In a November post-election blog post, we wrote, “The pandemic and its effects have taught us we can and must rebalance our economy to recapture industrial capacity we have exported to low-wage economies. Only a shared sense of purpose will allow us to do that.”

Our argument was rooted in a Brookings Institution report, which found, “Jobs in blue America disproportionately rely on national R&D investment, technology leadership, and services exports. By contrast, [in red America] prosperity remains out of reach for many . . . . This is not a scenario for economic consensus or achievement.”

We suggested big technology companies like Google are best positioned to rejuvenate our manufacturing economy. And we argued the Great Lakes region is where that activity should take place. Available there are large, inexpensive tracts of land, a well-educated work force, moderate cost of living and plentiful fresh water.

Last week, Ohio media outlets reported Intel will spend $20 billion to create a semiconductor manufacturing hub northeast of Columbus, Ohio, on 3,200 acres of farmland: that is five square miles, or ¼ the size of Manhattan. A significant portion of the funding will likely come from taxpayers, as Congress considers the CHIPS Act, a bill that will feed $65 billion to the U.S. semiconductor industry.

Although the pandemic-induced chip shortage is the immediate cause for Intel’s Ohio gambit, infrastructure that makes it possible was built by the federal government 50 years ago in response to another crisis—river flooding. Intel was incorporated in 1968, as semiconductors entered the mainstream economy. In the same year, the Army Corps of Engineers and the State of Ohio began work on Alum Creek Dam, the newest of three large water reservoirs north of Columbus.

In the mid-19th Century, Alum Creek was known to travelers on the Underground Railroad as the Sycamore Trail, due to the abundance of that distinctive tree species along the creek.[1] Enslaved people seeking freedom followed the creek upstream due North for 58 miles through Central Ohio. They waded in the stream to put slave catchers’ dogs off the scent. They took shelter in hollow trunks of sycamore trees, which can live 500 years and become hollow as they age. Safe houses also provided sanctuary, including an 1830s farmhouse just down the street from my childhood home.

Alum Creek Dam was completed in 1974 as part of the network of dams that control flooding on the Ohio River. The five square miles of land behind the dam are now a state park, which the Army Corp of Engineers floods as needed to prevent flooding downstream. Meanwhile, Columbus and nearby communities draw their drinking water from the reservoir at Alum Creek Lake and the other two flood control reservoirs nearby. Since Alum Creek Dam was commissioned, Columbus’s population has doubled to nearly 1 million.

Intel, Google and their peers grew up in the Western U.S. Today, that region’s limited water resources make big tech companies problematic neighbors.[2] Intel’s Ohio project is expected to be a clone of its Chandler, Arizona, fab plant, which consumed 1.8 billion gallons of water in Q4 2020.[3]

Intel and the city of Chandler have spent hugely to build a water recycling plant to reduce the burden Intel places on the city’s water resources. Even so, residents, city and company officials are wary. Chandler’s Drought Management Plan calls for rationing water if deliveries from the Colorado River fall by 30% or deliveries from the Salt River Project fall by 60%. Either scenario is plausible if population growth continues its current trajectory.

Intel’s and other big tech companies’ embrace of the Great Lakes states is also politically astute. Ohio’s Congressional delegation greeted last week’s news with calls for Congress to pass the CHIPS Act. The runner-up to Ohio in the Intel bidding was New York, whose Senator Schumer lobbied for an Upstate New York location that also has ample water nearby.

The general public understands the current chip shortage, but not how the global semiconductor business has morphed. Since 2000, U.S. companies, Intel excepted, have quit manufacturing chips. They design chips, but contractors manufacture them in what the industry calls foundries. Samsung in South Korea and Taiwan Semiconductor Manufacturing Co. (TSMC) control more than 70% of global chip manufacturing.[4] More worrisome, Samsung and TSMC have taken the lead over Intel in the race to fit the greatest number of circuits on the thinnest, smallest silicon wafers.

Samsung and TSMC enjoy 30% government subsidies. Chinese government subsidies are even larger.[5] Although Chinese chip makers are not yet competitive at the high end of the market, the Chinese government’s heavy investment poses the risk that gap will close within a decade.[6]

The need to find a new equilibrium to sustain a U.S. manufacturing economy is the dominant question of our day. Reestablishing domestic semiconductor fabrication is an obvious strategic need. Also important is making in America furniture, household appliances, medical supplies, pharmaceuticals, construction tools and countless other more ordinary goods. Time and again in our work at Renaissance Partners over the last three decades, we have encouraged U.S. business executives and government officials to recognize the economic value of domestic manufacturing.

As the semiconductor industry trade association says, the choice between U.S. production and Asian production is not binary.

While we should take seriously [Chinese semiconductor industry challenges], the answer cannot be the wholesale decoupling of our economies. The semiconductor industry is truly global, and access to global markets is critical for U.S. firms to sustain high levels of investment in R&D and capital expenditure. . . . The right approach to addressing market-distorting Chinese industrial policies is to work closely with our allies to both compel China to change its ways, as well as to develop new global rules and standards that improve market access and ensure fair competition.[7]

This position can be read as self-interested—don’t close off the great market opportunity China represents for U.S. firms. The better view is it as realistic. It is impossible not to deal with China in today’s economy. The need is to define the terms of trade in a way that creates mutual benefit. A vital American manufacturing sector is essential to that equation.

[1] https://www.columbusmonthly.com/story/news/2015/02/23/city-quotient-what-part-did/22795383007/.

[2] https://www.nytimes.com/2021/07/09/technology/big-tech-community-impact.html

[3] https://www.wranglernews.com/2021/05/27/chandler-intel-pact-preserves-citys-water-resources-as-drought-lingers/

[4] https://www.cnbc.com/2021/04/12/us-semiconductor-policy-looks-to-cut-out-china-secure-supply-chain.html

[5] https://www.semiconductors.org/taking-stock-of-chinas-semiconductor-industry.

[6] “Chinese chip producers are focusing on making a breakthrough in memory and mature node logic foundries to gain an edge in the global market. Since 2016, the Chinese government has invested at least $16 billion into state-owned memory fabs to develop China’s domestic 3D-NAND Flash and DRAM industry, and the efforts have begun to yield some success. In addition, leading Chinese foundries and several foundry start-ups have accelerated their pace of building trailing-edge fabs. According to VLSI, China’s memory and foundry capacity is expected to grow at a CAGR of 14.7% over the next 10 years.” Id.

[7] Id.