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Ensuring Long-Term U.S. Leadership in Semiconductors 1. Challenges and Opportunities

Semiconductors are essential to many products used in modern life, from computers, cellular telephones, and solar panels, to medical diagnostics and self-driving cars. Progress in semiconductors has opened up new frontiers for devices and services that use them, creating new businesses and industries and bringing massive benefits to American workers and consumers and to the global economy. Cutting-edge semiconductor technology is also critical to defense systems and U.S. military strength, while the pervasiveness of semiconductors makes their integrity an important factor in shaping cybersecurity risk.

Today, the semiconductor industry faces challenges from technological barriers and rapidly shifting markets—trends that are now compounded by increasingly active Chinese industrial policy (see Box 1. The State of U.S . Industry). U .S. policy should aim to sustain and grow the contributions semiconductor technology makes to the economy and national security by promoting an environment that drives semiconductor innovation while protecting against specific national-security risks. Delivering on these goals requires sustaining a vibrant and competitive domestic semiconductor industry, but it will demand much more than just that.

Industry is a critical part of the semiconductor innovation system. In order to maintain and accelerate innovation in the semiconductor space, it is essential that companies have an open, market-based environment in which they have intellectual-property protection, access to affordable capital, access to leading-edge academic research and pools of well-trained engineers and scientists, and access to large markets. Industry requires an environment in which market power is not misused. This environment can be delivered through strong competition or by government-imposed restraints on abuse.

Innovation will benefit the U.S. economy regardless of where it occurs. Sustaining innovation, however, is far more likely if the United States itself has a robust semiconductor industry (along with a strong research community). The United States, in contrast with some major competitors, provides companies the ingredients necessary to innovate rather than simply cutting costs for existing technologies. Historically, U.S. government-sponsored research and development (R&D) has been essential to driving semiconductor innovation—but that support will be unsustainable if industry is hollowed out.

The innovation spurred by a robust U.S. semiconductor industry also creates a virtuous cycle: by helping U.S. producers stay ahead of competitors, it further strengthens U.S. -based industry, which in turn drives semiconductor innovation. This cycle will be most powerful when U.S. -based industry stays ahead through genuine comparative advantage, building on strong U.S. capital markets, talent, and research institutions. If the United States instead tries to keep its industry ahead by shielding it from legitimate foreign competition, innovation will suffer, ultimately leaving the U.S. industry less competitive and the U.S. economy worse off.

Economic strength is also fundamental to U.S. national security—increasing the urgency of getting the economic part of the semiconductor equation right. The United States faces a distinct set of specific, 4