the plan failed. You need to “invest” at least 2 trillion for things to work, as we know now.

  11. There’s an obvious reason why a government/industry “consortium” to share investments in tech is doomed to failure and mediocre results: because the companies in the consortium will only share their standard technical knowledge and ideas, reserving the best and most profitable ideas for themselves. Why give away competitive advantage?

  12. Really bad timing on this one Boehm. With all the recent incursions into Taiwanese airspace and war looming on the horizon, this is precisely why protectionist trade policy is necessary. Everyone knows tariffs are bad in a vacuum. We’re not ignorant of economics. Tariffs are taxes/price controls. They disrupt markets and create deadweight loss. In exchange for that loss, they generate tax revenue and reduce competition for more expensive domestic producers.

    What we have right now is like reverse juche. We are so obsessed with free trade that we refuse to intervene in markets, even if the most efficient market means a major industry is isolated within a politically at-risk nation. If anything bad happens to Taiwan, our semiconductor supply chain is fucked, to be blunt.

    We need strategic alternatives. That’s why Trump went after manufacturing, rare earth metals, etc. He knows that war with China is a realistic possibility and recognizes that we need to reduce (and eventually eliminate) economic co-dependency on China. You never want to put all your eggs in one basket.

    It may take a century or more, but eventually, trade with China today will be viewed the same way as trade with Nazi Germany in the 1930s.

    1. That assumes “going after” Chinese industry is what is needed, rather than other measures, such as removing regulatory barriers to domestic industry.

  13. When asked where he was going to get the rope with which to hang the capitalists, Lenin supposedly quipped, “The capitalists will sell it to us.”

    We’re pretty much selling the Chinese everything they need to dominate the world.

  14. Lets get rid of the Tarrifs WHEN the foreign governments stop subsidizing their industries – and not before.

  15. Taiwan once voted to request American statehood–the only foreign country I can recall so doing. They would have been an asset to the US and Congress was crazy as we suspect for not welcoming them with open arms.

  16. I sometimes wonder if some of your articles are meant to be provocative to stimulate debate or your writers are just stupid . I get the whole free trade thing . If Taiwan was a bit further from China I would not be as concerned . If China invaded Taiwan do you really think the only thing that would change is who the checks get made out to to purchase the chips. If Denmark manufactured most of our pharmaceuticals and computer chips we depend on I wouldn’t be concerned . This isn’t a Orange man vs Demented man thing. It’s common sense.

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