The Global Chip Shortage Doesn’t Demand Supply Chain Nationalism

Scott Lincicome

The global semiconductor shortage roiling the U.S. automotive industry has become the latest pandemic‐​induced supply chain disruption embraced by economic nationalists to justify their preferred trade and industrial policies — policies that would renationalize global supply chains and supposedly improve America’s economic “resilience” during future emergencies. Leaving aside the fact that the auto industry’s semiconductor problems are in large part “self‐​inflicted” (and not shared by better‐​planning car companies), or that North American producers are among the least‐​affected automakers in the world, or that automotive companies primarily need low‐​margin commodity chips made by older equipment (not the bleeding‐​edge chips/​equipment that the U.S. military needs or that the federal government wants to subsidize), the nationalist argument suffers from a fundamentally flawed premise that I detail in a new policy analysis. In particular, there is ample evidence that, while re‐​shoring supply chains might insulate U.S. producers and consumers from external shocks like foreign wars or natural disasters, those same policies can actually make the U.S. economy less resilient — especially when the shock is domestic.

And this very flaw just revealed itself in the case of semiconductors:

Severe weather conditions hitting much of the U.S. have caused some semiconductor companies to idle production capacity, threatening to exacerbate a chip shortage that has already prompted car makers to curtail output at some plants.

South Korea’s Samsung Electronics Co. , one of the world’s biggest chip makers, operates two factories in Austin, Texas, and was asked by local authorities to shut those down on Tuesday, said a company spokeswoman. Samsung expects to resume production as soon as possible and, the spokeswoman said, was waiting for electricity provider Austin Energy to advise when the chip maker’s operations could start up again.…

Dutch chip company NXP Semiconductors NV said Wednesday that it had to scale back work at two facilities in Austin. “Affected customers are being notified directly by NXP of the potential for supply disruptions,” the company said. NXP makes chips for the automotive industry. Automotive sales comprised $1.19 billion of the company’s fourth‐​quarter revenue, roughly half of the overall figure.…

Other large customers of Austin Energy have also shut down because of the storm, according to a statement from a consortium of those customers. Germany‐​based Infineon Technologies AG , a car‐​chip supplier, has manufacturing facilities there that Citi analysts say mainly produce memory chips critical for automotive and industrial markets that accounted for about 5% of the company’s revenue last year. Infineon said it shut down its Austin plant on Tuesday after authorities said power supply would be interrupted.

As I explain in my paper, openness to global trade and investment can mitigate domestic shocks like the current winter storms battering the United States by providing alternative sources of supply during emergencies and helping the nation recover thereafter. Such policies also tend to strengthen the domestic economy more broadly and make armed conflicts less likely. Of course, no strategy will produce perfect outcomes at all times — particularly when a surprise global pandemic causes both supply and demand to go haywire almost everywhere. But it’s nevertheless essential for policymakers to understand that attempts to forcibly renationalize supply chains in the name of “resiliency” carry their own risks and could end up making the U.S. economy less, not more, secure in both the short run and long.

And the semiconductor shutdown in Texas provides the latest proof.