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The U.S. To Diversify Its Supply Chain: A Focus on Domestic Manufacturing and Countering China

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The Biden administration is actively working to reshape the global supply chain for high-tech industries, especially in semiconductor manufacturing. The strategy involves encouraging foreign companies to invest in chip production in the United States and urging partner countries to handle final assembly and packaging. This approach, known as “chip diplomacy,” aims to reduce dependency on China and increase the resilience of global supply chains.

President Biden has emphasized the importance of producing more electronic chips within the United States. States like Texas and Arizona are being promoted as prime locations for these new factories. The goal is not only to boost the American economy but also to enhance national security by reducing reliance on foreign-made chips. Investments from countries such as South Korea, Japan, and Taiwan are critical to this plan, with companies like SK Hynix and Taiwan Semiconductor Manufacturing Company (TSMC) making significant commitments. For instance, TSMC is constructing a massive plant in Phoenix, Arizona. These factories will produce chips that will be sent to other countries, including Costa Rica, Vietnam, and Kenya, for final assembly before being distributed globally. This new model aims to create a more diversified and secure supply chain for semiconductors and other critical technologies, such as electric vehicle batteries and solar panels.

China poses a significant risk to the global supply chain due to its dominant position in semiconductor manufacturing and its strategic control over essential materials. The Chinese government has been aggressively expanding its semiconductor capabilities and has threatened Taiwan, a key hub for advanced chip technology. This geopolitical tension adds urgency to U.S. efforts to diversify its supply chains.

China’s recent restrictions on the export of germanium and gallium, both crucial for semiconductor production, highlight the vulnerability of the global supply chain. These curbs are a response to U.S., European, and Japanese efforts to limit China’s access to advanced technology. China accounts for 98% of the world’s gallium production and 68% of refined germanium, making it a formidable player in the semiconductor market. If China decides to halt exports significantly, it could cause severe disruptions, impacting industries ranging from defense to communications.

The U.S. is focusing on attracting foreign investment and preventing China from accessing advanced technologies to counter these risks. The Commerce Department has been pivotal in this effort, distributing $50 billion to boost research, development, and manufacturing of semiconductors within the U.S. Additionally, export controls have been tightened to restrict China’s ability to develop its semiconductor industry. The CHIPS and Science Act is a cornerstone of this strategy, providing $500 million annually to create secure supply chains and protect semiconductor technology. This funding is used to identify and develop infrastructure in partner countries, ensuring they meet the standards needed for efficient chip assembly and packaging. Countries like Costa Rica, Indonesia, Mexico, Panama, the Philippines, and Vietnam are already part of this program, with Kenya recently added to the list.

While the U.S. strategy is ambitious, it faces significant challenges. The semiconductor industry in East Asia offers cutting-edge technology, a large pool of skilled engineers, and lower production costs compared to the U.S. Moreover, building an independent supply chain for materials like gallium and germanium outside of China requires substantial investment and time.

Despite these challenges, the U.S. share of global chip manufacturing is expected to rise from 10% today to 14% by 2032. The success of this strategy depends on continued investment, both domestically and internationally, and effective cooperation with global partners.

The Biden administration’s policy to diversify the supply chain and bring more manufacturing to the U.S. is a critical step toward ensuring economic prosperity and national security. By reducing dependency on China and building a resilient global supply chain, the U.S. aims to mitigate risks and prepare for future disruptions. This strategy addresses current geopolitical threats and positions the U.S. as a leader in high-tech manufacturing for years to come.

China’s hoarding and control of critical materials are particularly troubling. By dominating the production of essential elements like gallium and germanium, China holds significant leverage over the global supply chain. This monopoly is not just a matter of economic control but a strategic move to exert influence in global politics. The recent export restrictions imposed by China serve as a stark reminder of how vulnerable the world is to these supply chain disruptions. These actions by China underscore the importance of the U.S. strategy to create more resilient and diversified supply chains.

China’s control over these materials is part of a broader pattern of using its economic power to achieve political goals. The country has been known to use trade restrictions as a weapon in geopolitical conflicts, which is why the U.S. must reduce its dependence on Chinese resources. By developing alternative supply chains and increasing domestic production, the U.S. can protect itself from the economic blackmail that China has repeatedly shown it is willing to use.

The Biden administration is also focusing on job training to support this shift. Developing a skilled workforce is essential for the success of new manufacturing plants in the U.S. Institutions like Arizona State University are partnering with overseas universities to create training programs. These initiatives aim to ensure that the workforce is ready to meet the demands of the high-tech manufacturing industry.

Moreover, the U.S. is working with allies to limit China’s access to advanced technologies. This approach includes convincing countries like Japan and the Netherlands to stop selling certain chip-making tools to China. The aim is to slow down China’s progress in developing its semiconductor industry, which could otherwise give it a significant technological edge.

The strategy to diversify the supply chain is not just about economics; it’s also about national security. By relying less on China and more on a network of global partners, the U.S. can better protect its interests and those of its allies. This approach also sends a clear message to China that its attempts to dominate the global supply chain will not go unchallenged.

The focus on semiconductor manufacturing is just one part of a broader strategy to enhance U.S. technological leadership. The administration is also targeting other critical areas, such as green energy technology. By investing in the production of electric vehicle batteries, solar panels, and wind turbines, the U.S. aims to reduce its dependence on Chinese-made products in these sectors as well.

The Biden administration’s efforts to diversify the supply chain and bring more manufacturing to the U.S. are crucial for economic and national security. By reducing dependence on China, the U.S. can create a more resilient and secure supply chain. This strategy addresses current geopolitical threats and sets the stage for future growth and stability in high-tech manufacturing. But this is a form of war, and the Biden Administration has been slow to respond. Will this strategy and a move from a mere 10% to a mere 14% may not be ambitious enough.

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