What’s in the CHIPS bill?

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President Biden is expected to sign the CHIPS and Science Act of 2022, or CHIPS+, this week. In late July, Congress passed a $280 billion package to support national semiconductor manufacturing capabilities, as well as research and development in cutting-edge technologies. That’s a huge bill – by some measures even bigger than the Apollo Moon program.

CHIPS+ is big news for another reason — the bill shows how Washington is rethinking the role of government in the industry, in response to the re-emergence of great power competition and the fragilities of globalized production networks. CHIPS+ is both a large-scale high-tech industrial policy, a jobs program and a secure supply program. Will it also catalyze innovation? Here is the policy behind the new legislation.

The United States does not want to rely on others for the manufacture of chips

Silicon wafer chips, or semiconductors, have become an integral part of a wide range of products, including cars, smartphones and home appliances. The chip supply chain tends to fragment R&D-intensive activities and concentrate wafer manufacturing in a few places. But geopolitical risks – namely competition with China – as well as natural disasters such as the coronavirus pandemic have bolstered the case for national security and economic resilience, and pressure from the US government to “relocate » semiconductor manufacturing capabilities.

This marks a shift from reliance on free trade and efficient markets to concerns about bottlenecks in complex economic networks that adversaries might militarize for political leverage. These concerns reflect multiple factors, including loss of faith in the benefits of globalization, fears that China and other economies are manipulating trade rules and institutions – and, of course, disruptions to related supply chains. to the pandemic.

While the United States accounts for 47% of the global chip industry, this is based on its dominance in R&D-intensive activities like chip design and manufacturing equipment. Most US semiconductor companies operate on a “fabless foundry” model – they design microchip technology in-house, but outsource production overseas. This business model makes sense from a “lean supply chain” perspective, and specializing in a small part of the supply chain minimizes a company’s investment costs. Within this industrial structure, US chip production has fallen from 37% of global supply in 1990 to 12% today. The United States currently does not have the capacity to manufacture the most advanced microchips.

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Encouraging domestic production is politically complicated

Chipmaking is extremely capital-intensive, and countries with the largest market share of chip production heavily subsidize the industry. CHIPS+ is trying to make domestic semiconductor manufacturing more feasible by providing $52 billion in grants – and a 25% investment tax credit – to companies that build new factories in the United States, or expand or retrofit existing microchip manufacturing plants in the United States. Much of the funding will go to manufacturing advanced chips, with $2 billion earmarked for legacy microprocessors used in many commercial applications, including automobiles.

The bill also authorizes an additional $200 billion for programs to spur innovation, including a new National Science Foundation directorate for technology, innovation and partnerships and $10 billion to create 20 “regional technology centers”.

Incentive programs were designed to distribute funds to benefit more rural and disadvantaged communities. However, research on investment incentives suggests that these programs are often insufficient to overcome locational disadvantages and may lead to unnecessary rent seeking.

Do industry incentives work?

Whether CHIPS+ incentives can effectively foster semiconductor manufacturing and high-tech clusters will depend on many factors, including the process for selecting which projects to support. In co-authored work, I show that investment incentives often reflect real development priorities. But, as political scientist Stephanie Rickard has demonstrated, electoral politics often determines which locations the central government chooses to support. And political scientist Nate Jensen’s comment points out that CHIPS+’s requirement to pair federal chip subsidies with state or local incentives could lead to fierce competition between states. Already, New York has created a $10 billion tax incentive program to attract certain semiconductor factories.

However, if any industry is a good candidate for industrial policy, it would be semiconductor manufacturing – facilities are capital intensive and difficult to move once built, they usually generate follow-on investment and complementary innovation , and can create good, well-paying jobs. . As others have noted, semiconductor manufacturing and R&D require highly skilled talent, so new US grants may not be enough without efforts to address the STEM talent shortage. through an education and immigration policy. Although CHIPS+ has provisions on workforce development, the new bill says nothing about facilitating the immigration of STEM professionals to the United States.

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Ultimately, whether CHIPS+ is a costly waste or an effective catalyst for innovation depends on the administration of the program. The legislation grants the US Secretary of Commerce considerable discretion over funding programs; it will be important to watch how the Commerce Department interprets its mandate and if and how it insulates the Department from the politicization of funding decisions.

What does this say about globalization?

Another question is whether CHIPS+ ultimately sacrifices open markets in the quest for self-sufficiency. The Biden administration has combined efforts to build national capacity with steps to coordinate supply chain resilience among allies and partners — and anyone from Texas would point out that even closed systems aren’t up to par. sheltered from supply interruptions.

CHIPS+ alone is unlikely to prevent US companies from continuing to relocate production to China. During negotiations, Congress removed trade-related provisions from the original bill, including the National Critical Capabilities Defense Act, which would have added, for the first time, provisions to screen outbound foreign investment in “countries of concern”. However, Congress will likely revisit the issue of outbound screening in the fall.

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But CHIPS+ includes guardrail provisions to prevent companies benefiting from US subsidies and incentives from building advanced semiconductor factories in China. Korean chipmakers Samsung and SK Hynix, for example, report that CHIPS+ complicates their investment strategy in China. It is unclear, however, whether CHIPS+ will allow companies seeking US subsidies to continue producing legacy technology in China.

Would overly restrictive provisions have the opposite effect and lead to a complete technological decoupling between China and a US-led semiconductor coalition? While industry will likely lobby against this, my research shows that companies often tolerate investment restrictions if they also receive subsidized funding.

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Sarah Bauerle Danzman is an associate professor of political science at Indiana University and author of “Merging of interests: when domestic firms shape FDI policy(Cambridge University Press, 2020). Find her on Twitter @sarahbauerle.

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