Legacy chips are the unsung heroes of modern technology. Although they might not be as flashy as the cutting-edge chip technology that is often discussed in relation to U.S. technological competitiveness, chips above 28 nanometers are the backbone of critical industries such as automobiles, consumer appliances and medical devices. Unfortunately, there is a severe shortage in the supply of legacy chips, causing widespread disruption across these sectors — a problem the 2022 CHIPS and Science Act aims to address.
On September 13, the U.S. Trade Representative announced that it had finalized tariffs on semiconductor technology imports from China, following a four-year Section 301 investigation. In response to China’s growing dominance in legacy chip production, the U.S. Trade Representative will expand tariffs on chip imports from China to 50% in 2025, building on the 25% tariffs implemented by the Trump administration in 2018.
These tariffs are coming on the heels of a global shortage in both cutting-edge and legacy semiconductors. The chip shortage became particularly acute during the COVID-19 pandemic, when the demand for PC and smartphone chips skyrocketed. While the semiconductor industry had stabilized somewhat by 2023, the supply of legacy chips, in particular, has proven to be a persistent area of concern due to underinvestment and diminishing capacity.
The shortage in legacy chips, combined with China’s rapid expansion in legacy chip production, has made U.S. leaders concerned about overreliance on Chinese chips. But the new semiconductor tariffs implemented to mitigate those risks conflict with the goals of the CHIPS and Science Act by worsening the existing shortage of legacy chips, raising costs for U.S. chips manufacturers, and revealing a deeper misalignment in strategic priorities between investment in cutting-edge technology and the immediate need for mature chips.
There exists a mismatch between the demand for and supply of legacy chips in the U.S. According to data collected by the U.S. Commerce Department in 2021, legacy chips are the most disruptive bottleneck in American chip supply. Christophe Fouquet, CEO of Dutch chip equipment supplier ASML, argued to the European Commission this summer that the demand for these chips is continuing to grow. Fouquet highlighted that the automotive industry, which relies on legacy chips for 95% of its semiconductor needs, is particularly vulnerable to this shortage. This issue came to a head for the auto industry during the pandemic, causing it to lose $200 billion in just one year.
Beyond automobiles, the legacy chip shortage is highly disruptive. Even smartphones, which feature some of the most advanced chip technology, mostly use mature chips for components like power management and transceivers. U.S. Commerce Secretary Gina Raimondo explained that the chip shortage has ripple effects across the American manufacturing industry, threatening factory production and fueling inflation.
China is poised to solve this bottleneck, as it is rapidly expanding its capacity to produce mature chips. The Semiconductor Industry Association predicts that China will dominate the legacy chip market over the next decade. China currently produces 33% of legacy chips and this number is expected to grow to 37% by 2032. By comparison, Taiwan’s market share of legacy chips is expected to contract to 25% by 2032, a five percent drop from 2022. A large reason for this expansion, the Commerce Department reported, is massive levels of state investment into the chip industry, amounting to $150 billion over the last decade. In recent years, much of this investment has been funneled into the production of legacy chips, in part due to U.S. export controls that have hampered China’s ability to expand its advanced chip manufacturing capacity.
The U.S. is worried that China is on the precipice of being able to flood the American market with legacy chips by selling them at below market prices, creating a dangerous reliance on Chinese chips that could make the U.S. vulnerable to economic coercion. In January, the U.S. House Select Committee on the Chinese Communist Party warned that “Just as Russia had to scour the world for chips to keep its weapons production alive after Western sanctions, the United States and the global economy may be forced to do the same if the PRC decides to restrict access to PRC foundational chip production.” The Commerce Department is currently surveying the extent to which the U.S. sources legacy chips from China, but the results haven’t been released yet.
While it remains to be seen how the most recent tariff increases will affect American manufacturing, empirical evidence suggests that they will heighten costs and worsen global chip shortages. The Semiconductor Industry Association found that the first round of tariffs placed on chips in 2018 led to a 25% increase in the cost of affected chips, contributing to supply chain disruptions that worsened the global chip shortage, exacerbated inflationary pressures and led to factory shutdowns.
It is reasonable to expect some growing pains in response to tariffs as supply chains adapt and the domestic semiconductor industry begins to benefit from the import protection that tariffs provide. However, tariffs may actually be undermining the domestic semiconductor industry in at least three ways. First, most U.S. chip manufacturers ship their wafers to be assembled, tested and packaged abroad, and China accounts for 38% of the world’s assembly, testing and packaging facilities. While the tariffs could hypothetically lead to the reshoring of chip manufacturing by raising the cost of doing business in China, the Semiconductor Industry Association says this is not the case. Since the cost of reconfiguring supply chains is greater than the cost of tariffs, companies will not reshore whatever semiconductor manufacturing processes they currently carry out in China. Second, additional costs due to tariffs will lead semiconductor manufacturers in the U.S. to reduce their investment in R&D. Third, a study by the National Bureau of Economic Research found that the first round of protectionist measures instituted in 2018 have undermined the semiconductor industry workforce in the U.S., evidenced by a major reduction in the number of students graduating with chip-related skills, as well as a reduction in the hiring of domestic chip-related talent.
In response to criticisms expressed by industry members about how the increase in chip tariffs to 50% could do more harm than good, the Office of the U.S. Trade Representative argued that the CHIPS and Science Act investment of $53 billion dollars will help restore American semiconductor manufacturing capacity, and that the tariffs are “an important initial step to complement the sustainability of these investments.”
This is a big ask of the CHIPS Act, as the American semiconductor industry is not motivated to invest in legacy chip production. In fact, a major cause of the legacy chip shortage is a lack of investment in mature chip technology. Domestic semiconductor manufacturers do not want to invest in legacy chips because they are not as profitable as leading-edge chips. While legacy chips sell for a couple dollars a piece, higher end chips can sell for over $100 each. As a result, older fabs in the U.S. are closing down and not being replaced. And U.S. semiconductor companies are choosing to invest the vast majority of their R&D expenditures in current-generation and leading-edge chips.
Given these hurdles, the CHIPS Act does not provide sufficient funding for legacy chip production, revealing a misalignment between the immediate need for mature chips and the outsized focus on funding cutting-edge technologies. Existing legacy fabs in the U.S. are operating at over 90% capacity, which means that fulfilling U.S. demand for legacy chips will require significant investments in new production facilities. Bain estimated that an increase in manufacturing capacity by 5% to 10% would cost around $40 billion. The Center for Security and Emerging Technology at Georgetown University gave a more conservative number. In a study published before the CHIPS Act was signed into law, the center argued that the absolute minimum amount the U.S. should invest into legacy semiconductor technology is $4 billion to $9 billion. This would not cover total U.S. demand for legacy chips, but would keep up with the demand for the most sensitive technologies. Shockingly, only $2 billion in CHIPS Act funding is allocated to funding the production mature technology.
The legacy chip shortage is more than just a supply chain hiccup — it stems from a fundamental disconnect of incentives in the semiconductor industry. The U.S. must recalibrate its policies to balance national security concerns while addressing the critical shortage of this technology and providing the necessary support to manufacturers of legacy chips.
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