BUSINESS TIMES
The US’ Chips Act may protect national security – at the cost of taxpayers and businesses
By Leon Hadar
WED, MAR 08, 2023 -
THE United States’ recent launch of a US$52 billion semiconductor subsidy programme could be seen as a turning point in how Washington manages the American economy, in the direction of so-called “industrial policy”: bureaucrats and politicians employing government resources to benefit certain sectors, in order to advance specific priorities.
The first Chips for America funding opportunity was launched on Feb 28, under the Chips Act. Overseen by the Department of Commerce, the Act includes US$39 billion in incentives for domestic semiconductor manufacturing, and US$13 billion for research and development.
While the semiconductor industry was created in the US, American economic conditions and global market forces encouraged semiconductor manufacturing to move overseas in the last few decades. As a result, the US’ share of global chip manufacturing capacity has fallen from 37 per cent in 1990 to 12 per cent today.
It was no secret that Democratic President Joe Biden’s Chips Act – backed by a bipartisan coalition of lawmakers – was driven first and foremost by national security considerations. More specifically, it was made in response to technological advances by China, regarded by a strong consensus in Washington as America’s leading global geo-strategic and geo-economic rival.
The move puts strict decade-long limits on the expansion of companies’ operations in China, reflecting a reversal of traditional American trade policies that not long ago had encouraged the expansion of trade and investment between both countries.
After all, American companies could pursue efficiency by moving production to China, where costs are lower. Producing chips in the US is overall 40 per cent more expensive than doing so overseas.
In reality, Taiwan produces more than 90 per cent of the world’s chips needed for critical tasks such as defence and artificial intelligence. Here is where US geo-economic and geo-strategic concerns merge: A possible Chinese invasion of Taiwan could basically devastate large parts of American industries.
For six decades, both Republican and Democratic administrations embraced the conventional wisdom that the free market is the best judge in promoting new technologies – and that when the government gets involved to “pick winners”, this is not to help an industry flourish, but to assist a favoured company with powerful lobbies in Washington.
But political and economic changes at home and abroad – including growing geopolitical competition, the war in Ukraine, the Covid-19 pandemic, and climate change – have triggered enormous supply shortages and other forms of economic insecurity, such as a tight global energy market.
Automakers and other manufacturers reliant on semiconductors were affected by these shortages. Meanwhile, against the backdrop of rising tensions with China, politicians expressed concerns over China’s heavy investment in their semiconductor industry and its use for military purposes.
These developments have led the US and other Western governments to reassess their commitment to the dogma of the free market. They are now considering the use of government power to protect and advance their nations’ interests, and in particular, to begin onshoring the supply chains on which their economies depend.
Indeed, before the Chips Act came last year’s Inflation Reduction Act, under which the US government transferred nearly US$400 billion to develop electric vehicles and clean energy technology.
Yet whether or not the Chips Act advances US economic and security interests, it involves costs – for the companies benefiting from the subsidies, and for the American taxpayer and the economy in general.
For companies, the costs are the terms that they must accept in order to receive the subsidies, in line with the Biden administration’s social and economic priorities. These include workforce diversity, the use of union labour, providing affordable child care for workers, and having to share part of their profits with the government.
In their applications for subsidies, chipmakers have to describe their “wraparound services to support individuals from underserved and economically disadvantaged communities”, such as adult care, transportation assistance, or housing assistance.
Free-marketers would point out the irony. US chipmakers shifted production overseas to cut costs by 40 per cent. Now they are being asked to manufacture at home, with the costs borne by the American taxpayer; in addition to that, they are being asked to provide their workers with social-economic benefits.
Asking American consumers to pay more for homemade chips due to national security considerations may make sense. Using the Chips Act to force Americans to pay the costs of the Biden administration’s social-economic priorities makes less sense.
There is also the criticism that industrial policy is antithetical to American political-economic tradition. But in fact, the US government has intervened in American industrial policy since World War II, in national security-related areas such as the defence, aerospace and communications industries.
Washington provided huge public funds for the development of America’s space programme, including the moon landing, as well as for the creation of the Internet, which was first used by the Pentagon.
In that context, the development of leading-edge semiconductors – at facilities receiving funding from the Chips Act – should be seen as another national security project. The industry could supply the military with the advanced chips needed for modern weapons systems.
At the same time, many chipmakers have already reduced their Chinese investments in recent years as tensions rose between Washington and Beijing, so they may be less shattered by the loss of the Chinese market as stipulated by the Chips Act.
Yet there remains a lot of unease in Washington and in corporate America about the shift to industrial policies – which have failed in the past, whether in developing supersonic airliners or flat-display panels.
Presidents and lawmakers have in general turned to tariffs, quotas and other trade measures to protect industries that they insisted were vital to the national interest. But in reality those steps were meant to reward politically powerful industries like textiles and steel. They did not improve the economic vitality of these industries; in fact, they ended up raising the costs of products for consumers.
No one denies that chips are critical for the development of American civilian and military technology. But will the Chips Act really ensure that a growing share of their fabrication does not move to mainland China, South Korea and Taiwan?
Will American and foreign companies really find the programme attractive, when it adds to their costs and reduces their financial flexibility? After all, Japan, the European Union, South Korea, Taiwan, and India are all offering incentives of their own for chip production.
The Commerce Department says that at a minimum, the Chips Act would ensure that semiconductors that are vital to national security would be manufactured in the US. That doesn’t amount to a moon landing, but maybe it would still be worth the cost.