The US Chips Act becomes a Christmas tree

Industrial policy is back in vogue in America, on a grand scale. Applications have opened to companies for a share of the $39bn funding earmarked by last year’s $280bn US Chips and Science Act to build an advanced semiconductor manufacturing capability. Along with the $370bn subsidies for clean energy in the Inflation Reduction Act, the chips project is emblematic of the Biden administration’s approach. Putting the US back among the leaders in top-end chipmaking is likened to a new moonshot. But the White House is freighting it with additional policy aims that endanger the project’s chances of success.

One rule of industrial policy is to use it sparingly. Governments in advanced economies have no business intervening widely to support “winners”. Achieving national security goals is one area where a state-led strategy and funding can sometimes be justified — and the White House has a defensible case that reducing US reliance on foreign-made microchips is vital.

The US share of global microchip manufacturing capacity has fallen from 37 per cent in 1990 to 12 per cent today. More importantly Taiwan, mostly via Taiwan Semiconductor Manufacturing Company or TSMC, produces more than 90 per cent of the world’s leading-edge chips, crucial for defence applications and technologies such as cloud computing, fast communications networks and artificial intelligence. Chinese action against Taiwan — no longer such a remote possibility — could cripple chunks of US industry.

A second rule is to set precise goals and stick to them. The chips plan aims to expand manufacturing of advanced logic chips the US doesn’t produce, creating at least two “clusters” including a supplier ecosystem and research and development facilities. But the administration has tacked on a list of conditions for companies receiving funding. They cannot expand advanced chip capacity in China for 10 years, or use funds for share buybacks or dividends. They must share returns above agreed levels with the government, pay union wages for construction and ensure access to affordable childcare.

Though some of these aims are understandable and positive, taken together they suggest the White House is trying to stretch one initiative to cover too many goals. The chips act is becoming a Christmas tree in which all interest groups get a bauble. Officials say requiring day care makes sense to make jobs attractive when skills are in short supply, but companies will realise this anyway. And commerce secretary Gina Raimondo has signalled that after Congress failed to back plans to put billions of dollars into new childcare last year, the administration sees spending programmes that did pass as a way to achieve the goals within certain sectors.

Since chipmaking moved offshore in part because US production is so costly, the White House should be trying to ease cost and regulatory burdens, not add to them. US customers may, as TSMC officials have suggested, be ready to pay more for chips made in America, but there are limits. The US is also in a global fight to attract advanced chipmakers: in coming years the EU, Japan, South Korea, India and Taiwan, and China, are offering hundreds of billions of dollars in subsidies and tax breaks.

Indeed, the White House needs to be clearer over whether it is aiming for self-sufficiency in chips, or to boost resilience through “friendshoring” of supply chains. The latter is preferable, even if US customers might prefer all-US chips, and some of the friends need to be outside striking distance of China. A “Chip 4” alliance the US has touted with South Korea, Japan and Taiwan has made little headway. But without careful co-ordination with US allies, a subsidy war could leave no one the winner.