From American Affairs Journal:
Before student loan forgiveness, the raid on Mar-a-Lago, and the Inflation Reduction Act, something called the CHIPS Act was a major news story for a few days in late July. CHIPS was essentially a bill to support semiconductor manufacturing in the United States, and the final version that passed into law, which added basic research funding and related programs, was christened the CHIPS and Science Act.
By some accounts, CHIPS is a critical tool in the intensifying economic and technological competition against China, a solution to address America’s eroding technological leadership and the decline of a key manufacturing sector. Others still argue that it represents America’s abandonment of free market capitalism. In reality, however, it is neither. More semiconductor fabs will be built in the United States as a result of CHIPS (some commitments have already been announced), but its legislative trajectory also reveals the shortcomings of the current U.S. approach to industrial policy and the lack of any serious resolve when it comes to competing against China.
By way of background, although the United States still leads in key elements of semiconductor design, its share of global manufacturing has fallen from nearly 40 percent in the 1990s to around 10 percent today. Moreover, the chips that are produced in the United States are not at the technological frontier. Taiwan, Korea, and China are the top global producers, with Taiwan’s TSMC the technological leader. China has invested heavily in building its own semiconductor industry since the early 2000s, when it essentially started from zero. While it remains far from technological leadership, it has established a strong presence at the lower end of the value chain. Moving up the technological ladder remains a major priority for the Chinese government; Beijing’s spending on the sector dwarfs that of the United States, even after CHIPS.
The path of CHIPS itself was a long and winding one. It began as two bills in 2020, both led by Republicans with bipartisan support, that were folded into one: the CHIPS for America Act. CHIPS for America was passed into law via the National Defense Authorization Act in December 2020, but Congress still needed to appropriate funding before it could be implemented. Hence CHIPS funding became a key component of two larger bills, the United States Innovation and Competition Act, or usica (in the Senate), and the America competes Act (in the House). These bills combined CHIPS funding with various research spending and industrial policy programs (mostly drawn from yet another proposal, the Endless Frontiers Act). As with any major piece of legislation nowadays, both also contained their share of pork and extraneous provisions; usica—perhaps ironically for a bill touted as essential to competing with China—additionally included significant tariff relief on Chinese imports. Both bills passed their respective chambers and headed to conference committee, where they languished for months, with no compromise bill that could pass both houses emerging. This is where the story becomes interesting.
There are basically two industry lobbies in the United States interested in CHIPS, in particular, and industrial policy more generally: the Semiconductor Industry Association (SIA), naturally, and a gaggle of groups that lobby on behalf of American universities to promote research funding. Other industries that might presumably have an interest in industrial strategy—such as aerospace, defense, and pharma—are entrenched within their own silos and, if anything, tend to oppose any “innovation” policy that might disrupt the status quo in their verticals. CHIPS was the pet project, and in many ways the brainchild, of SIA from the beginning.
SIA’s attitude toward the broader industrial policy proposals of the larger usica and competes bills was always somewhere between indifference and hostility—which is understandable in the near term but, as we shall see, may prove unfortunate in the longer term. Thus, as the usica–competes conference negotiations dragged on, SIA lobbied aggressively to remove these additional proposals—some dubious, and some, like “Manufacturing Investment Companies,” much more interesting—and pass a “skinny bill” focused on semiconductor funding alone.
After CHIPS had been isolated from the rest of usica–competes, and essentially reduced to subsidies for incumbent firms, SIA then launched a scorched-earth campaign aimed at removing any restrictions on these subsidies. First, progressives like Bernie Sanders sought to limit firms receiving subsidies from engaging in share buybacks and cash distributions to shareholders. This effort never stood much of a chance in today’s America and was defeated easily. A somewhat more serious challenge came from senators, primarily Republicans, seeking to restrict beneficiary firms’ ability to continue investing in China.
A late addition to the bill allowed the secretary of commerce to grant exemptions from the law’s prohibitions on recipient firms investing in manufacturing facilities in China. This may seem like a minor technical detail to those unfamiliar with multinational firms’ strategies to circumvent trade laws, but allowing the Department of Commerce to grant exemptions has become a common industry tactic to vitiate statutory restrictions. Indeed, the Wall Street Journal recently reported that a “Commerce Department–led process that reviews U.S. tech exports to China approves almost all requests and has overseen an increase in sales of some particularly important technologies.” Of course, selling the chips themselves to China is defensible insofar as it keeps Chinese industry dependent on U.S. exports. But investing in production facilities in China is another matter entirely, and this “loophole” arguably undermines a major premise of the whole bill. Several Republican sponsors of the original CHIPS legislation in 2020, including Senators Cotton, Rubio, and Hawley, ended up voting against the 2022 bill as a result.
But by this point, it didn’t matter. The industry’s brazen and in many ways dishonest lobbying tactics foreclosed any opportunity to correct this loophole. The usual chorus of “national security experts” was trotted out to insist that the bill was essential to compete against China—though on the question of beneficiary firms continuing to invest in China, these experts apparently had nothing to say. Intel threatened to cancel a previously announced investment in an Ohio fab, and the SIA threatened that investment would flow elsewhere if the bill suffered even the slightest delay. In reality, these blackmail attempts were risible—firms would still accept subsidies to invest in the United States even with tighter restrictions on Chinese facilities, and they will continue to invest elsewhere if the subsidies in those countries are sufficient, especially since the bill’s restrictions are so weak—but most congressional offices showed little willingness or capacity to seriously investigate these issues.The bill’s provisions for research funding went through a similar process....
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