Exogenous shocks, industrial policy, and the US semiconductor industry

The Ukraine war and the Covid-19 pandemic provide windows to study the impact of exogenous shocks on the US semiconductor industry. This column uses high-frequency data to reveal that supply chain disruption did not severely damage the industry in the US. However, the US is less competitive than the East Asian countries in the semiconductor industry because of educational attainment, fiscal discipline, and employment incentives. Policymakers should be aware of these factors before subsidising the industry.

Baldwin and Freeman (2022) observed that the last couple of years has been filled with exogenous shocks. They noted that researchers could use high-frequency data to investigate how these shocks affect global supply chains.

The impact of the Ukraine war on the US semiconductor industry
One such shock occurred on 24 February 2022 when Russia invaded Ukraine. Ukraine supplies 90% of the neon, and Russia supplies 30% of the palladium used by the US semiconductor industry. How did these supply chain shocks affect the US semiconductor industry? One way to examine this is to investigate how semiconductor stock prices have responded. In theory, stock prices equal the expected present value of future cash flows. One can predict the evolution of stock prices using macroeconomic variables and then examine the difference between actual and predicted prices after the war started. Four variables that are useful for explaining sectoral stock prices are the return on the country’s aggregate stock market, the return on the world’s aggregate stock market, the change in the log of the exchange rate, and the change in the log of the price of crude oil.

Figure 1 shows the performance of US semiconductor stocks from 24 February to 8 April 2022. It also shows the performance predicted using regressions of semiconductor stock returns on the four macroeconomic variables up to 23 February 2022 and actual out-of-sample values of the macroeconomic variables to forecast semiconductor returns after that. Actual stock prices have performed about as predicted given the macroeconomic environment. This indicates that shocks to the supply chain caused by the war have not damaged the US semiconductor industry.

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