With CHIPS on Table, Leave It to Congress to Drop Ball on Semiconductor Subsidies

In honor of this week’s baseball All-Star Game, Congress and the Biden administration look poised to take a swing at the Creating Helpful Incentives to Produce Semiconductors for America Act.

Senate Majority Leader Chuck Schumer, D-N.Y., has begun the process of advancing a bipartisan technology research and development package through the Senate, whose hallmark is to dish out subsidies to incentivize semiconductor manufacturing within the United States.

The bill includes roughly $78 billion, including $52.2 billion in subsidized grants, loan guarantees, and research and development dollars, along with a $24 billion investment tax credit.

The legislation’s stated goals are increasing domestic production, while reducing reliance on Asia-based manufacturers and easing supply chain disruptions seen in the auto industry and other parts of the economy.

How Did We Get Here?

The initial authorization for the original CHIPS for America Act came within the fiscal year 2021 National Defense Authorization Act, yet congressional appropriators have not deemed it necessary to fund this program for nearly two years.

The current bill would fund much of this through “emergency” spending and increased deficit spending amid record U.S. inflation. Different constituencies on Capitol Hill and lobbying by outside groups ($100 million-plus funded by various chip companies) have argued that the nation is harmed from reduced U.S. market share in global production as well as by overreliance on advanced chip nodes from Taiwan in light of possible Chinese aggression in the Taiwanese Strait.

The Biden administration launched a broad review of supply chain issues, including semiconductors, at the beginning of the administration headwinds hitting the fabrication industry. These headwinds include COVID-19, a drought in Taiwan, a freak winter storm that nearly took down the power grid in Texas, and significant disruptions throughout the auto manufacturing industry.

Automakers historically rely on “just in time” delivery of cheaper legacy-style chips and slashed orders at the beginning of COVID-19 with the expectation that demand would decrease when instead, in short order, it exploded.

‘Downright Scary and Untenable’

In recent weeks, Commerce Secretary Gina Raimondo has flooded the airwaves and Capitol Hill with dire predictions that previously announced semiconductor investments and future investments could depart our shores for European Union nations or other partners in Japan and South Korea due to their own government-backed incentives.

Raimondo’s rhetoric comes as the administration seeks a “win,” with the commerce secretary describing the chips situation as “downright scary and untenable.” While previously advocating for the ability to nearshore and find complementary efforts among allies, the secretary has doubled down on the need for the CHIPS for America Act by saying, “We need to move to making chips in America, not friend-shoring.”

But as the sirens continue to sound from Capitol Hill and the White House, and downtown lobbyists scream “woo, pig, sooie!” for troughs of taxpayer dollars, quieter pronouncements of near-term easing of supply chains have emerged.

As The Wall Street Journal recently noted, “[Y]esterday’s shortage may be tomorrow’s glut, as chip firms have expanded production without subsidies. Taiwan Semiconductor Manufacturing Co. tripled capital spending between 2019 and 2022. Intel nearly doubled capital spending during the pandemic, and Samsung last year increased its 10-year investment plan by more than 30%.”

Market mechanisms and recent-year investments are beginning to ease the crunched supply the world saw over the past few years. Intel, Samsung, Texas Instruments, and Taiwan Semiconductor Manufacturing have announced projects in Texas, Ohio, and Arizona totaling at least $99 billion, with Intel previously suggesting its investment in Ohio could grow to $100 billion over 10 years.

George Calhoun, a professor at the Stevens Institute of Technology, has calculated that private-sector investments could roughly equal $834 billion worldwide in the years ahead.

Back to the Future

This is not America’s first rodeo venturing into industrial policy in the semiconductor space. In the 1980s and ’90s, the U.S. established the Semiconductor Manufacturing Technology (“Sematech”) consortium to counter what was viewed as the “Japan threat” to the industry.

It spent more than $500 million (roughly $1.3 billion in 2022 inflation-adjusted dollars) in taxpayer funds and, according to a former chairman of the Semiconductor Industry Association, “The U.S. has wasted money … . [T]he Sematech consortium began spending $500 million in government funds that did zero for the industry. … [It was] pork-barrel funding. … More important, ‘free government money’ induces horribly inefficient spending … .”

The argument that the United States can out-subsidize and incentivize others that are active in this arena is a fallacy. Today’s “necessary” semiconductor industry subsidies will be the future gateway for CHIPS 2.0/3.0 on other “critically important” industries with an unsatiable appetite for taxpayer-backed dollars, be it domestic production of electric vehicle batteries or advanced chips packaging and testing facilities.

The U.S. can make itself more competitive and resilient in this market, but a Commerce Department-run program likely won’t end at its five-year authorization but will come back for more. That will be detrimental to addressing longer-term issues.

After months of pressure, the current language in the bill has placed restrictions on companies receiving U.S. taxpayer dollars in the form of a 10-year commitment to not expand or build new manufacturing capacity for certain advanced semiconductors in countries that present a national security threat to the U.S.

Fierce lobbying has broken out from semiconductor company advocates such as Intel, a significant past investor in Chinese technology startups, and the biggest proponent of the subsidies.

Intel, who earlier this year announced major investments in Ohio, has threatened to freeze and upend those plans to subsidy-providing Europe unless it extorts Congress for U.S. taxpayer dollars.

If one of the goals of the CHIPS for America Act had been to dampen China’s ascent in semiconductors, the fact that many of these same companies are bellyaching to senators behind closed doors about future needed investments in China should be all you need to know.

Benching China?

What would a solid home run look like to further the U.S. technological and semiconductor industry and relegate China to the bench?

To begin with, the entirety of the complex supply chain cycle should be considered. While semiconductor fabrication facilities are a major portion of the process, less-known areas, including raw materials and the packaging and testing of semiconductors, are heavily reliant on Asia.

While recent moves have been made to establish rare earth mineral processing functions in the U.S. with cooperation from Australian mining interests, more needs to be done to remove regulatory hurdles at the federal, state, and local levels and to seek investment and trade opportunities in upstream supply chain functions, such as rare earth mineral processing, mining, and base chemicals and gases.

Congress failed to address long-standing regulatory issues specifically affecting the planning and construction time frames of fabrication facilities.

As the Center for Security and Emerging Technology noted in “No Permits, No Fabs,” the U.S. needs to prioritize reducing regulatory red tape at the local, state, and federal levels. That includes removing redundancies in federal and state rules, “fast tracking” permitting from the Environmental Protection Agency and accelerated National Environmental Policy Act reviews, and reducing regulatory burdens in materials, gases, and chemicals used in semiconductor manufacturing.

In the midst of a major energy crunch around the globe, from soaring gas prices in the United States to the rationing of natural gas in Europe ahead of winter, the U.S. and the Biden administration need to unleash domestic energy production to drive down energy costs across the board and further attract energy-reliant manufacturing industries such as semiconductor fabricators.

Furthermore, the U.S. could improve the tax environment of capital investments for semiconductors where current recovery periods heavily disadvantage commercial building infrastructure, such as fabricators.

The House Minority View

House Ways and Means Committee Republicans recently released worthy points of what the CHIPS for America Act and investment tax credit could do for their nearly $80 billion price tag.

Instead of targeting one facet of the technological industry, over which we are in fierce competition and a security fight with China, the U.S. government could double the research and development tax credit for all companies through 2025.

In addition, Congress could offer 100% immediate expensing and allow any research and development costs to be immediately deducted through 2025.

As Ways and Means ranking member Rep. Kevin Brady, R-Texas, noted, “I think we’re missing the bigger picture here: China, in their ‘Made in China 2025’ economic plan, is seeking to dominate 10 manufacturing and technologies in the world. It doesn’t make sense to me to cede to China nine of those industries.”

The United States should also be pursuing further bilateral and possible multilateral trade efforts to counteract China through our networks of allies, engaging opportunities to diversify the National Technology and Industrial Base to include geopolitical allies in Japan, South Korea, Germany, India, and the Netherlands. This could help expand the playing field of such allies, who bring impressive and unique skill sets to the technology debate.

Recent international investment-related policy changes to have the newly established Development Finance Corp. counter China’s Belt and Road Initiative are failing to live up to its mission.

Congress should instruct the Development Finance Corp. to focus on countering investments by China in the technological space and more importantly, prioritize investment in sectors in which China has gained ground, such as the semiconductor supply chains.

If geographically diversifying U.S. supply chains outside of Taiwan and Asia is a goal, then Congress can right the ship and use its oversight efforts to make sure the Development Finance Corp. is achieving its congressional intent mission.

Congress must also get a handle on a functioning export-control regime in an ever-changing Chinese espionage environment. Protection of U.S. intellectual property in the software engineering and design space will be fundamental, as will continuous evaluation of cutting Chinese access off to leading-edge technologies used to build semiconductors.

Lip Service to Greater Oversight

As economist Derek Scissors has noted, the Biden administration and Congress have given lip service to the need for greater oversight of outbound investments that are likely contributing to the rise of Chinese goals in its “Made in China 2025,” yet has worked against those goals within the belly of the bureaucracy at Treasury and Commerce.

It must also be acknowledged that a hard physical limit is being reached on semiconductor node design, and much of the future will be dictated by advances in software design and future materials. As Calhoun noted, the U.S. can continue leading the way on displacing the “process node” size complex:

New paradigms are emerging, like neuromorphic computing (in which Intel has taken a strong interest), and quantum computing, along with other design-based approaches that sidestep (rather than assaulting frontally) the physical limits of traditional processor designs.

‘Process node’ competition is hardware-intensive, physics-intensive, materials-intensive technology. It is not the only way to drive progress. Design-driven solutions (software) can sometimes overleap hardware-intensive technologies, and with far superior economics. ARM (a core IP supplier) has achieved near-monopolistic dominance of some applications (95%+ of the smartphone market, the largest processor application today), not by brute-force hardware innovation, but by the opposite—subtle-force software innovation.

National Security Considerations

In the realm of the national security debate, there are merits to advanced chips processing, design, and manufacturing that should be considered. Any government funding should be tailored toward national security-related, cutting-edge semiconductors, not old semiconductor technologies to out-subsidize foreign competitors.

For example, the Defense Advanced Research Projects Agency’s Structured Array Hardware for Automatically Realized Applications program has rightly sought to expand access to domestic manufacturing capabilities for defense systems secured microelectronics.

The Defense Department’s Trusted Foundry Program has continued to grow, to include 78 industry participants and covering about 2% of the overall Pentagon chip purchases.

Bolstered oversight scrutiny, elimination of Pentagon bureaucratic bloat, and the “Valley of Death” for new tech, such as artificial intelligence, and properly aligned resources from Congress on programs that seek government and private-sector coordination can be warranted for securing future custom-chip designs and production capabilities to match our national security demands.

To its credit, the underlying CHIPS for America Act does include $2 billion over five years dedicated to Defense Department-unique microelectronics applications, but this amounts to about 1.5% of the overall semiconductor package.

The provision related to Public Wireless Supply Chain Innovation Fund is also worthy of consideration in light of a broader national security response within Open Radio Access Network technology to counter China’s “5G in a Box”-driven sales and investments throughout the developing world that come with a host of surveillance concerns.

The fact that these types of provisions are only minor fractions of the overall package and actual areas where market forces are unlikely to dictate sufficient outcomes as it relates to U.S. national security underscore the legislation’s many failings.

Lawmakers even attached a $2 billion earmark in the package dedicated to “mature” semiconductors for the now easing shortage within the auto industry, as demanded and pork-barreled by auto industry-heavy Michigan’s Senate delegation to be on equal footing with the Department of Defense.

American technological superiority and our ability to counter China require competition in innovation. Elements of the CHIPS for America Act will likely undermine innovation as investors “follow” the government’s centrally planned funding paths, both here and abroad.

The U.S. cannot beat China by becoming more like China. The U.S. should further examine government-imposed barriers that are preventing American companies from competing, rather than awarding industry-specific subsidies.

Semiconductors will not be the last technological paradox faced vis-a-vis China, but we have an opportunity to create the best fundamental economic conditions to thrive against all these challenges from Beijing while resourcing proper national security measures.

The underlying issues and concerns regarding America’s technological might against China as a current and future adversary warrant more serious and difficult policy prescriptions.

Unfortunately, Congress missed an opportunity to put runs on the board. It has struck out looking.

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