State Department's plan to use $500M CHIPS funding to bolster the supply chain

While the United States is working to strengthen and secure semiconductor manufacturing, it cannot do it alone, and international cooperation is integral to the semiconductor supply chain, according to a senior State Department official. 

Ramin Toloui, assistant secretary for the Bureau of Economic and Business Affairs at the Department of State, noted that fostering relationships with allies and partners abroad will help build a robust and secure semiconductor ecosystem while the United States is also strengthening its own semiconductor manufacturing capabilities.

The CHIPS and Science Act aims to increase semiconductor manufacturing in the United States and strengthen American technology leadership. 

“Achieving that objective requires international partnerships because we need to have reliable and secure access to the critical materials that are used in the semiconductor fabrication process,” Toloui told Nextgov. 

Toloui added that it is important to cooperate with partners on the global fab—or semiconductor fabrication facility—and semiconductor ecosystem “because the semiconductor industry is an incredibly complex industry and one that relies upon global connections.”

For example, while the U.S. is looking to have assembly, testing and packaging capabilities as part of that law, “we anticipate that there will still be components of that downstream supply chain—assembly, testing and packaging—that will be done in other countries, and we want to forge strong partnerships in order to do that,” Toloui said.

He noted that the partnerships can vary, but there are some commonalities. As part of the CHIPS Act, the State Department was allocated $500 million over the course of five years, which it can leverage to help with these endeavors. 

Toloui stated that the agency is looking to use the funding to accomplish four things: 

• Secure reliable critical materials supply chains.
• Bolster downstream connections for assembly, testing and packaging.
• Participate in policy dialogues with key partners that are manufacturing semiconductors to share information about each parties’ incentive programs and supply chain interruptions, while ensuring policies are working toward shared goals—building robust semiconductor supply chains among allies and partners.
• Protect critical national security interests. 

Specifically, he noted that “semiconductor fabrication requires reliable access to minerals like cobalt, aluminum, arsenic, copper and rare Earth elements, and we want to bring new, more diverse and resilient mining, refining and processing, and recycling capacity online to meet the purchase supply [of] global chip production, including in the United States. The objective of this first component is to make sure that there aren’t bottlenecks in critical materials needed for semiconductor fabrication.”

For the second element, which is the downstream component occurring once the silicon wafers are produced, the chips must be packaged in a protective medium to then be placed into products; this process is “highly concentrated in Southeast Asia.” According to Toloui, the State Department will use its funding to “diversify those capacities for downstream processing in both Asia and in the Western Hemisphere.”

Toloui noted that for the third component—policy coordination—“it really involves these three different dimensions: the sharing of information about our respective incentive programs, the developing systems for communicating about disruptions in the supply chain—what we would call an early warning system for disruptions in the semiconductor supply chain—and then third is making sure that our various national policies are complementary and are advancing this common objective of secure and resilient global supply chains for semiconductors.” 

Lastly, for the national security component, he added that “there are some very sensitive elements of these technologies that we want to protect and ensure that they don’t end up advancing military uses in other countries and potential adversaries.”

There are many different partners that the State Department is working with on semiconductors in a variety of capacities, such as existing critical mineral initiatives for electric vehicle batteries in South Korea. 

“We can use that work to develop similar initiatives in the area of access to the critical materials for semiconductors,” Toloui said. “In the policy dialogue space, we already have a dialogue with the Europeans called the U.S. Trade and Technology Council, where we discuss a range of issues in trade and technology. And one thing that we’re doing under that is exchanging information about our respective policies to support our semiconductor sectors. There are a number of different economies that we work with in Asia—Japan, Korea and Taiwan. And so there are numerous partnerships that are existing and also that we’re seeking to cultivate.”

Partnerships are important because of the “intense pressure to reduce costs” and the complex intellectual property that goes into a modern semiconductor, which can be distributed over several entities around the world—necessitating additional collaboration with industry. For example, the U.S. has worked with the public and private sectors of Belgium, the Netherlands, Germany, Japan and India on semiconductors.

“I meet not only with government officials, but representatives of private sector in those countries that are working on semiconductor supply chains, in addition to having lots of discussions with companies here in the United States,” Toloui said. 

Toloui added that there are also some challenges because of the new landscape this creates. 

“The key thing is that through the CHIPS Act, we are making these historic investments in America’s technological leadership and manufacturing. But this is a new area for government involvement, and so, similarly, it’s a new area for many of our partners,” he said. “One of the challenges is basically trying to navigate this new area effectively, use [taxpayer] money well and try to coordinate with our partners such that our efforts are supporting one another in terms of the objectives, and not working across purposes. And so because of the novelty, that is a key challenge. And that’s why we think that it was far-sighted of Congress to allocate $500 million of the CHIPS Act back to the State Department because there’s a recognition that diplomatic coordination with other countries in an industry with such globalized supply chains is critical to achieving the CHIPS Act’s goals.”

Toloui explained that during the COVID-19 pandemic, the State Department helped to sustain semiconductor supply chains. Specifically, the Delta wave of COVID-19 in Southeast Asia  “threatened to shut down some parts of that semiconductor manufacturing supply chain that were critical to serving the U.S. automotive sector. And the State Department helped engage, for example, the government of Malaysia, on public health interventions that could be used to help make sure that those facilities can stay open while also protecting public health. That demonstrated how important diplomacy could be in keeping these supply chains that are vital to our economy going.”

According to Toloui, the funding “is a recognition that we have the opportunity to do that kind of coordination and cooperation in advance to try to build strong supply chains and strong diplomatic connections that will mean that those supply chains are more robust going forward.”