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Impacts of the CHIPS and Science Act of 2022

When President Biden talks about his economic program, the CHIPS Act is the star of the show

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The increasingly hostile technology race between the United States and China now revolves around the key to the modern economy: semiconductors. Semiconductors are the microprocessors that power smartphones and washing machines and automobiles. Indeed, these chips are needed in advanced weaponry and artificial intelligence. That places them at the focal point of international tension.

Simply put, semiconductors are the world’s new oil.

And, as both President Joe Biden and Commerce Secretary Gina Raimondo have been quick to note, American ingenuity invented the semiconductor. But today, the U.S. currently produces only 12 percent of the world’s supply, none of which are the most advanced. This is down from 40 percent in 1990.

The technology and machinery needed to create the most advanced semiconductor chips is so complex and sophisticated that the world’s supply is manufactured by only a handful of companies.

Taiwan hosts the world’s largest producer, Taiwan Semiconductor Manufacturing Company. It manufactures chips for leading chip design companies, including Apple, Nvidia, Qualcomm and Broadcom. TMSC alone accounts for around 60 percent of the global market for semiconductors, and more than 90 percent of the most advanced ones.

This is especially concerning for America’s national security in light of the mounting threat that Taiwan appears to face from its neighbor, the People’s Republic of China. The PRC itself hosts almost 300 semiconductor manufacturing plants, and China has launched initiatives of its own to invest in domestic production through the China Integrated Circuit Industry Investment Fund. Established in 2014, this fund was aimed at achieving self-sufficiency for China in the semiconductor industry.

America’s solution: The CHIPS and Science Act

In the face of rising competitiveness in China, Congress passed the $280 billion CHIPS and Science Act of 2022 in August. It is designed to spur American leadership in semiconductor research, development and production.

The Act directs $200 billion for scientific research, development and commercialization, $53 billion for domestic manufacturing, research and workforce development, and $24 billion in tax credits for chip production. An additional $3 billion will go to programs aimed at cutting-edge technology and wireless supply chains.

The CHIPS Act combined the Endless Frontier Act, aimed at boosting investment in domestic high-tech research, and the CHIPS for America Act, designed to bring semiconductor manufacturing to the U.S.

Biden highlighted the measure in both his 2022 and 2023 State of the Union Addresses. In the 2022 speech, before the law’s passage, Biden brought Intel CEO Pat Gelsinger into the House gallery, a visual reminder of the need for lawmakers to pass the bill. This February, the CHIPS Act returned to Biden’s narrative about an American industrial renaissance.

After recounting America’s decline from 40 percent of production, he said, “We all saw what happened during the pandemic when chip factories shut down overseas. Today’s automobiles need 3,000 chips — each of those automobiles — but American automakers couldn’t make enough cars because there weren’t enough chips.”

“Car prices went up. People got laid off. So did everything from refrigerators to cellphones. We can never let that happen again,” Biden dramatically continued. “That’s why — that’s why we came together to pass the bipartisan CHIPS and Science Act.”

Bipartisan support, with some criticism

Nearly every senator in the Senate Democratic Caucus and 17 Republican senators voted in favor of the bill. Both parties expressed support for the Act’s mission to energize American innovation and global competitiveness. Critics, including House Speaker Kevin McCarthy, R-Calif., (then majority leader), and Sen. Bernie Sanders, I-Vt., called the bill a “blank check,” which Sanders equated as a bribe to semiconductor companies.

Embedded in the CHIPS Act are guardrails intended to guarantee that the act’s funds are not used in any way that would jeopardize U.S. security or support semiconductor development in “foreign entities of concern.”

The federal government’s regulations define foreign entities of concern as “any entity organized under the laws of China or having its principal place of business China and any entity organized outside of China 25 percent or more of whose voting interests are owned by the Chinese.”

In March, the Commerce Department issued a notice of proposed rulemaking to offer additional details on the guardrails and expand the definition of foreign entities of concern.

The statute specifies countries as the PRC, Russia, Iran and North Korea as foreign countries of concern. The rules would prevent recipients of CHIPS incentives funds from using the fund to support manufacturing in any of these countries.

The Semiconductor Industry Association said in its comments that it believes Commerce needs to strike a better balance with its proposed guardrails. The rule against working with Chinese chip manufacturing, it said, “could unnecessarily hamper the competitiveness of funding recipients among industry competitors and increase the administrative burden and cost of compliance.”

“The innovation and technology funded in the CHIPS Act is how we plan to expand the technological and national security advantages of America and our allies; these guardrails will help ensure we stay ahead of adversaries for decades to come,” Raimondo said in a statement.

Skepticism about addressing the core issues

Despite the major investment that the CHIPS Act brings into the U.S. semiconductor industry, many lawmakers are skeptical about its ability to close the cost differential between Asian countries and the U.S.

Current strong chip-making nations generally have lower costs of labor, fewer labor laws and easier permitting processes for building new facilities than the U.S., said Chris Miller, associate professor of international politics at Tufts University in an interview with the New York Times. The CHIPS Act does not guarantee that the U.S. will close the cost differential and maintain long-term workforce investment, he said.

“The CHIPS grants, while substantial, will generally not fully make up for the foreign cost differential without additional support, either through a tax credit, or state or local support,” said Sen. Chris Van Hollen, D-Md.

Was CHIPS Act funding in jeopardy during the debt ceiling debate?

Before the passage of the bipartisan legislation to lift the debt ceiling by suspending its application until 2025 by the House on May 31 and by the Senate on June 1, some were concerned that the CHIPS Act could be on the chopping block.

Senate Commerce Committee Chair Maria Cantwell, D-Wash., headed a letter to the Appropriations Committee in late 2022 that urged Congress to fully fund the law. Failure to do so would risk critical programs that seek to “unleash American innovation in emerging technologies.”

The compromise between Speaker McCarthy and President Biden requires the administration and Congress to limit the growth of federal discretionary spending over the next two years to 1 percent growth — a budget cut when accounting for increasing inflation rates.

That appeared to put pressure on new domestic programs like the CHIPS Act. Rep. Frank Lucas, R-Okla., told The New York Times that he was “very frustrated with how the funding of science has gone” in recent years. Rep. Ro Khanna, D-Calif., added that, regarding the CHIPS Act, “a bill is fine, but without the money, it doesn’t mean anything.”

For example, to date, the $10 billion Tech Hubs Program included in the CHIPS Act has received only 5 percent of its anticipated funding.

But the budget agreement will not affect the CHIPS Act, House committee officials confirmed. Indeed, the $53 billion investment in domestic semiconductor manufacturing has already been appropriated, and is not at risk from recission.

(The debt ceiling did impose some clawbacks from IRS funding under the Inflation Reduction Act. Those clawbacks will not affect green climate provisions in the IRA.)

But some analysts are still worried.

“There is already significant underfunding of the ‘and science’ side of the [CHIPS Act] given low appropriation numbers in the omnibus spending bill last winter,” said Mark Muro, senior fellow at Brookings Institution, speaking to Broadband Breakfast.

He was referring to the $1.7 trillion appropriations bill signed into law in December to provide appropriations to federal agencies through fiscal year 2023.

“Now, the discretionary spending caps, enforced by the across-the-board cuts during the first two years, will only complicate efforts by members who are wanting to improve science and advanced-technology funding levels, which fell in some cases far below last year’s authorized levels,” Muro said.

What are the rules governing CHIPS and Science Act applications?

A large portion of the money in the CHIPS Act — $39 billion — will fund the construction of new and expanding manufacturing facilities on U.S. soil. The CHIPS Program Office in the Commerce Department anticipates offering grants of between 5 and 15 percent of a company’s capital expenditures for a project. Tax credit reimbursement has the potential to fund 25 percent of project construction.

A further $11 billion will support research into new chip technologies which, along with tax incentives, will bring the investment in domestic manufacturing of semiconductors and R&D to a total of nearly $53 billion.

The office announced in May that it has received more than 300 statements of interest from various applications that represent 37 states.

Applicants must prove that projects advance economic and national security and that they meaningfully increase the U.S. semiconductor production and strengthen global supply chains. The office will prioritize projects that provide the Department of Defense with stable, long-term onshore access to semiconductors or advance national security in some other way. The plan should include steps to meet environmental and permitting requirements in a timely fashion.

Of all the application requirements, workforce development may prove to be the most difficult to achieve. The program requires that applicants commit to hiring economically disadvantaged individuals and work with government organizations, educational institutions and other partners to develop a sustainable workforce for the industry.

Any applicant requesting more than $150 million in funding will be required to provide a plan for access to affordable and high-quality childcare for both facility and construction workers.

In a letter addressed to Raimondo, Republican Senators including Ted Cruz, R-Texas, Eric Schmitt, R-Mo., and Ted Budd, R-N.C., accused the Biden administration of using the money intended to build American competitiveness to advance Democratic Party priorities like childcare.

It is apparent… that the Commerce Department intends to repurpose the CHIPS program and circumvent Congress,” read the letter. The guidelines will only serve to increase the cost of constructing semiconductor plants, it continued.

Raimondo responded that the measures were necessary to address a workforce shortage that could hinder efforts to expand semiconductor manufacturing. “There is zero ‘social policy’ that we’re trying to achieve here,” Raimondo said. “We have no desire to put requirements on companies that are bad for the companies.”

Phased application progress

Funding applications will be submitted in three phases. The first phase will support commercial fabrication facilities which include leading-edge facilities that have capacity to achieve highest power performance, current-generation facilities and back-end production facilities for the assembly, testing and packaging of semiconductors.

The application window for the second phase will open by June, intending to fund material suppliers and equipment manufacturers. The third and final stage will fund the construction of semiconductor research and development facilities. Its application window will open in early fall.

Applicants interested in grant funding must present a statement of interest which can be submitted at any time. Full applications for leading-edge manufacturers opened in March and applications for current generation manufacturers opened in May.

Impact on democratic allies of the U.S.

South Korea requested in May that the U.S. reassess the guardrail provisions it adopted in the CHIPS Act. South Korean companies Samsung and SK Hynix represent two of the world’s top manufacturers of memory chips and have invested billions of dollars in Chinese chip factories. The country is a leading chipmaker and also a major investor in the U.S.’s chip sector.

“The Republic of Korea believes ‘guardrail provisions’ should not be implemented in a manner that imposes an unreasonable burden on companies investing in the United States,” read the country’s statement. As currently structured, the rules would prohibit Samsung and other South Korean companies with investments in Chinese plants from receiving funding from the CHIPS Act without proving it is not vulnerable to Chinese surveillance.

In a separate filing, the Korea Semiconductor Industry Association urged the National Institute of Standards and Technology under the Commerce Department to adopt rules that would revise the definition of “foreign entities of concern.” 

It claimed that the current definition, “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation,” is “overly broad and vague.” It asked that “foreign entities of concern” be specifically identified and exclude recipients’ subsidiaries located in these foreign countries.

The law as it is currently worded could restrict funding recipients from forming agreements with their own subsidiaries located in foreign countries of concern, the comments read.


Impact on the People’s Republic of China


In October 2022, the Department of Commerce’s Bureau of Industry and Security implemented rules that restricted the PRC’s ability to obtain advanced chips to “protect U.S. national security and foreign policy interests.” 

The rules restrict U.S. exports on advanced semiconductor chips and impose controls on certain manufacturing items and transactions for semiconductor development to prevent the PRC’s access to them.

Under Secretary of Commerce for Industry and Security Alan Estevez said that the rules ensure Commerce is “doing everything in its power to protect our national security and prevent sensitive technologies with military applications from being acquired by the PRC’s military, intelligence and security services.”

This is not the first time the U.S. has restricted chip flow to perceived threats. It did so with the PRC in 2020 when it blocked chip sales to individual Chinese customers and in early 2022 following the Russian invasion of Ukraine.

“This announcement is perhaps the most expansive export control in decades,” however, said Sujai Shivakumar, analyst at the Center for International and Strategic Studies.

“We resolutely oppose the U.S.’s restrictive actions targeting certain countries,” said Yu Xiekang, vice chairman of the China Semiconductor Industry Association only months after the U.S. sanctions were imposed at an industry conference in Nanjing.

In May 2023, the PRC banned the use of American-based Micron chips on its critical infrastructure. The move was widely regarded as a retaliation against U.S. sanctions.

China’s Cyberspace Administration claimed that a network security review of Micron’s products indicated that they have serious network security issues and pose a major risk to the country’s critical infrastructure system.

In response, Raimondo issued a statement opposing the restrictions and claiming that the Micron ban was not fact-based.

American graphical processing unit manufacturer Nvidia’s CEO Jensen Huang warned in a May interview with the Financial Times that escalating the trade war with China through further guardrails in the CHIPS Act could harm the U.S. tech industry.

China is a large market that can’t be ignored, said Huang. Limiting Chinese access to U.S. chips will force the country to develop its own. “If [China] can’t buy from… the United States, they’ll just build it themselves,” he said.


Impact in America: Private investment 



Perhaps the most eager anticipated response to the CHIPS Act is what it will do, or has done, for U.S. manufacturing. Following passage in August, the semiconductor industry announced nearly $50 billion in additional investments in American semiconductor manufacturing. According to the White House, these announcements increase the total business investment to nearly $150 billion since Biden took office.

Micron, for example, last August announced plans to invest $40 billion through the end of the decade to build leading-edge memory manufacturing in the U.S. Indeed, Micron is the only U.S.-based manufacturer of memory chips, and the company claims that this investment makes it the largest memory manufacturing investment in U.S. history. The anticipated investment would create up to 40,000 new jobs.

Micron also plans to build what it called “the largest semiconductor fabrication facility in the United States,” with support from New York State.

Semiconductor design company Qualcomm and chip manufacturer GlobalFoundries announced that they would more than double the length of their current semiconductor manufacturing agreement. The extended agreement would, they said, “secure wafer [a thin slice of semiconductor substance] supply and commitments to support U.S.-based manufacturing through capacity expansion” through 2028. That was particularly touted by Senate Majority Leader Chuck Schumer.

Many other announcements

In September, American semiconductor developer Wolfspeed announced it will build a silicon carbide semiconductor plant in North Carolina at a cost of $1.3 billion. The project will be supported by approximately $1 billion in incentives from state and local governments.

In December, TSMC announced the opening of its second chip plant in Arizona, despite the nearly quadrupled cost to build in the U.S. compared to Taiwan and its difficulty finding qualified personnel.

Both Texas Instruments and Integra Technologies announced in February new plans to build plants in Utah and Kansas respectively.

Industry group Semiconductor Industry Association estimated that the CHIPS Act is spurring nearly $200 billion in company investments across the country. Announcements following the CHIPS Act introduced more than 50 new semiconductor ecosystem projects.

Addressing ‘Build America, Buy America’ requirements?

The Build America Buy America Act enacted as part of the Infrastructure Investment and Jobs Act in 2021 requires that all iron, steel, manufactured products and construction materials used in federally funded infrastructure projects be produced in the U.S.

To be considered as produced in the U.S., manufactured goods must contain greater than 55 percent domestic materials and be manufactured in the U.S.

However, the U.S. no longer produces many of the items needed to modernize its infrastructure. In February, the U.S. Department of Transportation denied a request by nation’s ports to use federal funds to purchase dock cranes, trucks and other necessary equipment that are not manufactured domestically. Semiconductor chips are currently considered construction materials and may be subject to the same regulations.

Grant awardees of federally funded programs — such as the Broadband Equity, Access and Deployment program, Digital Equity program and Middle Mile program — will not be able to deploy networks unless lawmakers provide a waiver of BABA requirements, Patrick Lozada, director of global policy at the Telecommunications Industry Association, told Broadband Breakfast.

Although Lozada said that the CHIPS Act will have a positive impact on the mid- to long-term U.S. capacity for semiconductors, that will not negate the need for a waiver of these rules to ensure BEAD applications can effectively deploy their projects. Semiconductor fabrication plants take three to five years to build out in the U.S., and BEAD applicants will not be able to meet requirements within that time frame, he said.

Further, “homeshoring” plants will raise projects costs by an estimated 25 percent on average and will increase time to deployment, according to a report by the Information Technology and Innovation Foundation.

The Commerce Department has not specified whether CHIPS Act funding will be considered an infrastructure project subject to the Buy America Act requirements.