CHIPS Act Moving Forward
Nancy Pelosi is ready to pass $250 billion for semiconductor companies and tech research through the House.
U.S. senators voted on Tuesday to advance a bill to give $52 billion in subsidies and $24 billion in tax breaks to U.S. semiconductor makers to help them build manufacturing plants here in the United States.
The bill, the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act, had the support of 17 Republican senators. It also allocates an additional $200 billion to be spent on science and technology research, $80 billion of which would be doled out to universities by the National Science Foundation over the next 5 years.
The vote on Tuesday, 64 in favor and 32 against, ended debate and will bring the bill to a floor vote. Once it passes the Senate, possibly as soon as today, it will go to the House, where it also has bipartisan support.
President Biden, together with a number of semiconductor manufacturers, had lobbied strenuously in favor of the CHIPS Act, believing it to be a solution to supply chain disruptions that have held up the manufacturing of cars, appliances, and other consumer goods that require semiconductors, as well as creating risks for America’s military.
“One-third of the core inflation last year in 2021—one-third of it—was due to the high price of automobiles,” Biden stated, arguing that much America’s record inflation was the result of shortages in semiconductors, with the remainder being due to Russia’s invasion of Ukraine.
Currently, two-thirds of the world’s semiconductors, and 90 percent of the most sophisticated chips, such as those used in iPhones, are made in Taiwan. A report by the Semiconductors Industry Association (SIA), a lobbying group, stated that the percentage of semiconductors made in the U.S. has declined from about 40 percent in 1990 to 12 percent in 2020 because the cost of domestic manufacturing is 25 to 50 percent higher than in countries like Taiwan, Korea, and China because of government incentives in those countries.
According to the SIA, if the U.S. does not approve subsidies, our global share of chip manufacturing will remain roughly the same as where it is today. But with a government subsidy of $50 billion, America’s chip makers will return to a 40 percent market share, building 19 new domestic manufacturing plants and investing $279 billion in capital.
China has plans to invest in chip manufacturing facilities. And an additional worry for global supply chains comes from China’s threats against Taiwan, which it views as belonging to mainland China and whose independence Beijing has never accepted.
“This is a matter of national security, and I don’t think we can put a price tag on it,” Commerce Secretary Gina Raimondo said in a CBS news interview.
Critics of the bill, however, argue that it is an unnecessary and wasteful gift to a tech sector that is already highly profitable, and that protections to ensure that the funds would not be used to benefit Chinese manufacturing were not included in the version that Senators approved.
Sen. Ron Johnson, a Republican from Wisconsin, said in a Fox News interview on Tuesday that “the solution is not more corporate welfare and certainly not allocating dollars to our university system and at the same time canceling the China Initiative. You’re basically going to fund the R&D that you then make it easier for China to steal. It is madness and stupid policy.”
The China Initiative was a project enacted by the Trump administration to protect U.S. laboratories and businesses from economic espionage and intellectual property theft by China. Upon taking office, President Biden ordered a review of the policy, which he deemed racist against Asian Americans and Chinese nationals; in February, Biden’s Justice Department cancelled it.
The American semiconductor industry has been split on its support for the manufacturing subsidies included in the Senate bill, with companies like Intel, which can afford massive investments in factories, gaining a windfall advantage over their competitors, like Nvidia, Advanced Micro Devices, and Qualcomm, that merely design chips and outsource the manufacturing to partner companies. These latter companies would seemingly get little or nothing from the Senate bill.
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Critics also allege that the CHIPS Act does nothing to prevent U.S. companies from subcontracting portions of their manufacturing to foreign companies, including those in China. And according to a report on the bill by the Heritage Foundation, “while the subsidies to semiconductor manufacturers are the worst portion of the bill, the rest of the package spreads nearly $200 billion in research funding across a variety of government agencies, with insufficient guardrails included to protect that research from Chinese espionage.”
Sen. Bernie Sanders (I-VT) also criticized the bill, stating that “the microchip industry helped cause this crisis by, over the last 20 years, shutting down 780 plants here and eliminating 150,000 good-paying jobs.” Sanders went on to question “whether they will continue to demand a $53 billion bribe to stay here.”
An additional concern is that more government spending will further fuel inflation, currently at an official rate of 9.1 percent. To the extent that federal deficit spending continues to escalate, the Federal Reserve will likely have to increase interest rates even further in what has so far been an ineffective effort to bring inflation down.