The CHIPs Act Falls Short on Domestic Production Targets

Congress recently passed the CHIPs and Science Act, legislation that includes $52 billion worth of tax credits for companies to build semiconductor fabrication facilities (“fabs”) in the United States. This is an important step, since the U.S. is currently too dependent on computer chips manufactured in Asia. The CHIPs Act could certainly lead to more fabs being built in the United States.

But a smart approach is needed—and could serve as a model for the reshoring of other important industries. At present, shortages of semiconductors are a major problem. Each year, the U.S. consumes billions of dollars-worth of electronic products that contain vast amounts of semiconductors. However, the U.S. only manufactures a small and shrinking share of global chip output.

The U.S. now faces major challenges when it comes to computer chips. Many key industries are dependent on semiconductors—and have been hampered by shortages arising from the COVID pandemic. There’s also a China challenge, since Beijing’s “Made in China 2025” plan calls for huge investments in semiconductor design and manufacturing. By 2030, it’s estimated that China’s share of global chip production will reach 24%, the largest in the world. If Beijing achieves this sort of dominance in semiconductors, the U.S. risks being dependent on China for yet another key technology. And while the U.S. is currently the dominant nation in chip design, this trend could draw more chip manufacturing, design and related software industries toward China.

The solution is for the U.S. to have a critical mass of manufacturing in each sector of semiconductor production—particularly in memory and LED (light-emitting diode) chips. Right now, for example, U.S. production of memory chips is extremely limited—and is non-existent when it comes to LEDs. These two kinds of chips are essential to homes and businesses, since they’re found in household appliances and automobiles as well as electric vehicles and military equipment.

What’s needed is to set targets for the implementation of CHIPs Act funding that can establish a potential U.S. share of global production for each sector of semiconductors. The U.S. generally accounts for about 30% of global consumption of technology products—and is the largest user of semiconductors. If the U.S. produced 20% of global output, it would be able to fulfill the majority of its domestic needs. Each chip sector should have its own targets, including not just chipmaking but advanced packaging and other essential functions.

Washington needs to appoint several smart, retired, veteran venture capitalists to oversee disbursement of CHIPs Act funds. Equipped with targets for different types of chips, these VCs would identify chip companies willing to commit to specific production targets. It’s true that the semiconductor industry is dominated by a few giant players in each sector. But with a $52 billion pot of funds, the VCs could identify nimble, smaller companies—and look to avoid excessive dependence on industry giants.

What really matters is bringing production back to the U.S. A federal investment of $52 billion should be structured so that any company receiving funds commits to raising its U.S. production targets over a fixed time period—and maintain that level of capacity for a period of 10 years. If the company doesn’t meet these targets, it pays back the investment.

Unfortunately, with the current Chips Act, incentives are not aligned. The legislation itself doesn’t change the fundamental aims of U.S. semiconductor companies. Yes, it throws them a nice tax credit to produce in the U.S. But that alone can’t stop the slow, steady drift toward China.

However, by making government funding a commercial transaction, all parties involved would have an interest in finding a way to make it profitable for chip companies to manufacture a certain portion of their output in the U.S. This matters, since the Biden administration is looking to address shortages in other industries. Government investment should require domestic production targets for other key sectors, such as pharmaceuticals and critical minerals.

The overriding goal should be to counter China’s efforts to dominate global manufacturing in advanced industries. We can’t do that without the support of the very companies that have been outsourcing jobs and production for 30 years. That’s why aligning the incentives of the government and the private sector should go beyond subsidies to include a completely new mindset based on concrete targets for rebuilding domestic production.

Jeff Ferry is chief economist at the Coalition for a Prosperous America.