Beyond the CHIPS Act: Investing in a Technological Leap
TSMC Global R&D Center in Hsinchu, Taiwan. Source: 曾 成訓
By Alexander Sarti
The CHIPS and Science Act marked a historic step in bolstering U.S. semiconductor manufacturing. It was passed following chip shortages due to COVID-19 supply shocks and a drought in Taiwan, aiming to mitigate those vulnerabilities in global supply chains, foster job creation, and strengthen national security against potential geopolitical crises. A Taiwan contingency, a blockade or invasion of the island by China, is first among those geopolitical concerns. While this legislation has made meaningful progress, it remains insufficient to fully achieve its objectives. Policymakers must now consider the next evolution of semiconductor industrial policy. Three principal options emerge:
Double down with a second CHIPS Act, expanding subsidies and incentives to further scale domestic semiconductor manufacturing.
Develop a strategic microelectronics reserve, a stockpile of essential semiconductors to mitigate supply chain disruptions.
Invest in a technological leap in manufacturing, a strategy that emphasizes new manufacturing paradigms that have been largely absent from the current policy framework.
While these approaches are not mutually exclusive, centering the third offers a path to long-term competitiveness and strategic autonomy without the scale limitations and political vulnerabilities embedded in the current, incumbent subsidy-driven model.
The Challenge of Onshoring Manufacturing
The CHIPS Act has already spurred over 90 new semiconductor projects across 22 states, attracting nearly $450 billion in private capital [1]. U.S. semiconductor fabrication capacity is projected to expand 203% by 2032 [2]. Even with this ambitious growth, the U.S. share of global chip production will increase to only 14% from 10% today, keeping the country heavily dependent on foreign sources. Without the CHIPS Act, however, that U.S. share would fall to 8% in the same timeframe. Taiwan continues to dominate the production of cutting-edge chips, particularly those below 10nm, manufacturing 92% of the world's advanced semiconductors [3].
The expansion of U.S. domestic production faces challenges unseen in East Asia, including higher labor costs and regulatory hurdles. The construction costs for a new fabrication facility (fab) in the U.S. are 20% higher than in Taiwan or South Korea, and operational expenses remain a persistent disadvantage [4].
The semiconductor supply chain is effectively a series of bottlenecks, with most phases of production dominated by a single region holding at least two-thirds of the global market share [5]. At every stage, the supply chain remains vulnerable to disruptions, threatening reliable access to one of the world’s most indispensable resources. For example, chip design relies on American EDA (electronic design automation) tools and British intellectual property, while silicon wafers are processed, assembled, and packaged into microelectronics in Taiwan, China, Japan, or South Korea, using equipment and materials from the U.S., Japan, and the Netherlands. Notably, extreme ultraviolet (EUV) lithography machines, critical for advanced chip production, are supplied exclusively by ASML in the Netherlands. These processes are not only fragile but also highly capital- and resource-intensive.
Despite investments in education and workforce training in the U.S., the domestic pipeline for STEM graduates and skilled laborers remains insufficient to support the scale of new fabs under construction. Demand for highly specialized engineers, technicians, and operators far exceeds supply. The U.S. semiconductor industry is projected to require 115,000 additional skilled workers by 2030, with 67,000 of those roles for manufacturing alone [6]. If these workforce shortages are not addressed, they could undermine the effectiveness of CHIPS Act investments by preventing fabs from operating at full capacity.
In the U.S., the scale of government subsidies pales in comparison to the size of the private sector. In 2022 alone, semiconductor firms in the U.S. spent approximately $109.6 billion on capital expenditures and R&D, nearly double the amount from 2012 [7]. By comparison, the CHIPS Act provides $39 billion in industrial subsidies spread over five years, and if fully appropriated, around $200 billion for R&D over 10 years, sums that represent only a fraction, rapidly decreasing, of the industry's annual investment [8]. In industries where private capital vastly outweighs government investment, conditions placed by the government on subsidies can provide only limited leverage. Large private sector stakeholders may act as the government desires only as long as it is strategically advantageous to them. If government-imposed requirements prove inconvenient, incumbent semiconductor manufacturers may simply refuse to accept them or even influence government policy to align with their own strategic interests.
This was evident in the implementation of the CHIPS Act, where major subsidy recipients such as TSMC postponed domestic manufacturing projects for two years, leveraging their market power to pressure the Biden administration into fast-tracking the release of funds and exemptions from environmental review ahead of Donald Trump’s potential re-election [9].
The Limits of a Strategic Semiconductor Reserve
A strategic microelectronics reserve could help mitigate supply chain shocks by stockpiling essential semiconductors for critical industries including defense, telecommunications, aviation, and finance. In a Taiwan contingency, the strategic release of a well-organized national stockpile could maintain the operations of critical industries dependent on Taiwanese chip manufacturing, which would otherwise be disrupted as new or replacement equipment is needed.
However, the sheer volume and variety of semiconductors required for modern applications make stockpiling difficult. Unlike commodities such as oil, semiconductors evolve rapidly, and chips designed for current needs may become obsolete within three to five years. Managing an up-to-date and relevant reserve would require continuous investment and replenishment, adding logistical and financial burdens. This challenge is exacerbated by the federal government's ongoing reduction in capacity under the guise of government efficiency, likely hampering its near-term capability to manage such a new and delicate large-scale program. Given the potentially limited time before a Taiwan Strait contingency, it may not be possible even for the most well-organized of administrations to establish an effective reserve before it is needed.
While a strategic reserve could serve as a temporary stopgap, it does not address the underlying issue of supply chain fragility, particularly evident in an emergency. An amphibious invasion of Taiwan by China is projected to cause a 10% drop in global GDP given the disruption of Taiwan's semiconductors, including a 7% drop for the U.S. alone [10].This would exceed the economic impact of both the Great Recession and COVID-19 pandemic. Even a blockade of the island would devastate the world economy. Without an enormous increase in domestic production, a semiconductor reserve would only delay, rather than prevent, the impact of a major disruption of this or any other choke point in the semiconductor supply chain.
Leapfrogging: Investing in a Manufacturing Paradigm Shift
A forward-thinking approach to semiconductor policy must go beyond merely expanding and improving existing manufacturing methods. Achieving a paradigm shift in semiconductor manufacturing is not just essential for insulating the nation from global supply chain disruptions in the long-run; it is about U.S. global competitiveness. Between the massive expenditure needed, the limited leverage, comparative cost disadvantages with East Asia, and persistent workforce shortages, the U.S. is unlikely to muster the massive resources needed to fully develop its domestic semiconductor ecosystem.
The following model aligns with the international development concept of “technological leapfrogging.” This often relies on latecomers taking advantage of exogenous windows of opportunity [11]. The U.S., effectively a latecomer to modern chip manufacturing, is a capital-, resource-, and innovation-rich nation which can, on its own, provide a significant market for new technology. The nation then has the capability of creating such a window of opportunity itself. The key is not just fostering innovation in new manufacturing technologies, but ensuring their rapid adoption.
While the CHIPS Act includes some provisions for semiconductor manufacturing research, its approach remains limited to incremental enhancements rather than fostering a fundamental transformation of semiconductor production. For example, in late 2024, the CHIPS Manufacturing USA Institute, SMART USA, announced a $285 million federal investment within a $1 billion public-private partnership to improve semiconductor design and packaging through digital twin technology [12]. While such efforts will enhance current fabrication techniques, they do not represent the kind of paradigm shift needed to establish long-term leadership. Adoption of such improvements in the U.S. is still largely premised on the presence of an existing semiconductor industrial base. Given the challenges to expanding the existing industrial base domestically, the U.S. then has little advantage over East Asia in the rapid adoption of these SMART USA innovations.
Prioritizing new manufacturing technologies does not mean abandoning current investments. For example, an estimated 40%-60% of the operational cost advantage of Taiwanese fabs stems from ongoing government incentives [13]. The U.S. should similarly provide long-term financial incentives to sustain the viability of the CHIPS Act's successes. However, with current progress secured, the next phase of investment should push beyond the constraints of today’s semiconductor production. By focusing on areas such as advanced materials, additive manufacturing, micro-fabs, and even replacements for the semiconductor itself, the U.S. can aim to leapfrog its limitations as a latecomer that make traditional onshoring efforts so costly and difficult. This approach would allow the U.S. to secure a competitive edge without having to replicate Taiwan’s dominance in current manufacturing processes.
Crucially, funding for R&D and adoption of entirely new manufacturing technologies likely requires significantly less capital than massive industrial subsidies while offering a higher potential return. Unlike subsidies for established players, which reinforce the market dominance of major incumbents, investments in breakthrough technologies often favor startups, smaller firms, and university research, sectors where the government has more leverage and where competition is more dynamic. By directing a new generation of investments to such stakeholders, engaging in basic and applied research toward a new manufacturing paradigm, rather than simply improving on the status-quo, the U.S. can support innovation while avoiding the political and economic constraints of large incumbent interests.
A successful strategy for a technological leap must extend beyond direct funding. The federal government can wield significantly more leverage than in the CHIPS Act, pulling both monetary and non-monetary industrial policy levers, in pursuit of a manufacturing paradigm shift.
● Mission-driven innovation programs: With clear national priorities for next-generation semiconductor technology, the U.S. government can define a wide spectrum of good problems to solve, backed by the steering power of de-risked funding, regulation, and market formation that characterize industrial policy. This would mirror the widely used model from the defense sector.
● Public-private innovation hubs: The government wields unique convening power, and the ability to facilitate rapid collaboration among a variety of stakeholders to an extent the private sector alone rarely can. Examples from the CHIPS Act include targeted approaches, such as the Microelectronics Commons addressing the lab-to-fab valley of death, and ecosystem-wide approaches, such as the National Semiconductor Technology Center. New hubs can target new manufacturing technologies, connecting basic research to applied research, to prototyping, to customers. Through its convening power, the U.S. government can facilitate collaboration between industry, academia, and government to drive rapid prototyping and commercialization, defining future contract terms among convened participants ahead of time and helping to screen and manage intellectual property.
● Federal acquisitions: Using its buying power, the U.S. government can create early markets for experimental semiconductor technologies, providing firms with reliable demand as they scale new manufacturing techniques. Globally, the government sector, including the military, represents only around 1-2% of demand for microelectronics [14]. However, a technological leap will mean the emergence of new technologies and companies for which there is initially only a limited, if any, private market. In this case government acquisitions become a powerful tool, providing these companies the time and capital to scale.
The Department of Defense especially can play a critical role, with its demand spanning leading-edge microelectronics, custom integrated circuits, and legacy chips. Many new manufacturing technologies will produce a viable higher node product long before they are capable of achieving the leading edge. By presenting itself as a customer in these early stages, purchasing microelectronics currently covered by its legacy chip acquisition programs, the Department of Defense can bridge what would otherwise be a valley of death for many companies that will occupy this space, all while placing itself at the forefront of the microelectronics space as these technologies mature to the leading edge. This does, however, require a readjustment of standards for public-sector acquisitions. Their purpose here, at least initially, would not be the best, most affordable, most efficient product. Acquisitions of this sort would be meant to further and hasten the development of a critical sector, even if the initial product is worse and more expensive than that of incumbent industry players. It is a long-term, high-risk investment.
Conclusion
The CHIPS Act has laid a critical foundation for revitalizing U.S. semiconductor manufacturing, but it alone is insufficient. Future semiconductor policy must go beyond subsidies for existing manufacturing models and prioritize investment in and adoption of new manufacturing technologies. This does not mean abandoning previous investments, but rather the inclusion of substantial federal funding for research institutions and new companies to ensure that the U.S. leads the next wave of semiconductor innovation. Without centering investment in frontier manufacturing research, the U.S. risks losing ground. By ensuring long-term CHIPS Act support while aggressively pursuing breakthrough manufacturing technologies, the U.S. can establish itself as the global leader in the sector, securing both long-term economic resilience and national security.
About the author
Alexander Sarti is an MPA Candidate at Princeton University School of Public and International Affairs. His interest area is in emerging technology, and, before Princeton, he previously worked as the Special Assistant to the Assistant Secretary of Defense for Critical Technologies. Alexander holds a BS in Engineering of Computer Systems from Politecnico di Milano in Italy.
Endnotes
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Disclaimer
The views expressed in this paper are solely those of the author and do not reflect the opinions of the editors or the journal.