The CHIPS and scientific law signed by Joe Biden on Tuesday was a much-needed victory for the US president, whose ratings have stagnated amid a series of legislative setbacks.
Under the bipartisan bill, $54 billion in grants have been pledged to bolster the US semiconductor industry to move away from reliance on Chinese imports.
This interdependence has wreaked havoc on supply chains throughout 2021/22, as the smartphone, automotive and computer technology sectors battled for dwindling supplies.
NVIDIA was unable to keep up with demand for its popular graphics cards; Honda had to suspend or reduce its production bases; thousands of cars sat parked in Michigan waiting for tokens; Micron Technology’s bleak outlook this week sent the Philadelphia SE Semiconductor Index lower.
In the UK, new car sales suffered the worst June in 28 years due to the shortage.
Obviously, the tensions between the United States and China were hitting and are still hitting end users around the world, but the signing of the CHIPS and scientific law could calm the semiconductor supply chain.
However, the bill is not unlikely to have an immediate effect on corporate earnings, reflected in some lukewarm forecasts among key stakeholders.
Although Honda raised its full-year operating profit forecast, in part due to a weaker yen, the company warned against over-optimism, as he sees the continuing shortage of chips, while also being concerned about the economic slowdown.
Meanwhile, NVIDIA issued a profit warning on Tuesday August 9 that caused repercussions for the NASDAQ Composite.
Is CHIPS the last act of de-globalization?
The CHIPS Act is one of many self-sufficiency policies that have recently come onto the world stage.
China’s long-term self-reliance plan has only intensified after US President Nancy Pelosi’s controversial visit to Taiwan, as Europe rushes to abandon its dependence on Russian gas after the invasion from Ukraine.
According to Peter Garnry, head of equity strategy at Saxo Bank, self-sufficiency policies could backfire in the form of inflation.
“The war in Ukraine and the problems in Taiwan will lead to de-globalization and self-sufficiency systems throughout the global economy, which will likely increase inflation in the longer term…
“Globalization has been the main driver of lower inflation in the developed world and therefore de-globalization would likely mean higher inflation in the future as output returning to Europe and the United States is more dear,” Garnry commented.
Regardless, the CHIPS and scientific law is unlikely to uncouple US-China interdependence, at least for a while.
As Explain by the Center for Strategic & International Studies: “American and Chinese semiconductor companies are deeply integrated into a complex and highly interdependent global value chain that has enabled decades of progress in the industry.
“Given the enormous economic and innovation costs of localization, a complete decoupling of global semiconductor value chains would be highly impractical.”