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Econ Commentators Join TSMC to Declare U.S. Workers’ Premature Defeat
The econ blogosphere hasn’t really checked, but knows in its heart American workers aren’t up to the job.
A semiconductor fab under construction in the Sonoran desert is becoming an acid test of President Biden’s industrial policy.

Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading maker of advanced computer chips, announced earlier this summer that it intends to fly in 500 or more Taiwanese workers, in addition to overseas workers already employed on the site, to complete construction of the fab. Nikkei has reported that the company is “in talks” with U.S. government officials to secure the temporary visas, which are said to be E-2 investor treaty permits.

Union leaders have whiplash. In December, President Biden visited the plant to announce that the fabs would be “built with union labor.” He did not say “exclusively.” But it has come as a shock that the vast majority of work on the roughly 20,000-job site is non-union. TSMC is seeking some $15 billion in government subsidies for the fab.

In May, I went to Phoenix to interview workers at the site. Some shared anecdotes of how untrained workers with non-union contractors had made costly mistakes. Others described grisly injuries. For over a year, the company has denied labor leaders a project labor agreement, a prehire deal that ensures union jobs and incentivizes training. Instead, TSMC has brought in hundreds of non-union contractors like ABM Industries, a company that staffs Amazon warehouses and is notorious for wage violations.

Now, TSMC says the lack of a skilled workforce is causing construction delays. In response to its decision to bring in more foreign workers, the Arizona Pipe Trades 469 union has started a petition to block the visas.

TSMC executives emphatically oppose labor unions, and run a business with razor-thin operating costs and extraordinary profits. The Department of Commerce’s CHIPS Program Office, which manages subsidies from Biden’s semiconductor subsidy bill, is currently deep in talks with prospective grantees. It makes good business sense that TSMC, which has not yet secured those subsidies, would emphasize its staffing woes and complain that it is expensive to operate in the U.S.

What is surprising, however, is that the U.S. economics blogosphere has gone to bat for TSMC, echoing the company line about the urgency of finding a skilled workforce, and the need to find it abroad.

Responding to the petition to block Taiwanese workers, Samuel Hammond, a fellow at the Niskanen Center think tank, tweeted, “This is the opposite of how industrial policy actually works. When Korea and Taiwan were developing, they aggressively courted workers from other countries to transfer their tacit knowledge.”

“America simply doesn’t have a lot of people who know how to install this equipment,” economics blogger Noah Smith wrote on Thursday. “American pipefitters simply do not know the technical details of installing ultraviolet lithography machinery. They need someone to teach them before they can do it, and the people who can teach them live in Taiwan.”

At an abstract level, Smith is right to pay attention to looming workforce constraints. Proponents of industrial policy have long pointed out that you can’t stand up advanced manufacturing by reading wikiHow. You need transfers of specific and tacit knowledge—the many details of a craft that don’t get written down or formalized—and also plenty of “learning-by-doing.” Trust and coordination help, too.

In other words, subsidies aren’t enough to ensure that the factories we’re building will churn out competitive goods. China has achieved rapid dominance in manufacturing electric vehicles, for example, and has breached impressive thresholds on quality and reliability, at low cost. As the U.S. attempts to fire up new industries, the ability to learn through trial and error is critical.

This set of insights is typically applied to engineering and other jobs within the walls of advanced manufacturing plants, where cutting-edge skills and iteration are essential. Critics like Smith who are increasingly anxious about the ability of American workers to tackle new production challenges have exported the same critiques to construction—without showing that they belong.
In this case, Smith is so sure American workers are inept, he doesn’t bother to check what they’re already doing. Members of Arizona’s Pipefitters Local 469 have built fabs in Ireland and in Israel. In 2015, around 700 members helped build a GlobalFoundries fab in Buffalo. They are steadily employed building an Intel plant south of Phoenix that hopes to compete with TSMC.

OK, Smith might say, but building a state-of-the-art facility is different. (Smith does not differentiate between leading-edge chips, like graphics processors, and more basic chips, like power management circuits, or even between logic and memory chips, but he points out that TSMC is the world’s top chipmaker. The reader is left to conclude that a leading-edge construction site might involve unique “technical details,” though Smith does not spell out what those would be. Instead, he defers to the company’s expertise. TSMC says American construction workers aren’t up to the job, and ours is not to reason why.)

Smith’s one specific claim is that American workers can’t install lithography machines. In fact, union pipefitters are already installing lithography machines at TSMC, as well as nearby Intel. (The equipment is not specific to TSMC. Both use equipment from the same Dutch vendor: ASML.) Workers have their own thoughts on technical details of the job—on which, more below.

The broader point is that, with all the concern about how Americans have lost their dynamism and mojo, there’s a risk of mystifying the task at hand.

“What pipefitters, electricians, and others do is hook up equipment,” Aaron Butler, president of the Pipefitters’ local and head of the Arizona Building Trades Council, told me. “The pipe does not care what it’s going to. My guys don’t make the chips, they’re not trying to run the lithography equipment. We connect the piping to the mechanical connection, pressure-test the line, make sure it’s clean and quality, and walk away.”

Like all work, of course, chip fab construction requires distinctive skills and benefits from experience. One of the weirder things about building a fab, for example, is the need for extreme cleanliness. Workers wear protective suits to ensure that skin flakes, hair, saliva, and other tiny particles do not contaminate the “clean room” as it is being built. Even as the walls go up, janitors scrub crannies in the flooring to remove any dust that has been accidentally left behind.

Ironically, TSMC may be crushing the opportunity for learning-by-doing to emerge in the construction stage of the fab. TSMC has outsourced most of the job site—like its janitorial work—to temp contractors with little training and high churn. Even where it has brought in union workers with a career in the building trades, it has done so grudgingly and kept them on precariously, disincentivizing investment in training and growth.

The company, in other words, has opted to work wherever possible with the least-skilled segment of the American workforce. Now, as it turns around to bring in its own skilled workers, would-be supporters of industrial policy are declaring that this was inevitable.

IN THE CASES WHERE TSMC HAS USED UNION WORKERS, workers in the building trades have plenty of notes on how they’re doing the job.

Luke Kasper of the sheet metal workers union, for example, worries about the quality of the Teflon-coated stainless steel ductwork. Where non-union contractors have done the work, he says, gaskets are missing in areas, and not all of the ductwork achieves an airtight seal. “Even though it’s negative-pressure exhaust ductwork, it’s not supposed to be done like that,” he said. Corrosive exhaust passing through the ductwork could leak.

Butler, with the Pipefitters, described ongoing disagreements over welding techniques. Polyvinylidene fluoride (PVDF) pipes are the arteries of a fab, carrying pure, ultraviolet-treated water to the clean room. Arizona Local 469 pipefitters have been installing mechanical piping in clean rooms since Motorola production sites sprung up in the 1980s, and many members learned to weld the PVDF by hand, using socket welding, which requires a paddle.

Butler says socket welding can be leaky, and he favors the Bead and Crevice Free (BCF) process, which is automated and produces data on quality. But TSMC favors socket welding, so they have continued to use the older technique.

In a higher-trust atmosphere, this might be a fruitful debate, and exactly the sort of exchange you would want to encourage as workers aim to boost productivity on advanced sites. In the current hostile climate, the notion that this is cheery and collaborative learning-by-doing seems more far-fetched.

Smith, Hammond, and others might argue that workers should just defer to TSMC on questions like socket versus BCF welding, rather than raising concerns. They might assume that the company knows best, since it is the single producer of the world’s most sophisticated chips.

But that same observation—that TSMC currently has no peers—might point in the opposite direction. Perhaps we should assume TSMC isn’t running the tightest possible ship. If it were holding its own among a pack of competitors, that would be a much more robust signal that it had optimized across all operations. But TSMC’s cutting-edge logic chip production is not really subject to competitive market pressures, like the market that exists in memory chip production, for example. There, competition is brutal, margins are tight, switching costs are low, and competitors stay neck and neck.
This is not to minimize TSMC’s technical prowess. The U.S. media came late to recognizing that TSMC achieved its global status through truly sublime skill, and is now making up for lost time with rhapsodic praise. In a particularly memorable extolment, the historian Adam Tooze remarked on a podcast, “Our ability to do this stuff at nanoscale is us up against the face of God.”

But if TSMC is doing modern alchemy in its clean rooms, it is also employing more pedestrian business strategies to stay ahead. Earlier this week, The Information reported on the cozy terms TSMC has set for Apple. It is the sole supplier of processor chips for iPhones. Most tech companies place an order of chips and pay for them all, including bad batches. With Apple, TSMC has agreed to eat the cost of defective chips.

Apple has long thrown around its volume to win sweetheart deals. And regulators used to be more critical of TSMC’s monopoly status. Five years ago—before the pandemic and supply chain shocks—both EU and U.S. officials were considering challenging TSMC’s monopoly hold. With the U.S. staking major national-security objectives on TSMC’s timely delivery of electronics for key weapons systems, the criticism is getting more awkward.

That isn’t some grand indictment of Bidenomics. It’s just trade-offs. Economists love tradeoffs! But when the government gets back in the business of weighing competing interests, the reaction can get a little hysterical.

Biden’s state-led economic development strategy has three pillars: Industrial policy, labor revitalization, and antitrust—that is, market competition. If industrial policy is about quickly standing up new industries and maybe also national champions, there are immediate, obvious frictions between these goals.

There has already been a mini boom in proposals aimed at making those goals of Bidenomics more mutually compatible. Now comes the hard part in industrial policy, as they say, and it’s essential to be specific.

Smith writes that “Germany has much higher rates of collective bargaining coverage, due to something called sectoral bargaining that lets even non-union workers be covered by union agreements.” There is indeed plenty to be learned from German corporatism. One wonders whether Smith is aware that right here in the United States, under the flawed American unionism that troubles him, non-union construction workers on sites with federal funding are covered at collectively bargained rates. The Biden administration recently strengthened this system with a sweeping reform to the Davis-Bacon Act, which may soon apply to TSMC.

Some of the most interesting research on chip market structure is being done by Todd Achilles, a former HP executive who also ran American operations for the Taiwanese consumer electronics company HTC. In a forthcoming report, Achilles proposes a bevy of ways he believes the U.S. government could reduce the risk that chips subsidies entrench the monopoly power of tech giants like TSMC. For example, he argues that the Biden administration should require fabless chipmakers like Apple to dual-source their semiconductors, diversifying their supply chain beyond a single champion.

For my money, the sharpest proposals to make markets, labor, and industrial policy work together seem to be coming from people like Butler, Kasper, and Achilles, who are closest to the action.
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