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Friendshoring: Both National Security and Economic Efficiency Matter

By passing the CHIPS Act of 2022 and by imposing export controls on the export to China of certain semiconductor chips, semiconductor equipment and related technologies, the United States is continuing and expanding industrial and export control policies implemented by both the Obama and Trump Administrations—policies that encompass both industrial competitiveness and national security components. This approach is now also supported by both Japan and the Netherlands who are the dominant suppliers of lithography semiconductor equipment.
We’re fans of national security but generally not fans of industrial policy (industrial policy referring to government efforts to support particular industries that are considered strategically important). After all, anytime government tries to direct something as complex as the economy it runs squarely into the maw of Hayek’s knowledge problem.
But even though industrial and export control policies are generally frowned on from a free market economic perspective, Adam Smith himself argued that government intervention in a market is justified for national security purposes, which these policies have in large part as their objective. And it would appear that reducing our dependence on China for critical computer chips and depriving China of advanced technology are in the national security interests of the United States.
This is not the first time the U.S. has imposed export controls for reasons of national security. However, this time they are also being used for industrial competitiveness objectives as well.
Aside from the direct national security considerations behind these policies in regard to the use of semiconductor equipment and technology by the Chinese PLA is the concern that the global supply chain for computer chips is too reliant upon Taiwan and in particular Taiwan Semiconductor Manufacturing Corporation (who is a contract manufacturer for most semiconductor chips manufactured today). The obvious concern is that a Chinese blockade or invasion of Taiwan would imperil U.S. access to computer chips that our economy and military depend upon.
Some, however, are under the impression that the United States should not be dependent on ANY other countries for critical goods, and thus seek to move semiconductor chip manufacturing back to the United States from a reliance on semiconductor chip supply chains from Taiwan and to a lesser extent South Korea (i.e. Samsung).
This policy of seeking to revert semiconductor chip manufacturing back to the United States has led to the recently enacted CHIPS Act which provides financial incentives for semiconductor firms to invest in building semiconductor manufacturing plants in the U.S. Its purpose is not only to limit the national security risks of reliance on a global supply chain fraught with geopolitical tensions, but also to increase the U.S. international competitive position in that industry.
However, as recently pointed out in an article on the perils of attempting to create within a country a self-sufficient supply chain for semi-conductor chips, the upstream supply chain for semiconductor manufacturing is incredibly complex. To become self-sufficient where no part of a semiconductor manufacturing supply chain is global is neither feasible nor reliable, as Ricardo’s lesson on comparative advantage still works to the benefit of both supplier and consumer.
One solution to this reality is the somewhat novel idea of “friend-shoring,” or reorienting global supply chains away from countries that are considered risky to countries that are at least friendly.
Friend-shoring need not be a violation of global liberalized trade so long as it results in a short list of countries we avoid trading with rather than a short list of countries we agree to trade with. Of course, our trade with countries like Iran and North Korea is virtually non-existent, so in reality we are still talking about China.
While there are those who argue that friend-shoring is bad economic policy, at least friend-shoring is realistic, while attempting to create supply chains wholly within the United States is unwise and probably impossible. National security matters, but so does economic efficiency and consumer welfare.