The CHIPS Act Does Not Solve All Semiconductor Problems

 

ASSESSMENTS

The CHIPS Act Won’t Reduce the U.S.’s Strategic Reliance on the Global Semiconductor Sector

7 MIN READJul 28, 2022 | 20:16 GMT

U.S. President Joe Biden participates virtually in a meeting on the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act on July 25, 2022.

(Anna Moneymaker/Getty Images)

The latest U.S. bill to support the domestic semiconductor industry will struggle to reduce the United States’ reliance on foreign chipmakers and suggests Congress is unwilling to impose strict controls on companies looking to invest in China. On July 27, lawmakers in the U.S. Senate passed the $280 billion the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, which subsidizes U.S.-made semiconductor chips and boosts investments in cutting-edge science and technology initiatives. U.S. President Joe Biden strongly supports the bill, which he argues will create more jobs for Americans by incentivizing more firms to manufacture chips in the United States. The U.S. House of Representatives passed the bill on July 28, sending it to Biden’s desk. 

• The CHIPS Act portion of the bill allocates $50 billion in subsidies for the CHIPS for America fund to bolster the U.S. semiconductor industry — including by building new chip fabrication plants, expanding research and development (R&D) efforts, and supporting workforce development — as well as an additional $2 billion in subsidies for the CHIPS for America Defense fund to bolster projects specific to the U.S. defense sector. The CHIPS Act portion also includes $700 million in subsidies for various other semiconductor-related funds.
• The science portion of the bill includes a wide range of measures, including increasing financial support for several programs being run by the U.S. Department of Energy, like those related to carbon storage and nuclear power. The bill also establishes new mechanisms and incentives designed to boost the United States’ STEM workforce, and provides additional funding for a number of NASA programs. 

The passage of the bill in Congress comes after more than a year of legislative debate and dialogue with U.S. business leaders on how to support the semiconductor industry in the wake of the disruptive global chip shortage and the growing competition with China. For lawmakers, the chip shortage was a visible example of how far the United States had fallen in semiconductor manufacturing, despite its dominance in key areas of the industry like semiconductor design and R&D. The bill itself borrows from a number of predecessor bills that have been introduced but not passed, including the Endless Frontiers Act and the United States Innovation and Competition Act (USICA), since the semiconductor shortage began in 2020. However, the CHIPS and Science Act stands a greater chance of passage in part because it represents a watered-down version of previous bills. It is also more likely to pass because U.S. officials have pointed to the hollowing out of the U.S. semiconductor industry as a national security risk, particularly as China tries to make strides in developing its semiconductor industry. Even so, some Republicans and Democrats have still criticized the new CHIPS and Science Act, highlighting how divisive the issue has become and the number of iterations it has gone through.

• Between 1990 and 2021, the U.S. share of global semiconductor production fell from 37% to just 12%, according to data from the U.S. Semiconductor Industry Association. This drop has coincided with the rise of chip manufacturing in Asia, which now accounts for roughly 75-80% of global semiconductor production. 
• Democratic Senator and former presidential candidate Bernie Sanders has criticized the bill for what he accuses of enabling “crony capitalism” by providing subsidies to companies that are already making billions of dollars in profits. 
• Republican and fiscally conservative voices in the United States have also expressed concern about the cost of the new CHIPS and Science Act, which expands on what was originally a $76 billion bill for semiconductors subsidies and tax credits to authorize billions of dollars of more funding for other projects — with The Wall Street Journal’s editorial board recently calling it a “spendorama.”

If signed into law by Biden (as expected), the CHIPS Act portion of the bill will increase domestic semiconductor manufacturing. But this is unlikely to significantly reduce the United States’ overall reliance on the global semiconductor industry. Intel and other semiconductor manufacturers will certainly take advantage of the extra financial assistance offered by the tax credits and subsidies to boost production in the United States. But any new investments in U.S. fabrication plants are likely to still pale in comparison to global investment in the sector. While $52 billion is a large sum, it can cost anywhere between $10-15 billion to build a single semiconductor manufacturing facility, illustrating the limits of the bill’s funding. Taiwan’s TSMC, for example — the largest contract semiconductor manufacturer — is planning to invest $100 billion alone over the next three years to keep up with demand. The semiconductor industry is also highly segmented as different companies concentrate on specific parts of the industry or types of chips, which makes it difficult for Washington to create legislation that supports all of the necessary areas of investment. Moreover, chip fabrication is just one of many parts of the semiconductor value chain. Even if the United States has more fabrication plants, semiconductor packaging and testing, key raw material inputs and manufacturing equipment would still need to be imported.

• The recent global energy shortage and rise in oil prices offer a cautionary tale about how domestic production does not necessarily isolate a country from global market conditions in a globalized industry. From 2012-2020, U.S. politicians lauded the growth of domestic oil and gas production, saying it boosted U.S. energy security. But the 2021-22 energy crunch, highlighted how that domestic growth failed to significantly protect the United States from international market conditions during global crises (like the COVID-19 pandemic and the war in Ukraine). The same would likely be true in the semiconductor industry, which, like the energy sector, is also highly globalized. 

Proposals that were ultimately left out of the final version of the bill also highlight that Congress may not have enough support for more aggressive measures to slow the advancement of China’s semiconductor industry, as well as deter U.S. (and Western) companies from investing in strategic industries in China. The final version of the bill left out a proposal to create an outbound screening mechanism for foreign direct investments that would have allowed a new review board to block investments into countries like China over national security concerns. The mechanism would have been similar to one that currently allows the U.S. government to review the national security risks of investments in the United States, such as if a Chinese company sought to acquire a U.S. semiconductor firm. However, various business leaders and some U.S. lawmakers in Congress criticized the outbound investment screening mechanism for giving the government too big of a role in the private sector. Moreover, there were also concerns over the vagueness of what would constitute a national security risk, given that former President Donald Trump had placed tariffs on steel and aluminum on U.S. allies with what most observers called a dubious national security argument. To assuage these fears, the final version of the bill only scrutinizes outbound investments in the semiconductor industry itself, rather than more holistically covering outbound investments in other key emerging technologies. It does so in the context of wanting to ensure that the government funding provided by the act does not lead to investments in China. Tech companies, however, will still be free to invest in other strategic Chinese sectors, which is why some U.S. lawmakers have called for a broader mechanism than what is currently included in the bill. 

• If Biden signs the the CHIPS and Science Act into law, companies that seek funding under the bill must enter an agreement with the U.S. Commerce Department that they will not make transactions that lead to a “material expansion” in China’s semiconductor manufacturing capacity over the next ten years. But the bill includes clear exemptions for investments into legacy chips (defined as those from the 28-nanometer generation or