It’s Worse than You Think: On the Consequences of the Chip Wars for U.S. Semiconductors (Job Market Paper)

Trade policies during the U.S.-China Chip War have been criticized for harming U.S. semiconductor manufacturers. To formally quantify this effect, I develop a dynamic vertical production network model in which producers compete oligopolistically in both input and output markets, taking into account the market power of oligopolistic input suppliers and technical progress through learning by doing. Applying the model to the global production of memory chips, I find empirical patterns consistent with the model and use them to estimate its key parameters. The estimated model highlights that export controls raise unit delivery costs to third countries due to increased input costs and a slowdown in technical progress. Ignoring the market power of concentrated input suppliers leads to an understatement of the dampening effects of export controls on U.S. semiconductor production. Moreover, the effectiveness of the export controls—measured by the increase in China’s semiconductor price index—declines with each imposition, as U.S. semiconductor producers lag in technical progress and capture smaller shares of the output market over time.