America Pushes Its CHIPS All In, Will it Pay Off?

• Author: Carberry, Sean
• Position: BUDGET MATTERS

Anyone who tried to buy a car or dishwasher--or perhaps an F-35 fighter--since the COVID-19 pandemic began most likely learned there is a semiconductor shortage.

Growing demand for high-tech devices in the consumer and defense sectors was straining the global chip supply chain before the pandemic, and companies around the world have been struggling to find the workforce needed to feed the world's chip habit.

Unlike energetic chemicals or critical minerals where China dominates supply chains, most semiconductors are produced by U.S. allies. However, much of that production takes place in Asia--particularly in Taiwan--where China poses a threat, as evidenced by its recent military exercises around the island to protest the visit of House Speaker Nancy Pelosi, D-Calif.

Hence, for the past few years, Congress has been debating whether and how to onshore chip manufacturing--currently, there is almost no chip production in the United States--to reduce economic and security risks.

The 2021 National Defense Authorization Act included the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act. The legislation had provisions to invest in research and fabrication of chips in the United States.

However, Congress did not appropriate any funding for the provisions.

After intensive debate over the national security risks of having most chips made in East Asia, whether the government should provide massive subsidies to tech companies--as countries currently manufacturing chips do--and how to prevent those companies from taking government money and investing in facilities in China, Congress passed the "CHIPS and Science Act."

On Aug. 9, surrounded by tech executives, President Joe Biden signed the $280 billion act into law.

According to a Senate summary, the legislation includes $39 billion in financial aid for companies to build, expand or modernize domestic facilities for chip development and fabrication. There is also a 25 percent tax credit for investments in domestic manufacturing, which the Congressional Budget Office estimates will cost $24 billion through 2031.

The Defense Department gets $2 billion for the "Microelectronics Commons, a national network for onshore, university-based prototyping, lab-to-fab transition of semiconductor technologies," which includes defense-specific applications.

In total, the new law includes $52 billion directed toward building and modernizing facilities, research and development and workforce...