Julius Krein offers his thoughts on the CHIPS Act, and an explanation of the process that birthed the final form of the Semiconductor legislation.

Before student loan forgiveness, the raid on Mar-a-Lago, and the Inflation Reduction Act, something called the CHIPS Act was a major news story for a few days in late July. CHIPS was essentially a bill to support semiconductor manufacturing in the United States, and the final version that passed into law, which added basic research funding and related programs, was christened the CHIPS and Science Act.

By some accounts, CHIPS is a critical tool in the intensifying economic and technological competition against China, a solution to address America’s eroding technological leadership and the decline of a key manufacturing sector. Others still argue that it represents America’s abandonment of free market capitalism. In reality, however, it is neither. More semiconductor fabs will be built in the United States as a result of CHIPS (some commitments have already been announced), but its legislative trajectory also reveals the shortcomings of the current U.S. approach to industrial policy and the lack of any serious resolve when it comes to competing against China.

By way of background, although the United States still leads in key elements of semiconductor design, its share of global manufacturing has fallen from nearly 40 percent in the 1990s to around 10 percent today. Moreover, the chips that are produced in the United States are not at the technological frontier. Taiwan, Korea, and China are the top global producers, with Taiwan’s TSMC the technological leader. China has invested heavily in building its own semiconductor industry since the early 2000s, when it essentially started from zero. While it remains far from technological leadership, it has established a strong presence at the lower end of the value chain. Moving up the technological ladder remains a major priority for the Chinese government; Beijing’s spending on the sector dwarfs that of the United States, even after CHIPS.

The path of CHIPS itself was a long and winding one. It began as two bills in 2020, both led by Republicans with bipartisan support, that were folded into one: the CHIPS for America Act. CHIPS for America was passed into law via the National Defense Authorization Act in December 2020, but Congress still needed to appropriate funding before it could be implemented. Hence CHIPS funding became a key component of two larger bills, the United States Innovation and Competition Act, or usica (in the Senate), and the America competes Act (in the House). These bills combined CHIPS funding with various research spending and industrial policy programs (mostly drawn from yet another proposal, the Endless Frontiers Act). As with any major piece of legislation nowadays, both also contained their share of pork and extraneous provisions; usica—perhaps ironically for a bill touted as essential to competing with China—additionally included significant tariff relief on Chinese imports. Both bills passed their respective chambers and headed to conference committee, where they languished for months, with no compromise bill that could pass both houses emerging. This is where the story becomes interesting.

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