The CHIPS Act: Far From Perfect, but Still Very Good

Editorial note: Between the drafting of this newsletter and its publication, House Republican leadership has reportedly decided to “whip” against the CHIPS Act in response to Sen. Joe Manchin’s surprise reconciliation agreement with Sen. Chuck Schumer. I will not comment on the politics, but it would be nice if Congress could debate a serious issue like American national security and our technological competition with China on the merits, instead of turning it into yet another “shirts” vs “skins” game. Unfortunately, it seems that is too much to ask. 

Hello and happy Thursday.  

The U.S. Senate has passed a $250 billion plan to boost American semiconductor manufacturing and the House of Representatives is scheduled to vote on this bill later today. Thoughtful people are divided over the bill, including conservatives who share concerns about China’s rise and our own nation’s ability to produce technologies that are essential for economic strength and national security. The House’s Republican Study Committee (RSC) has issued a memo laying out its objections to the bill and Heritage Action for America (HAFA)—the political action arm of the Heritage Foundation—is demanding that conservatives who want to remain in its good graces must vote “no” on the legislation. 

I disagree and would like to briefly explain how, despite some of my own concerns, I’ve come to believe the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act meaningfully advances U.S. interests.  

There’s a lot in CHIPS but the three most important provisions are as follows: 

• $52.7 billion in grants to support domestic semiconductor research, manufacturing, and production—including $2 billion for chipsets that are essential to the U.S. auto and defense industries; 

• $24 billion in estimated tax credits for investments into U.S. semiconductor manufacturing; and,  

• $200 billion for chip-related scientific research. 

Because so much of the semiconductor supply chain runs through Asia, there are concerns that recipients might use these funds to expand or improve their operations in China—thereby doing the exact opposite of what we’re trying to do. Congress, therefore, has been debating a series of “guardrails” that would allow this support to energize the American chip industry without also boosting the capacity of our chief geopolitical rival. These guardrails are a key point of contention. 

Now I’d like to think that my “China hawk” credentials are beyond question, but Sen. Rubio and others are raising legitimate concerns, and I should explain how I’m thinking about these issues. 

I begin with an acknowledgment that the bill ignores broader semiconductor supply chain security and that this issue must ultimately be addressed if we’re going to get where we need to be in the long run. My AEI colleague Derrick Scissors makes this point frequently and forcefully; but I also feel a sense of urgency for action that causes me to support the “good” in CHIPS without insisting it be “perfect” (not that this is what Derrick is doing). Even more, if we’re ever going to achieve this supply chain security the United States will need more influence over the global chip industry, and I believe this bill is a good start in expanding this influence. 

I think we also must realize that foreign subsidies and our historical outsourcing of chip manufacturing puts us in a place where our ability to dictate the terms of this support is not as strong as we’d like it to be. If we, for example, say companies can get these funds only if they promise never to make any investments in their existing operations in China, no company will join our cause because the CHIPS funding simply doesn’t compare to the losses that would follow such withdrawal. But in the future, as the U.S. position becomes stronger, maybe such demands will be within reach. 

These two points mean that, at least for now, we must manage our expectations. But that doesn’t mean we cannot, and that the CHIPS Act does not, have effective guardrails. We can and it does. 

For both the grant funding and the tax credits, the legislation does several important things. The money can be used only for U.S. projects (the legislation actually “fences” these funds) and the secretary of commerce must confirm that all supported efforts meet a national interest standard—in other words, they must directly benefit American interests and citizens. Critics like HAFA may say, “Yeah, but money is slippery. If a company gets a couple million in grants or tax breaks, that frees up a couple of million dollars elsewhere on their books that can be spent on manufacturing in China.” Fair enough, but (1) this is equally true of the tax breaks HAFA offers as an alternative in their critique of the bill and (2) CHIPS still ensures that real money is going to be spent building out our domestic capacity that would not be spent otherwise. 

Opponents may also note that the same restrictions are not placed on the R&D funding. I’m sympathetic to these concerns but I also understand the rationale for their absence, which argues that they’d be unworkable due to the transnational nature of semiconductor research and because these funds are overwhelmingly distributed via federal agencies and programs, often in conjunction with the secretary of defense, director of national intelligence, and other national security leaders, who would presumably not knowingly give these grants to entities working against our interests. While I’d like more robust protections on R&D funds, I’m not willing to throw the baby out with the bathwater.  

But CHIPS also helps the United States go on offense, incrementally improving our ability to shape the industry as a whole and to constrain semiconductor manufacturing in China. About 16 percent of global silicon wafers are produced in China, two-thirds of which are made by foreign companies, all of whom are looking for a piece of the CHIPS pie. This means Washington will have a significant say over most of the chip manufacturing in China in a way that it currently does not. For example, most of the chip facilities in China were built in the early 2000s and are quickly becoming outdated. CHIPS recipients are prohibited from pursuing any “material expansion” of Chinese chips below 28 nanometers (28nm), which are almost two decades behind the state of the art. For those accepting CHIPS funding, the legislation effectively freezes their chip production capabilities in China at the current levels. Importantly, this cap at 28nm is far more restrictive than what is currently in place. The only meaningful restriction on chip manufacturing in China currently is the Wassenaar arrangement restriction to prohibit the export of extreme ultraviolet lithography tools, which are required only for 5nm production. So, practically speaking, CHIPS forces its recipients to begin decoupling from China by limiting their overall ability to modernize and therefore pushing them incrementally toward the United States and other, mostly democratic, nations. And you don’t have to just take my word for it. 

In November, the Chinese embassy in Washington reportedly pressed business leaders to reject the CHIPS Act, as the measure’s passage threatens their revenue and market share in China. Similarly, a recent op-ed in the Global Times—an official mouthpiece of the Chinese Communist Party—urged South Korean chip companies not to comply, saying, “Washington is trying to completely control the entire industrial chain and doesn’t care about the nightmares it would create for its allies.” Most enlightening is an assessment done by Gu Wenjun, chief analyst at a China-based research firm, that concludes, “The U.S. CHIPS Act would weaken and erode China’s ability to access foreign semiconductor technologies and resources,” going on to say, “This would also start a chain effect that would reduce technological spillover and workforce training developments of foreign companies in China, slowing down the overall development of China’s semiconductor industry” (translation provided by Google Translate). These and other Chinese statements give me warm-and-fuzzies about us being on the right path. 

Now, the RSC memo specifically complains about undefined terms like “material expansion” and says it’s unacceptable to leave these definitions and their enforcement to the secretary of commerce. First, I like having some elasticity in this language because it gives the U.S. government greater agility to tighten and to loosen the screws as we see fit—especially since the law also requires these definitions be updated every two years to ensure they are in keeping with the state of the semiconductor industry. Perhaps I’d feel differently if I thought Democratic and Republican administrations have fundamentally different perspectives on these issues, but we don’t. There is broad agreement on the threats that must be addressed, and the bipartisan support of this bill justifies my confidence. Second, I don’t believe Congress is more qualified to make these determinations and having these responsibilities rest with the Secretary of Commerce is in keeping with other similar measures, including several executive orders and directives issued by the Trump administration.  

While I take these and other concerns seriously, I’m not dispositively persuaded by them and I’m not alone. Dozens of national security leaders have called on Congress to pass this bill and the Republican ranking members of the House intelligence and foreign affairs committees, Rep. Michael Turner and Rep. Michael McCaul, respectively, circulated a “dear colleague” letter on Tuesday, arguing the following: 

Semiconductors are an American born technology that enables nearly all industrial and national security activities. If Congress doesn’t pass the CHIPS Plus Act, the United States will continue to lose this industry to other nations, including Communist China … Through government direction, control, IP theft, forced technology transfer, and subsidies, Communist China is trying to hijack the semiconductor industry and supplant the United States’ technological leadership… The CHIPS Plus Act can reinvigorate domestic manufacturing of semiconductors to avoid becoming dependent on our adversary for this vital technology … We must ask ourselves, should the U.S. government sit on the sidelines and watch the production of these foundational technologies continue to leave our shores or do we compete in the way many other countries do? We ask our colleagues to strongly consider this bill when it comes over from the Senate. (Emphasis added) 

If conservative critics are unpersuaded by these voices, perhaps they’ll be moved by the fact that multiple Trump appointees are supporting the bill, including former Secretary of State Mike Pompeo, former National Security Adviser Robert O’Brien, and former Deputy National Security Adviser Matt Pottinger. Or maybe they won’t.  

While I’ve grown more secure in my belief that this bill advances the national interest, I also agree that it’s far from perfect. But what legislation is perfect? Perhaps even more importantly, does it make sense to allow China to keep racing ahead while we wait for something better? I don’t think so. 

At the end of the day, the CHIPS Act is something conservatives can, and do, disagree on—and that’s okay. What’s not okay, however, is not taking decisive action to constrain Chinese and to bolster American advanced chip manufacturing. I think this legislation meaningfully does both and that’s why it has my support. 

That’s it for this edition of The Current. Be sure to comment on this post and to share this newsletter with your family, friends, and followers. You can also follow me on Twitter (@KlonKitchen). Thanks for taking the time and I’ll see you next week!