Tech Protectionism’s Incentives Undermine Global Market Goals

The basic components and necessary materials for a slew of technologies are increasingly becoming tantamount to basic needs. Somewhere between “safety” and “belonging and love,” Maslow is going to have to squeeze semiconductors into his hierarchy of needs.

If you drew contours around the geographic market for chips, it would look something like an outline around the map. Everyone needs them, and markets don’t need to be closed and protected. As such, protectionist policies in the technology sector are counterproductive and achieve little, save for increased international hostilities and deadweight loss.

We’ve spoken before about the measures governments, including the US, will employ to develop their technology sector. Lately, that has meant tax subsidies for semiconductor manufacturing. Most recently, South Korea has announced a slate of tax breaks for semiconductor producers, including 15% on investments on manufacturing facilities, 25% for capital expenditures by small companies, and 10% on additional investment in chipmaking.

South Korea’s chief competitor in the semiconductor market is Taiwan, which by some estimations accounts for about 50% of production. Rivaling Taiwan’s TSMC, South Korea is home to Samsung Electronics Co. and SK Hynix Inc., which together produce enough chips to bring South Korea in just behind Taiwan and ahead of Japan, China, and the US.

In an all-out trade war, everyone but maybe Taiwan loses—so why all the saber rattling?

Tech Protectionism

“Tech protectionism” is a term you’ll be hearing more often in the coming months and years. It usually refers to government action to protect domestic technology sectors from foreign competition. Many of the arrows in that particular quiver are some form of tax incentives keyed to domestic production by domestic entities. They range from reduced corporate rates to tax breaks for research and development and even property tax abatement for manufacturing and production facilities.

Such tax incentives are used not so much because they’re necessarily effective in the long term, but because they’re a political win in the short term. Some huge spending bill is to be passed, cutting massive checks to zillion-dollar companies, and there needs to be some kind of social-good counterbalancing narrative—so the argument is trotted out that it’ll be limited to domestic firms. Suddenly, what appears to be corporate welfare at first blush is reframed as a jobs program.

In the short term, the “why” mentioned above sounds like sound public policy. In the long term, it causes more problems than it creates jobs.

Issues such as trade disputes and subsequent tariffs arise when broader concepts of protectionism for a domestic tech sector are codified into policy. Here stands the Mistral supercomputer at the German Climate Computing Center on June 7, 2017 in Hamburg, Germany.

Photographer: Morris MacMatzen/Getty Images

Knock-On Effects

The first issues that arise when broader concepts of protectionism for a domestic tech sector are codified into policy are trade disputes and subsequent tariffs. In a post-globalization world, one country generally can’t disadvantage another major market country without there being reciprocal trade ramifications.

This can range from tariffs to a wholesale cessation of trade. For more than 17 years, up until mid-2021, the US and European Union were in a war of tariffs owing to their respective subsidization of Boeing and Airbus. Each accused the other of advantaging their respective major aircraft manufacturer to improve its positioning in the market. Obviously, these disputes can go on for decades.

The cost of the US–EU tariffs—and any tariffs—are born by consumers, be they purchasers of airline tickets or devices containing semiconductors. The entire scheme often has the opposite of the intended effect and leads to an increased cost for individuals and, save for international trade attorneys, very little job growth.

Another potential issue stems from poorly aimed policy. Take the Inflation Reduction Act’s targeting of domestically extracted or processed components for electric vehicles. It seems like a net positive on its face—domestic extraction and processing means more jobs and manufacturing independence. But if cobalt and nickel can’t be mined domestically, alternative technologies must be pursued by domestic manufacturers. The result is engineering decisions being made by tax policy, which is rarely a good idea.

There’s also the issue of the plight of foreign technology workers, who are rarely a considered party to these feuds. To advantage a domestic producer is to disadvantage foreign producers and to force a zero-sum condition; reducing the competitiveness of foreign producers in a given market absent any kind of corresponding immigration reform is to artificially “set” where a given good is to be produced and, in so doing, “set” who will be producing it.

In other words, given the realities of immigration, a tax incentive for a domestic semiconductor producer is a tax incentive for those workers who, one way or another, are producing goods in that country. It’s chip production musical chairs, and everyone sat down 30 years ago.

The goal of economic policy should be to promote well-being and reduce inequality, not jealously to guard the profits of specific companies in an industry. Said companies can look out for their own interests and don’t need any help from policy to do so. Protectionism can and has undermined international cooperation and puts at odds interests that should be aligned. It only benefits actors, such as China, that operate outside the bounds of traditional trade policy.

From innovation to cooperation and global growth, all signs point to open technology markets. In sum, a détente on tech protectionism is going to be necessary—and sooner rather than later.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.