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Editorial: Chips and other bottlenecks

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Volvo

A widening global shortage of semiconductors for auto parts is forcing Volvo and other major auto companies to halt or slow vehicle production just as they were recovering from pandemic-related factory shutdowns. David Zalubowski, AP

 

One winner stands out among the losers caused by the many recovery-slowing bottlenecks afflicting our economy. In the case of computer chips, for example, scarcity has contributed to production slowdowns at many automobile plants, including the Volvo plant in Ridgeville. The perhaps accidental winner: the U.S. semiconductor industry.

President Joe Biden recently ordered federal agencies to assess the reasons for the potential scarcity of many materials essential to national security. Because of the chip shortage, press coverage described his remarks as an effort to boost the semiconductor industry, drawing particular attention to his support for a $37 billion appropriation to help the industry. That’s a lot of money — enough to buy three aircraft carriers, for example. The president’s position will likely influence voters and their representatives to support the request

But the chip shortage is not going to be alleviated by the president’s actions. Like other major shortages, it is the result of post-pandemic demand rising faster than goods can be produced, made worse in some cases by winter storms and port bottlenecks. Lumber’s cost has risen 125% since 2019. Plastics are up about 60% and copper 50%. The price of crude oil is higher and rising. Federal Reserve Board Chairman Jerome Powell said this week he thinks these price increases are transient and will recede when the bottlenecks are eliminated.

Instead, the president is addressing a well-recognized long-term problem. Because of aggressive spending by China, which has committed by one estimate more than $100 billion to building up its chip industry, and the deployment of more advanced chip manufacturing technologies in Taiwan and South Korea, U.S. chip market share has fallen. U.S. companies need a boost to catch up with Taiwan and South Korea in chip technology and stay ahead of China in this critical field.

High-end chip manufacturing, carried out in so-called foundries, is very capital intensive. Intel’s last foundry cost a reported $10 billion, and foundries in Taiwan and South Korea now provide a higher-grade chip.

Last year, Congress passed the bipartisan CHIPS Act as part of the annual national defense authorization bill. It instructs the president to use the market-intervention powers of the Defense Production Act to aid the semiconductor industry and authorizes large tax incentives, grants and purchase orders to accomplish this at an estimated cost of $37 billion. Mr. Biden encouragingly voiced his support for the bill last week.

President Donald Trump took a similar path in 2019 when he ordered the use of Defense Production Act incentives to help increase U.S. production of rare earths, a decision supported by congressional appropriators at a smaller scale than the one proposed for semiconductors. Both steps are part of a needed reordering of critical supply chains in response to explicit and implicit Chinese threats.

The new investments in chip manufacturing will take several years to mature. Meanwhile, the semiconductor shortage will work itself out in the coming year after causing some serious problems for the automobile industry. But the shortage, by heightening awareness of the huge demand for high-quality chips, will help Congress overcome any qualms about subsidizing the U.S. semiconductor industry in the name of national security.

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