The Issue
The CHIPS Act’s national security guardrails aim to limit recipients’ operations and investments in foreign countries of concern, bringing an element of protection to the legislation’s promotion of U.S. advanced technology capabilities. The guardrails’ expansion clawback allows the Department of Commerce to reclaim funding if a recipient firm engages in any significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern, while the technology clawback supports reclaiming funding if recipients engage in any joint research or technology licensing with a foreign entity of concern related to national security critical technology. While the guardrails may protect the United States’ national security interests, they nevertheless come with risks. Their clawback measures could further Beijing’s design-out efforts, prove prohibitive to companies which would otherwise be valuable assets to the United States’ attempts to build up its semiconductor ecosystem, and strain diplomatic ties with U.S. partners.
Introduction
On August 9, 2022, Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 became law, continuing a wave of U.S. industrial policy. Backed by $52.7 billion in subsidies, tax credits, and related investments, the act seeks to boost U.S. competitiveness and innovation in semiconductor research and manufacturing while protecting national security. U.S. policymakers often tout its enactment—and ongoing implementation—as a crowning achievement, promising a “new Washington consensus” to promote U.S. geoeconomic leadership, revitalize domestic manufacturing, and reduce economic vulnerabilities—primarily in the context of competition from China.
To that end, the implementation of the CHIPS Act comes with national security guardrails that aim to limit recipients’ operations and investments in foreign countries of concern. This brief first explains the content of the guardrails, which comprise both expansion and technology clawback clauses. It then highlights that while the guardrails have clear national security benefits that may ultimately be worthwhile, they also come with drawbacks that U.S. policymakers should consider as they support the country’s advanced technology ecosystem through industrial policy packages.
Foundational Goals of the CHIPS and Science Act
The U.S. government has prioritized driving American competitiveness and innovation in high-growth critical industries, with industrial policy as a preferred means of achieving that goal. The CHIPS Act offers catalytic investments to rejuvenate domestic semiconductor research and manufacturing. While the United States created the modern-day semiconductor industry and has historically led in the technology’s development, the global semiconductor supply chain has become increasingly globalized and specialized over the last few decades, driving the offshoring of U.S. manufacturing capacity to lower-priced, often highly subsidized foreign markets. As a result, the United States has lost its competitive and innovative edge in key segments of the semiconductor supply chain, falling behind Taiwan, South Korea, Japan, and China in fabrication capacity. At the same time, semiconductors have become increasingly critical to economic and national security, enabling key dual-use applications such as artificial intelligence. The CHIPS Act and associated efforts, such as the National Standards Strategy for Critical and Emerging Technologies, endeavor to reverse this trend and restore U.S. leadership at the cutting edge of semiconductor innovation and production across the supply chain.
CHIPS Act investments likewise represent the U.S. aim to “revitalize domestic manufacturing” and “strengthen American supply chains.” Amid shortages of key technologies and inputs, including semiconductors, brought on by the Covid-19 pandemic and China’s economic coercion policies, which leverage China’s dominance in strategic supply chains to further its geopolitical objectives, the U.S. government has raised the alarm about supply chain fragility and lack of diversification. The U.S. government seeks to eliminate “supply chain chokepoints” and insulate itself from potential supply and demand shocks. This viewpoint extends beyond semiconductors: The United States has sought to onshore and reshore production across a host of critical supply chains, including pharmaceuticals and telecommunications.
CHIPS Act funding for domestic manufacturing is also devised to deliver on the “worker-centered trade policy” of the administration under former President Joe Biden. In response to what the administration perceived as the failures of economic liberalization—including deindustrialization, widespread job losses, and economic fragmentation—the administration prioritized industrial policies that advance growth from the “middle out.” The CHIPS Act is crafted to “create good-paying American jobs,” especially in new tech hubs that are historically overlooked. In the process, the CHIPS Act is said to “support equitable economic growth and development” and create new jobs. Likewise, the Infrastructure Investment and Jobs Act (IIJA) directs billions of dollars in investment toward construction in communities that lack access to clean water, high-speed internet, and quality transportation. Meanwhile, the Inflation Reduction Act (IRA) incorporates several prevailing wage and apprenticeship provisions into its various tax credits.
The U.S. National Security Strategy is another foundational element of the CHIPS Act. Owing to the growing nexus between economic policy and national security amid great power competition with China, the United States has increasingly sought to protect its interests through economic security policies. The CHIPS Act is a leading example, with new investments designed to protect U.S. access to key technologies, as are a range of bilateral and plurilateral U.S.-led economic dialogues that focus on nearshoring and friendshoring critical mineral and semiconductor supply chains.
CHIPS Act Provisions and Implementation
During the 116th Congress (2019–21), several proposed bills aimed to boost U.S. semiconductor research and fabrication capabilities. Many of these proposals were ultimately included in the CHIPS Act, either in full or in part. During the 117th Congress, the 2021 National Defense Authorization Act (NDAA) authorized them, while the CHIPS Act of 2022 appropriated their funding. In all, $52.7 billion in investments has been appropriated via the various CHIPS Act programs, with the goal of supporting three central initiatives: leading-edge manufacturing, new manufacturing capacity, and strengthened U.S. leadership in research and development (R&D).
The CHIPS for America Fund appropriates $52.7 billion to the Department of Commerce for semiconductor incentives. Of that, $39 billion is earmarked for subsidies to spur domestic manufacturing capabilities, while the remaining $11 billion is set aside for R&D and workforce development (Table 1). In addition, the act establishes and appropriates funds for three other initiatives: the CHIPS for America Defense Fund ($2 billion), the CHIPS for America International Technology Security and Innovation Fund ($500 million), and the CHIPS for America Workforce and Education Fund ($200 million).
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