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Congress is giving billions to the chip industry. Strings are attached.


The site of one of Intel’s future factories in Chandler, Ariz. Major chip manufacturers, including Intel, have already suggested they will apply for funding to build or expand U.S. facilities.

By Ana Swanson


Amid a global semiconductor shortage, and as lawmakers dithered over a bill to boost U.S.-based chip manufacturing, Intel went to the Biden administration with a proposal that some officials found deeply alarming.


Intel told Commerce Department officials that it was considering expanding its manufacturing capacity for chips by taking over an abandoned factory in Chengdu, China. The new facility, the company said, could help ease a global chip crunch that was shuttering car and electronics factories and beginning to fuel inflation.


Intel ultimately shelved the plan. But for lawmakers and the administration it became a vivid example of the need to pass legislation aimed at luring the global chip industry back to the United States. It was also an argument for giving the federal government significant influence over the industry, according to lawmakers, congressional aides and administration officials, many of whom requested anonymity to discuss private deliberations.


The sprawling bill that Congress finally passed last week, the CHIPS and Science Act, gives the federal government a primary role in deciding which chip makers will benefit from the legislation’s funding. The bill contains $52 billion in subsidies and tax credits for any global chip manufacturer that chooses to set up new or expand existing operations in the United States, along with more than $200 billion toward scientific research in areas like artificial intelligence, robotics and quantum computing. President Biden is expected to sign the bill into law on Tuesday.


With concerns growing about China’s economic and technological ambitions, the bill includes strict new guardrails for firms considering expanding into China. Chip manufacturers that want to take U.S. funding cannot make new, high-tech investments in China or other “countries of concern” for at least a decade — unless they are producing lower-tech “legacy chips” destined only to serve the local market.


The legislation will hand significant power over the private sector to the Commerce Department, which will choose which companies qualify for the money. Already the department has said it will give preference to companies that invest in research, new facilities and work force training, rather than those that engage in the kind of share buybacks that have been prevalent in recent years.


“This is not a blank check to these companies,” Gina Raimondo, the secretary of commerce, said in an interview. “There are a lot of strings attached and a lot of taxpayer protections.”


Ms. Raimondo’s department also has the authority to review future company investments in China and to claw back funds from any firm that it deems to have broken its rules, as well as the ability to make certain updates to the rules for foreign investment as time goes by.


To the bill’s supporters, these provisions represent the benefits of big government spending. The new legislation will not only subsidize advanced research and manufacturing that has withered in the United States in recent decades but also give Washington a bigger role in writing the rules that shape cutting-edge industries globally.


It’s an embrace of industrial policy not seen in Washington for decades. Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics who has surveyed U.S. industrial policy, said the bill was the most significant investment in industrial policy that the United States had made in at least 50 years.


American politicians of both parties have long hailed the economic power of free markets and free trade while emphasizing the dangers and inefficiencies of government interference. Republicans, and some Democrats, argued that the government was a poor arbiter of winners and losers in business, and that its interference in the private market was, at best, wasteful and often destructive.


But China’s increasing dominance of key global supply chains, like those for rare earth metals, solar panels and certain pharmaceuticals, has generated new support among both Republicans and Democrats for the government to nurture strategic industries. South Korea, Japan, the European Union and other governments have outlined aggressive plans to woo semiconductor factories. And the production of many advanced semiconductors in Taiwan, which is increasingly under risk of invasion, has become for many an untenable security threat.


Semiconductors are necessary to power other key technologies, including quantum computing, the internet of things, artificial intelligence and fighter jets, as well as mundane items like cars, computers and coffee makers.


“The question really needs to move from why do we pursue an industrial strategy to how do we pursue one,” Brian Deese, the director of the National Economic Council, said in an interview. “This will allow us to really shape the rules of where the most cutting-edge innovation happens.”


Disruptions in the supply chains for essential goods during the pandemic have added to the sense of urgency to stop American manufacturing from flowing overseas. That includes semiconductors, where the U.S. share of global manufacturing fell to 12 percent in 2020 from 37 percent in 1990, according to the Semiconductor Industry Association. China’s share of manufacturing rose to 15 percent from almost nothing in the same time period.


Senator Todd Young, a Republican from Indiana and one of the bill’s key architects in the Senate, called it “an important sea change in our public policies.”


“It’s really important not only to our national security but to our economic security and our very way of life that we have effective and at times energetic government,” he added.


Major chip manufacturers, including Intel, GlobalFoundries, Taiwan Semiconductor Manufacturing Company and Samsung, have already suggested they may apply for funding to build or expand U.S. facilities.


While Intel declined to say why it had opted not to invest in China, Bruce Andrews, the firm’s chief government affairs officer, said the company had made a historic commitment to invest in the United States and had a light manufacturing footprint in China. The incident with the Biden administration was reported earlier by Bloomberg.


“We are in a globally competitive market where China is 50 percent of the world’s semiconductor market, so we are working hard to be the world’s semiconductor leader,” Mr. Andrews said.


The bill still has plenty of critics. In focusing its restrictions on newer generations of semiconductors, the legislation could leave the door open for China to dominate the production of older chips that are used in cars and other consumer products.


Some Republicans, like Senator Marco Rubio of Florida, say the guardrails aren’t strong enough to prevent U.S. technology from leaking to China. Some Democrats and their allies, like Senator Bernie Sanders of Vermont, describe it as a corporate giveaway. But others say the law will restore the type of government leadership that fueled the creation of the internet, space exploration and the beginnings of the semiconductor industry itself.


Lindsay Gorman, the senior fellow for emerging technologies at the German Marshall Fund’s Alliance for Securing Democracy, said the bill would put the United States on a more even footing with China, which has spent vast amounts to subsidize its industries.


“We’ve taken our innovation advantages for granted,” she said, adding that “there’s nothing like a dedicated competitor to snap us into action.”

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