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The CHIPS and Science Act of 2022

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The CHIPS and Science Act of 2022

The US-China tech war heats up!

China, a country that is poised to be the world’s largest economy and a mighty tech power, has become increasingly assertive in pressing its economic, political and territorial claims. Be its open support for Russia in the Ukraine conflict or its unflinching stance on Taiwan, the dragon is not ready to bow down to the United States. This is what has made the United States anxious and high-strung. Although the United States has long treated China as something of a charity case, yet it now sees the latter as its principal rival and a formidable threat to its hegemony across the globe. While some tension is inevitable, the rhetoric in both nations has taken a bellicose turn.

After launching a number of initiatives like Build Back Better World (B3W), Indo-Pacific Economic Framework (IPEF) and Partners for the Blue Pacific (PBP), the US animosity against China has now also entered the domain of technology, besides those of economy and politics. The signing into law of the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act by President Biden is but one piece of evidence that proves this assertion right. The Act, which includes nearly $53 billion to support domestic production of semiconductors, the building blocks of the digital age, is meant to thwart China’s rise in this sector.

“Today is a day for builders. Today, America’s delivering,” Biden said during the White House signing ceremony, adding that the “CHIPS and Science Act is a once- in-a-generation investment in America itself.”

The CHIPS and Science Act is a spending package that allocates billions of dollars to bolstering domestic chip manufacturing, finalizing what is seen as the nation’s boldest industrial legislation in decades. The passage of the Act, whose total price tag comes to $280 billion, marked a rare display of bipartisanship in Washington, with politicians on both sides of the aisle framing the bill as essential to winning the economic competition with China as well as enhancing national security. The move also marks a serious escalation and a shift in the US’ multi-year crackdown on China’s chip sector, as Washington resorts to domestic legislation instead of relying on sanctions on specific Chinese companies in the campaign, Chinese industry analysts noted, calling for comprehensive countermeasures from the Chinese government and companies.

Why this law?
Semiconductors are critical pieces of an array of products including consumer electronics, automobiles, health-care equipment and weapons systems. The Covid-19 pandemic sparked a chip shortage and strained supply chains, highlighting that the United States, which once was a leader in semiconductor chip manufacturing, has lost ground in recent years as other countries like China ramped up production, forcing many American manufacturers to import chips which are essential to the production of cars, smartphones and medical equipment. The new funding is intended to help companies bring chip manufacturing back to the US and, as a result, help lower costs and prevent supply chain disruptions. A continuous chips scarcity has impacted everything from vehicles, guns, washing machines, and video games. As the shortfall continues to affect car makers, thousands of cars and trucks are stalled in southeast Michigan while waiting for chips.

The shortage has become an incentive for manufacturers like Intel to invest in new plants to meet the growing demand for tech products like laptops and smartphones worldwide. But US officials fear that, without government intervention, chip manufacturers will continue to offshore new foundries to China, leaving little room for the US to profit off of an industry it pioneered decades ago. Those fears were nearly actualized after Intel approached the US Department of Commerce with a proposal to take over an abandoned factory in China sometime this year. Although Intel suspended the plan, company’s conversations with the administration pressured lawmakers to act on the chips investment bill ahead of their August recess.

In July, Commerce Department Secretary Gina Raimondo warned that the US could miss out on the semiconductor industry’s rush to produce more chips. “Semiconductor companies need to get ‘concrete in the ground’ by this fall to meet this increased demand in the years ahead,” Raimondo said in a letter with Secretary of Defense Lloyd Austin. That is why the Biden administration underscored that the legislation, the CHIPS and Science Act, is vital to national security, competing with China, and reducing US dependence on Taiwan and South Korea for critical technologies.

What’s in the Act?
The core of the $280 billion CHIPS Act is $52.7 billion in funding to promote the US manufacture of semiconductor chips and help alleviate the chip shortage. The money will pay for factory-construction incentives, provide workforce training, pay for targeted tax credits, and underwrite loans and loan guarantees to qualifying companies.

The package will invest $39 billion over five years to expand domestic semiconductor manufacturing. It will provide companies incentives to build, expand and modernize US facilities and equipment.

The legislation will also create a new 25% tax credit for companies that invest in semiconductor manufacturing equipment or the construction of manufacturing facilities.

Private companies that receive financial assistance will be restricted from expanding certain chip manufacturing in China for 10 years.

The law will provide $11 billion over five years to the Department of Commerce to help spur research and development in advanced semiconductor manufacturing, to invest in new technologies and expand workforce training opportunities.

Another $1.5 billion will fund the Public Wireless Supply Chain Innovation Fund to help telecommunications companies compete with Chinese telecom giant Huawei and limit the scope of other telecommunications companies with close ties to China.
Millions of dollars will target workforce development to make sure workers are available to support more manufacturing.

It also provides funding for research and development activities across a range of government agencies. Its cast of characters includes the Department of Energy (the bill will support research into energy storage, carbon sequestration, nuclear fission and fusion power, particle physics, and more), the National Institute of Standards and Technology (information security, digital identity, and support for domestic manufacturing), the National Science Foundation (for example, expanding STEM education, supporting tech workforce training, and boosting diversity and research security in tech fields), the National Oceanic and Atmospheric Administration (for instance, work to counter ocean acidification), and NASA (operating the International Space Station through 2030 and integrating drone flights into the national air transportation system, among others).

As per a Fact Sheet available at the White House website:
The CHIPS and Science Act will boost American semiconductor research, development, and production, ensuring US leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems. America invented the semiconductor, but today produces about 10 percent of the world’s supply—and none of the most advanced chips. Instead, we rely on East Asia for 75 percent of global production. The CHIPS and Science Act will unlock hundreds of billions more in private sector semiconductor investment across the country, including production essential to national defense and critical sectors.

 

The law will also ensure the United States maintains and advances its scientific and technological edge. In the mid-1960s, at the peak of the race to the moon, the federal government invested two percent of GDP in research and development. By 2020, that number had fallen to less than one percent. Economic growth and prosperity over the last 40 years has clustered in a few regions on the coasts, leaving far too many communities behind. The CHIPS and Science Act will ensure the future is made in ALL of America, and unlock opportunities in science and technology for those who have been historically left out.

Private investment
Spurred by the passage of the CHIPS Act, companies have announced nearly $50 billion in additional investments in American semiconductor manufacturing, bringing total business investment to nearly $150 billion since President Biden took office:

  Micron has announced a $40 billion investment in memory chip manufacturing, critical for computers and electronic devices, which will create up to 40,000 new jobs in construction and manufacturing. This investment alone will bring the US market share of memory chip production from less than two percent to up to 10 percent over the next decade.

  Qualcomm and GlobalFoundries are announcing a new partnership that includes $4.2 billion to manufacture chips in an expansion of GlobalFoundries’ upstate New York facility. Qualcomm, the leading fabless (denoting or relating to a company which designs microchips but contracts out their production rather than owning its own factory) semiconductor company in the world, announced plans to increase semiconductor production in the US by up to 50 percent over the next five years.
Competition with China

Although US officials stressed that the legislation is primarily intended to strengthen US’ semiconductor production, content of the Act shows a clear tendency of cracking down on China’s chip industry. For instance, the Act requires that recipients do not build certain facilities in China and other countries of concern, a White House statement showed.

This is just one example of the US’ intensifying campaign to cut China out from the global chip supply chain. The US is also talking to some of its Asian allies such as South Korea and Japan about forming a chip alliance.

Apart from chips, the US is also taking measures to crack down on China’s electric car industry, which has shown signs of rapid development in recent years. For example, the US Senate recently passed a bill dubbed the Inflation Reduction Act that gives an uncapped $7,500 tax credit to electric cars on the premise that those cars don’t use any batteries after 2023 with any Chinese components.

Chinese companies might see mixed effects from such encircling measures from the US. For one thing, the costs of semiconductor or car parts might increase and eat into their profits to an extent that is hard to predict now.

They will also have to rely on themselves to achieve technological breakthroughs, which is not necessarily a bad thing as companies and local governments should be more motivated to put resources into such research and development.

Chinese companies are taking active measures to cope with the situation. For example, customs data showed that China imported 186 billion integrated circuit products in the first four months of 2022, down 11.4 percent on a yearly basis, suggesting that Chinese companies are gradually reducing reliance on imports.

Chinese mobile phone companies are also taking action to support domestic suppliers in case they face difficulties in importing products. For example, Huawei has launched a plan in recent years to support domestic chip companies by methods such as coordinating chip research and becoming their shareholders.

China’s response
Chinese foreign ministry and trade bodies raised objections soon after the Biden administration signed a long-brewing CHIPS Act which clearly aims at crippling China’s semiconductor supply chains, saying that the move will seriously disrupt global companies’ normal trade and investment activities, while bringing a negative impact to the stability of global chip industrial chains.

Experts opine that the bill is unsustainable in actual implementation, not only because it runs counter to basic market rules by arbitrarily breaking naturally formed international labor division in the semiconductor industry, but also because it may face change in the case of power rotation in the US.

Chinese authorities have also severely criticized the law by saying that the measure will “disrupt international trade and distort global semiconductor supply chains.” A Chinese Foreign Ministry spokesperson, Wang Wenbin, has categorically stated: “How the US grows its industry is its own business, but it should not set obstacles for normal economic, trade, scientific and technological exchanges and cooperation between China and the US, let alone undermine China’s legitimate development rights and interests.”

China’s semiconductor industry may see the negative impacts caused by the act in the short term. But these effects are not decisive, because they will stimulate a stronger explosive force and lasting dynamics for China to engage in independent innovation. In recent years, there have been many relevant cases. Even the most arrogant US politicians today won’t dare to think that China’s semiconductor industry will stagnate or even go backward as a result of such a bill from Washington.

The chip industry is highly globalized. Over the past few decades, the division of labor in globalization and the huge market demand are the fundamental conditions for the rapid progress of chip technology. Now, the US wants to build “camps” in chip making and artificially isolate China, the world’s largest market, from the industrial chain. Such an approach not only brings damages to all, but also sets up a new massive trap for the entire world. Obviously, when the CHIPS and Science Act comes into force, it represents a regression of history.

Conclusion
The chip industry is highly globalized. Over the past few decades, the division of labor in globalization and the huge market demand are the fundamental conditions for the rapid progress of chip technology. Now, the US wants to build “camps” in chip making and artificially isolate China, the world’s largest market, from the industrial chain. Such an approach not only brings damages to all, but also sets up a new massive trap for the entire world. It is an undeniable reality that the United States and China need each other. There is no better illustration than the cargo ships that continued moving between Guangzhou and Long Beach, California, during Nancy Pelosi’s recent visit to Taiwan, and will continue long after her return.
It is in everyone’s interest that the two most powerful nations on Earth find ways of easing these tensions. It is past time for President Biden to make a clean break with the Trump administration’s failed gambit of bullying China into making economic concessions by imposing tariffs on Chinese imports.

The writer is a member of staff.

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