Washington, D.C. — With the rollout of the landmark CHIPS Act subsidies underway—an important effort from the Biden administration and policymakers to build a resilient U.S. semiconductor industry—the American Economic Liberties Project today released a new paper identifying market structures and business practices that could hinder its success and proposing competition and trade policies to overcome them. The paper, “Reshoring and Restoring: CHIPS Implementation for a Competitive Semiconductor Industry,” is the second installment of Economic Liberties’ Industrial Policy and Competition Series.

“The CHIPS initiative is an important step to build a resilient semiconductor industry in America. However, the structure of the market can limit its success,” said Todd Achilles of UC Berkeley’s Goldman School of Public Policy and long-time technology executive at T-Mobile and Hewlett-Packard. “Since 2010, intra-sector acquisitions have shrunk the number of independent U.S. semiconductor companies by more than 40%. The result is a handful of firms that exercise market power over the modern economy’s most critical input. Without an intentional commitment to increase logic competition, injecting over $50B of CHIPS Act subsidies into this highly concentrated market will only make the situation worse.”

“The success of the CHIPS Act hinges on addressing structural issues in the markets it targets,” said Erik Peinert, Research Manager and Editor at the American Economic Liberties Project and a co-author of the paper. “The American semiconductor industry has lost its edge in manufacturing chips by outsourcing production abroad, all while excluding or eliminating new entrants through exclusive dealing, acquisitions, and patent abuse. We need more than just subsidies to fix this. Achieving true resiliency will require fostering competition and restraining Apple’s anti-competitive practices in the industry. Our new paper gives policymakers a clear roadmap for how to get this done.”

For the past several decades, American chipmakers have shifted to a business model focused on using intellectual property to exclude rivals, avoiding expensive capital investments in direct chip fabrication, and prioritizing short-term financial returns. This model has resulted in a single Taiwanese firm, Taiwan Semiconductor Manufacturing Company (TSMC), dominating the fabrication of most advanced “leading-edge” logic chips. Faced with TSMC’s manufacturing monopoly, American firms have maintained their own margins by ruthlessly pursuing market power via exclusive deals, patent abuse, and anti-competitive acquisitions—with Apple, the largest buyer of chips, being one of the worst offenders.

To break this vicious cycle of monopoly, rent-seeking, and exclusive dealing in the leading-edge chip category, the paper recommends that the CHIPS Program Office (CPO) support new entrants with the goal of four independent leading-edge foundries with operations in the US (rather than simply subsidizing already-dominant firms in bringing production to the US). Other proposals include for the CPO and the Federal Trade Commission to adopt the “whole of government” approach and collaborate in allocating funding and establishing competition-related commitments for recipients, greater limitations on stock buybacks and dividends, and requirements to openly license semiconductor intellectual property with competitors.

The paper also addresses CHIPS implementation in the mature-node chip category, which has similarly offshored direct fabrication but for entirely different reasons. Whereas the leading-edge is characterized by monopoly, the mature-node chip category is plagued by boom-and-bust cycles, overcapacity and Chinese dumping, and razor thin margins. Among other recommendations to address these obstacles, the paper proposes either a tax on mature-node chip products that rely on foreign-sourced chips or demand-side subsidies for electronics manufactured with domestic chips.

Read the full paper, “Reshoring and Restoring: CHIPS Implementation for a Competitive Semiconductor Industry,” here.

Learn more about Economic Liberties here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; foreign trade arrangements support domestic security and democracy; and wealth is broadly distributed to support equitable political power.