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U.S. manufacturing is not at the relative scale it once was.

The United States had a 37% share of semiconductors and microelectronics production in 1990; today just 12% of semiconductors are manufactured in the United States.

It is in this atmosphere that many in the U.S. government and semiconductor industry are pushing for a passage of the CHIPS for America Act. Outlined in a recent Reuters article, the proposed bill would most notably manifest as tax credits (payments) in exchange for building, manufacturing, and conducting research for semiconductors in the United States.

There seems to be general bipartisan support for the bill, though there is sure to be some wrangling over the details. What would the current bill look like years down the road?

U.S. Commerce Secretary Gina Raimondo said on Monday a proposed $52 billion boost in U.S. government funding for semiconductor production and research could result in seven to 10 new U.S. factories.

The recent Foxconn fiasco in Wisconsin shows the limits of government policy, and is good to keep in mind when looking at the most optimistic projections from proponents of the bill. It is of course possible to boost the production of semiconductors in the U.S., but will this be the ticket?

When it comes to semiconductor manufacturing, the number one competitor is China, where production is relatively cheap. This is partly due to the cheapness of goods and labor, but also governmental policy — the cheapness has been maintained with intense intervention by the CCP. One way the U.S. can compete and attract manufacturing is by lowering tax burdens.

Also worth looking at is Germany. Even though its situation is a little peculiar, it’s still able to manufacture and export a ton of value, despite being a country that has a relatively high cost of production.

China doesn’t have *the lowest* cost of labor or cost of goods in the world, but has the perfect marriage of low cost of production with high skill and high knowledge producers. The more that companies take advantage of this, the more the industry in China turns to accommodate them, and the more the relevant industrial knowledge and capacity concentrates.

In the past few years there has been much talk of a potential diversification away from China, especially during the COVID-19 pandemic, but that won’t happen overnight if it is to happen at all — relocation of such a concentrated industry is complicated and expensive. Indeed, if the U.S. is to increase its share of global semiconductor and microelectronic production, the CHIPS for America act may be a good place to start. A successful push towards investment in domestic manufacturing would lead to more entrenched infrastructure, labor, skills, etc. and thus the more expensive and complicated relocation away from the U.S. will be.

Read more information and discussion about the bill in the Reuters article here.