Economic interests and national security have long gone hand-in-hand in America’s economic orthodoxy— a phenomenon referred to as the military-industrial complex by President Eisenhower. The Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS Act) that was passed and signed into law by President Biden in August of last year might be seen as another example of this complex, but it would be reductive to argue that the CHIPS act is solely a geopolitical defense policy indicative of a protectionist mindset. Rather, what the CHIPS act offers is a way to stimulate both technological progress and economic growth in the United States by bringing parity of incentives and support for U.S manufacturers on a global scale.
The CHIPS Act was passed in response to the semiconductor industry’s increasing prominence, as more and more of our everyday objects began to rely on them to operate. Importantly, semiconductors don’t just power our phones and gaming consoles—our military heavily utilizes semiconductors, in everything from missile systems to AI development. Accordingly, the CHIPS act purports to, among other things, bolster our domestic chip industry for both security and economic prosperity. This is especially salient in light of the supply chain issues and semiconductor shortages that have occurred in recent years due to the pandemic and the war in Ukraine.
Although much of the attention around the CHIPS act has surrounded its semiconductor incentives, a large portion of funding authorized by CHIPS is allocated to federal agencies and programs related to STEM, such as the Department of Energy and the National Science Foundation. It should be no surprise that continued investment in our scientific programs and endeavors remains of vital importance with climate change, pandemics and other such challenges. That the CHIPS act allocates $174 billion of investments out of its total package of $280 billion in scientific research and programs is already an encouraging sign of the CHIPS act’s potential impact.
The controversial part of CHIPS comes with its semiconductor plans. CHIPS offers $52 billion in investments aimed at strengthening our domestic semiconductor industry and manufacturing, as well as $24 billion in tax incentives. Crucially, however, the tax incentives come with strings attached – firms that receive federal funding through CHIPS will be limited in their international expansion plans, particularly in China.
Just last week, the U.S Department of Commerce released guidelines regarding the provisions of the CHIPS grant, proposing that a ban on, “…significant transactions [$100,000] involving the material expansion of semiconductor manufacturing capacity for leading-edge and advanced facilities in foreign countries of concern for 10 years from the date of award to stop recipients from constructing new or expanding existing leading-edge and advanced technology facilities in those countries.” These limitations have been met with protests from a coalition of groups: free trade advocates, machine manufacturers and, of course, from the Chinese government.
There are several aspects of CHIPS though that distinguish it from the more harmful trade protectionist policies of the past. First is the way CHIPS achieves its goal—it’s neither strictly a carrot nor a stick. By offering funding contingent on certain conditions, CHIPS offers companies a carrot but its stick is the possibility of them removing the carrot. This is notably different from policies such as tariffs, which operate purely on a stick basis. This leads into the second way CHIPS is not a protectionist policy – it’s more of a long overdue catch-up effort by the United States. In 1990, the United States produced over 30 percent of the world’s semiconductor chips (the semiconductor was invented in the United States after all). The United States now manufactures only 12% of the world’s semiconductors, with many of the most advanced semiconductors now being produced abroad. The Semiconductor Industry Association explains “This decline is largely due to substantial manufacturing incentives offered by the governments of our global competitors, placing the U.S. at a competitive disadvantage in attracting new construction of semiconductor manufacturing facilities[…]’” China in particular has made a concerted effort to strengthen its chip manufacturing industry, offering grants and funding to chip manufacturers and R&D funding contingent upon manufacturing in China. This is important, because it means CHIPS is not an aggressive or provocative policy—it’s meant to provide parity for U.S chip manufacturers on the global scale.