In recent years, the Democratic and Republican parties have promoted domestic manufacturing to reduce the risk of supply disruptions from unfriendly nations. On its first day, for example, the Trump Administration issued an Executive order requiring the Commerce and Treasury Secretary to assess the national security implications of the U.S. trade deficit.[1] The national security and economic impacts are large — research groups have estimated a disruption of Taiwanese electronics manufacturing could cause a $2 trillion supply shock to the global economy.[2] However, since federal agency economic analysis of proposed regulations does not consider the costs of supply chain vulnerabilities, current regulatory policy favors actions that raise obstacles and costs for domestic manufacturing. In economic terms, a vulnerable supply chain is an externality. OMB should require agencies to estimate a value for this externality so that alternative regulatory options that favor domestic manufacturing receive equal weight.

For several decades, economists have estimated the externality costs to the US economy of imported oil. These costs include some of the United States’ military spending to secure access to overseas supplies, the expected value of the risks to the economy of a possible supply shock like an oil embargo, and the increased costs for oil and associated products. The U.S. EPA has applied a security premium in its regulatory analyses to support regulations that reduce consumption of imported oil. For example, in its 2024 final fuel economy standards for cars, EPA estimated the energy security premium to range from $0.07 per gallon to $0.30 per gallon of gasoline. By including this security premium, EPA’s standards promoting EVs appeared a more favorable regulatory choice.

Today silicon is the new oil. The CHIPS Act, restrictions on U.S. exports, and many other policies have been enacted to reduce the American economy’s vulnerability to the loss of Tawain-made semiconductors. The Trump Administration appears likely to add tariffs in part due to this externality. As a public good expense, Congress added a $10 billion dedicated fund to the Department of Defense’s budget to boost Pacific defenses, over and above the substantial spending for Pacific defenses in DoD’s baseline budget.[3]

However, at the same time, other regulatory actions discourage U.S. domestic manufacturing of semiconductors, aircraft, motor vehicles, medical devices, and their components. For example, EPA has issued chemical management rules that have banned or greatly discouraged the use of fundamental building block chemicals such as formaldehyde and fluoropolymers. In response to these increased costs, companies move production overseas, weakening supply chain and increasing the security externality.

Back-of-the-Envelope Estimate of the Security Externality

To make a quick estimate, let’s take the three components EPA uses for the energy security premium: (1) defense costs; (2) lost economic output from an oil shock; and, (3) excess price due to market structure. For simplicity, let’s assume that current semiconductor prices are not distorted by supply chain vulnerabilities. For defense costs, let’s assume $100 billion per year of military spending directed at South China Sea threats. The International Monetary Fund estimates that a supply shock comparable to the COVID-19 shutdown would decrease global gross domestic product (GDP) by 1.2 percent.[4] Applying a one-percent rate to the US GDP, the cost of a Pacific shock would be $250 billion. Therefore, the value of domestic production and/or secure supply chains is approximately $100 billion per year plus the expected value of reducing the risk of this $250 billion hit to the US economy and households.

Federal agencies have maintained and expanded regulatory barriers to domestic production of semiconductors and the associated supply chain and of other vulnerable products. Examples of these obstacles include the following:

  • Permitting. Permitting under NEPA and the Clean Air Act pose long-standing, significant barriers to siting new facilities. Congress and the Biden Administration recognized this problem and passed a 2024 law to streamline this permitting for semiconductor plants receiving federal funds. However, these obstacles still exist for other critical industries.
  • PFAS Bans, De Facto Bans, and Liability. Semiconductors fab plants use multiple types of PFAS throughout the production process and have reported discharges of PFAS in wastewater. The combination of EPA’s recent Superfund liability scheme and draft water quality standards will render use of many fluoropolymers in the United States too costly and financially risky. The Biden Administration realized this conflict late in its term but did not resolve it.
  • Chemical Management Regulations. In its sweeping rules banning key chemicals, EPA recognizes and grants exemptions for certain national security uses. However, EPA did not exempt uses necessary to enable a domestic supply chain of critical materials like semiconductors. With the uses banned in the United States, critical defense and semiconductor supply companies will remain abroad.

While these permitting requirements and chemical management regulations have social benefits, they must be balanced with the full measure of social costs, including the security externality. If EPA accounts for it for imported oil, it must also consider its regulatory impact on imported semiconductors. With numerous court-ordered and statutory deadlines for chemical management regulations in 2025, federal agencies should act now. OMB should examine the fundamental basis for a security premium and direct agencies to include it for policies that help/hinder onshoring of critical supply chains like semiconductors, personal computers, medical devices, and aviation.

[1] https://www.whitehouse.gov/presidential-actions/2025/01/america-first-trade-policy/

[2] https://rhg.com/research/taiwan-economic-disruptions/

[3] https://crsreports.congress.gov/product/pdf/IF/IF12303

[4] https://www.imf.org/-/media/Files/Publications/WP/2023/English/wpiea2023042-print-pdf.ashx