The CHIPS and Science Act signed by Joe Biden on Tuesday was a much-needed victory for the US president, whose ratings have flatlined in the midst of a string of legislative setbacks.
Under the bipartisan bill, US$54bn in subsidies have been pledged to bolster America’s semiconductor industry in order to move away from dependence on Chinese imports.
This interdependence caused havoc on supply chains throughout 2021/22, as the smartphone, automobile and computer technology sectors fought it out for dwindling supplies.
NVIDIA was unable to meet demand for its popular graphics cards; Honda had to suspend or reduce its production bases; thousands of cars remained parked in Michigan awaiting chips; Micron Technology’s bleak forecast this week pulled the Philadelphia SE Semiconductor index down with it.
In the UK, new car sales had the worst June in 28 years due to the shortage.
Clearly tensions between US and China were, and still are, hitting end users across the globe, but the signing of the CHIPS and Science Act could bring composure to the semiconductor supply chain.
However, the bill is not unlikely to have an immediate effect on company earnings, reflected in some tepid forecasts among the biggest stakeholders.
Although Honda raised its outlook for its full-year operating profits, partially due to a weaker yen, the company warned against over-optimism, as it sees the chips shortage continuing, while also being concerned about economic slowdown.
Meanwhile, NVIDIA issued a profit warning on Tuesday August 9 that sent ripples through the NASDAQ Composite.
Is CHIPS the latest act of deglobalisation?
The CHIPS Act is one of a number of self-reliance policies to hit the global stage recently.
China's long-term plan for self-reliance has only ramped up following US house speaker Nancy Pelosi’s contentious Taiwan visit, while Europe is rushing to shift away from its reliance on Russian gas following the Ukraine invasion.
According to Peter Garnry, head of equity strategy at Saxo Bank, self-reliance policies could backfire in the form of inflation.
“The war in Ukraine and the issues over Taiwan will drive deglobalisation and self-reliance systems across the global economy which will likely add to inflation longer term…
“Globalisation was the major driver behind lower inflation in the developed world and thus deglobalisation would likely mean higher inflation going forward as production shored back to Europe and the US is more expensive,” Garnry commented.
Regardless, the CHIPS and Science Act is unlikely to decouple US and China’s interdependence, at least for a while.
As explained by the Center for Strategic & International Studies: “US and Chinese semiconductor firms are deeply integrated within a complex and highly interdependent global value chain which has enabled decades of industry advancements.
“Given the enormous economic and innovative costs of localisation, a full decoupling of global semiconductor value chains would be highly impractical.”
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