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America’s industrial policy is counterproductive

By Anne O. Krueger

22 Mar 2023 · 3 min read

Editor's Note

The US's decision to subsidize its chipmakers could backfire, Anne Krueger writes in PS. While no one disputes the industry's importance, is this really the best way of securing a reliable supply?

WASHINGTON, DC – Last year’s US CHIPS and Science Act created large subsidies for investments in domestic semiconductor fabrication facilities (fabs), on the grounds that microchips are essential both to the US economy and to national security. But while no one disputes the importance of chips (which are used in everything from cruise missiles to refrigerators), there are serious questions about whether subsidizing such investments is the best way to secure a reliable supply.

In fact, US competitiveness in chipmaking might deteriorate further because of the legislation. After all, governments do not have a good history of “picking winners.” All too often, such interventions help to prop up losers and inefficient producers, leading to monopolization and concentrations of market power as new (unsubsidized) firms are deterred from entry. Moreover, in the case of chips, the industry has been retrenching with layoffs, canceled or postponed expansion plans, and other signs of a slowdown. In response to the new US subsidies, South Korea recently announced plans to support a $228 billion investment by Samsung to build the world’s largest advanced semiconductor complex; the European Union has taken up a proposal for a €43 billion ($46 billion) European Chips Act; and other countries have begun to roll out similar forms of support for their own industries. As a result, taxpayers in the US and these other jurisdictions may end up financing a wasteful chip glut.

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