Shock-Proofing the Semiconductor Supply Chain: The Role of Industrial and Other Policies

In 2021, global revenues from semiconductors amounted to almost $560 billion, and these devices are critical to the operation of some 200 downstream industries. The importance of semiconductors to the functioning of so many activities was brought home when the COVID-19 pandemic disrupted production and trade. A shortage of semiconductors forced a cutback in the output of vehicles, consumer durables, and electronic equipment of all kinds, inflicting heavy losses. The semiconductor drought also contributed to inflation in 2021 as manufacturers struggled to satisfy rising demand for a wide range of products.

The severity of the shock inflicted by the COVID pandemic demonstrated the diminished resilience of a critical supply chain. To pare costs, lead firms had cut down on the number of suppliers and opted for lean inventories. One consequence was that supplies of some inputs and equipment, and certain operations such as back-end manufacturing, were concentrated in a few East Asian and European countries. The pandemic and geopolitical tensions that had been building for some time also underscored China’s role as a supplier of key materials and a provider of ATP services.

The electronics industry had endured shocks before when floods or earthquakes affected production in particular locations, but this time was different. The impact of the shock was felt worldwide. Almost all segments of the semiconductor supply chain were affected, and recovery has been slow. This note focuses on the US response to semiconductor shortages. Read the full note here.

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