While authorization for legislation to incentivize domestic semiconductor production was passed over a year ago, the funding has yet to be approved.
By now, most Americans know that chips exist in every electronic item used in America today -- cars, refrigerators, airplanes, medical devices and smartphones. While the U.S. remains the leader in advanced semiconductor design and development, actual production of chips has shifted dramatically overseas. This geographic imbalance has evolved over the past two decades, and while it is a public inconvenience, it also poses a genuine national security risk and impedes America’s ability to maintain global leadership in critical advanced technologies essential to future growth and security.
Today chip production is hyper-concentrated in Asia, especially the development and manufacturing of advanced chips required for new technologies around artificial intelligence and quantum computing. Substantial Asian country government subsidies aimed at increasing the capabilities of indigenous companies, together with incentives to attract Western corporations, are key drivers that led to this situation. Another contributing factor has been the need for U.S. companies to be competitive in that region by securing market access and leveraging lower overhead and operational costs.
There is bipartisan recognition of these challenges, and more importantly, robust support for reviving the U.S. semiconductor industry. The pandemic forced the U.S. to consider how to reduce and mitigate the impact of overseas dependencies and build resiliency and redundancy into our own semiconductor supply chain. A major outcome of that effort was legislation known as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.
The authorization of the CHIPS Act was passed as part of the 2021 National Defense Authorization Act, in an unlikely vote overriding the president’s veto. Yet, a year and months later, this bipartisan legislation remains unfunded. The House and the Senate passed two differing pieces of legislation that incorporate $52 billion for CHIPS Act funding and recently began the conference process to reconcile the two bills. A compromise could pass this election year, which would be a win for both sides and the country.
Reversing the erosion of our domestic semiconductor production capacity is urgent and we have the rare opportunity to take advantage of strong bipartisan support for U.S. government initiatives to bolster U.S. semiconductor companies and their related suppliers. With that in mind, there are three steps Congress can take to expedite passage of funding for the CHIPS Act. Specifically, conferees working to reconcile the two bills should:
- Streamline the final legislation to focus on funding public-private initiatives to build a resilient and reliable semiconductor ecosystem in the United States. Irrelevant projects should be set aside, irrespective of their merit, to advance this vital goal.
- Make recipients of CHIPS Act funding subject to Buy America regulations. The goal of the CHIPS Act is to enhance U.S. development and production capacity. This objective should be implemented throughout the value chain—not just at the foundry level. Adding a provision requiring industry recipients of CHIPS Act subsidies to adhere to Buy America regulations will amplify the measure’s impact by strengthening U.S. companies who supply chip manufacturers. This will reinforce the broader domestic semiconductor ecosystem and industrial base.
- Adjust regulatory and tax policies to further incentivize industry to create more semiconductor capabilities in the U.S. It makes no sense to provide billions of dollars in financial support to companies while raising their taxes by a greater amount, especially in a difficult economic environment besieged by record levels of inflation. The impact of grants and subsidies would be far more powerful if accompanied by tax incentives and regulatory relief. The semiconductor industry is among the most R&D intensive sectors in the economy, with companies routinely reinvesting 15-20% of annual revenues into next generation product development.
Rebuilding the U.S. semiconductor industry and adding resiliency to the microelectronics supply chain is a long-term effort that should be monitored and measured. Congress should consider a reporting requirement after the first two years of CHIPS Act implementation that details the distribution of grants and compliance with Buy America provisions, which also highlights relevant regulations and tax measures. Such a report should provide an industry impact analysis from the Department of Commerce’s Bureau of Industry and Security which has unique survey authority.
Finally, the Biden administration should undertake an interagency effort to develop a long-term strategy advancing the viability and sustainability of the semiconductor industry. Beyond addressing targeted investments, regulation, and tax policy, this strategy should consider the competitive environment—specifically China and its licit and illicit actions to achieve global dominance in this critical sector.
Mira Ricardel is a principal at the Chertoff Group. She is the former under secretary of commerce at the Bureau of Industry and Security, and former deputy national security advisor.