The CHIPS and Science Act is an innovative and important industrial policy. It makes targeted investments in critical industries to strengthen America’s manufacturing base, protect workers, and strengthen US national and economic security. It will help reverse decades of offshore labor and supply chain trends and contribute to inclusive growth.
The law, signed by President Joe Biden after passing both houses of Congress with bipartisan support, has two motivating ideas. The first is the realization that economic competitiveness, especially in advanced manufacturing, often requires systematic government support. Support is required because “public goods” problems are endemic. The second is the recognition that the United States lacks reliable access to critical semiconductor manufacturing capacity, which creates economic and national security risks.
Advanced manufacturing is based on scientific discoveries, translating discoveries into prototype products and manufacturing processes, adequate standards and tests to control quality, and a well-trained workforce. Because private actors cannot capture all the benefits of investment in these preconditions—it is difficult, for example, to keep scientific ideas secret or to prevent well-trained workers from leaving for another job—the level of private investment in each of them is insufficient. . The CHIPS and Science Act includes initiatives to correct these market failures and allow American manufacturers to develop technologies and products that would otherwise be out of reach. Moreover, it is designed to increase economic development in various regions and make access to higher-wage employment more inclusive.
The law provides essential support for basic and applied scientific research in frontier areas such as artificial intelligence, quantum computing, communications, energy and materials science. It funds 20 regional technology centers dedicated to helping companies access discoveries and prototype new products. State governments, universities and other non-profit organizations will receive funding to help small firms improve their technological capabilities, expand manufacturing ecosystems and create employment opportunities. STEM education will expand to lower barriers to the recruitment and advancement of women and minorities. Standards and testing will receive much needed support.
Threats to economic and national security are also a focus of the law. The ongoing slowdown in domestic auto production caused by chip shortages illustrates the economic risks. National security risks include the need for the Department of Defense to obtain critical components of national defense electronic systems from countries in Asia.
Under the existing global division of labor in semiconductor manufacturing, both risks are substantial. The United States is dominant in semiconductor design but has a relatively small and declining share of chip manufacturing. Taiwan holds the dominant position in manufacturing, operating state-of-the-art chip “foundries” that manufacture to customer specifications. The assembly, testing, and packaging of semiconductors into finished components is done primarily by contract manufacturers in Taiwan and China. This means that important elements of the semiconductor supply chain are subject to events in other countries and, in the case of companies in Taiwan and China, to Chinese government intervention.
Foreign government interventions have greatly affected the geography of semiconductor manufacturing. Taiwan, for example, offers subsidies for land, construction and manufacturing equipment that lowers manufacturing costs by 25% to 30%. China has provided a single firm, Yangtze Memory Technology, with $24 billion in subsidies and allocated $100 billion in support for 60 new manufacturing facilities.
To remap manufacturing and reduce risk, the law authorizes the Commerce Department to provide $39 billion in financial assistance to build, expand or modernize domestic facilities and equipment for semiconductor fabrication, assembly and packaging, as well as research and development. This support, along with the 25% investment tax credit in the law, provides a significant incentive to locate and expand manufacturing in the United States. Furthermore, because funds and loans will be withdrawn if a firm invests in advanced manufacturing in countries such as China within 10 years, strategic profits will not be subject to rapid change.
In short, the CHIPS and Science Act will produce extremely broad and important benefits. American manufacturing will be more productive and competitive. This will create opportunities for higher-wage employment, and increased access to STEM education will mean that these benefits will be shared more inclusively. The functioning of the economy will be less endangered by unexpected global events and less dependent on anti-democratic countries. These results are a reminder of the power of well-designed economic policy to improve the lives of all Americans.
Marc Jarsulic is a senior fellow and chief economist at the Center for American Progress (americanprogress.org), a liberal public policy research and advocacy organization in Washington, DC.
