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How the Heritage Foundation Is Wrong About the CHIPS Act

When once challenged why he altered his position on a certain issue, John Maynard Keynes retorted, “when the facts change, I change my mind — what do you do, sir?” While we all know that the Heritage Foundation is not Keynesian when it comes to economics, it now appears not be Keynesian when it comes to logic. For decades, Heritage has opposed anything that smacks of the dreaded “industrial policy” and IT continues to do so even as China has taken the lead in advanced industry production over the United States and has become a peer competitor.

Most recent case in point is Heritage scholar Walter Lohman’s recent criticism of the bi-partisan, bi-cameral CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act, part of the Bipartisan Innovation Act now in Congressional conference. The Act envisions$52 billion worth of investments, including $39 billion in federal matching grants for state and local incentives toward attracting semiconductor fabs and $10.5 billion for semiconductor research and development.

There are compelling reasons why both sides of the aisle support CHIPS. The most important is that the sector is critical to U.S. national and economic security given that an adversary could potentially cut off access to semiconductors and cripple U.S. economic and defense capabilities. Indeed, over the last 40 years, the U.S. share of global semiconductor production cratered from 37 percent to just 12 percent.

The disturbing reality is that if U.S. global share shrinks much more the United States will have passed a tipping point where all the subsidies in the world would not be enough to restore production, because of the lack of skilled engineers and technicians, suppliers, knowhow, and other factors. If Congress doesn’t act with CHIPS, it’s very likely the United States will look like the UK, which has virtually no chip production, but some very good fabless companies like ARM that design chips but have others build them.

However, if you are a doctrinaire free-marketer like Lohman such policies must be opposed because they violate his core world view. From the start Lohman’s op-ed goes off the ideological deep-end by claiming that CHIPS “will help China achieve its industrial goals, and thus enhance its competitive position vis-a-vis its rivalry with the U.S.” Lohman knows that competition with China is a key driver of Congressional action, so attempts intellectual jiu jitsu by saying CHIPS will actually help China.

Congress should not fall for this intellectual trickery. The author claims that CHIPS encourages companies to invest in fabs in China “by providing subsidies for investment in the U.S. without barring the recipients of these funds from making similar investments in China.” This notion that “money is fungible” and therefore money going to companies investing in the U.S. will flow to China is simply wrong. Indeed, the assertion that the CHIPS Act would benefit Chinese industrial objectives is fanciful, at best.

Over the next several years, U.S. and allied semiconductor companies will get subsidies to build fabs outside of China. Europe is rapidly moving ahead with its own CHIPS Act, while a number of additional European countries including Germany, France, Italy, and Spain are developing further semiconductor incentive packages beyond the EU-wide CHIPS Act. Elsewhere, Japan has already approved its semiconductor fab incentive package. Koreaand Taiwan are doing this same. The only question is whether America will respond through the CHIPS Act to ensure that a significant share of that new production is on American shores. Because the industry is global, building fabs outside of China, even with incentives, will mean fewer, not more fabs inside of China, because building them there would make less economic sense.

In addition, the entire reason for the CHIPS Act is that it costs more to build fabs in the United States, especially when considering the subsidies other nations give. In fact, the Boston Consulting Group has found the 10-year total cost of ownership (TCO) of U.S.-based semiconductor fabs is 25 to 50 percent higher than in other locations, with government incentives in those countries accounting for 40 to 70 percent of the U.S. TCO gap. Foreign government incentives that reduce up-front capital expenditures for land, construction, and equipment may offset 15 to 40 percent of the gross TCO of a new fab (pre-incentives), depending on the country. So passing the CHIPS Act will not provide a capital windfall to companies investing in the United States that they can then use to invest in China. At best, they would break even compared to investing outside the United States.

Moreover, when Lohman calls for a requirement in the CHIPS Act to prohibit any company from receiving incentives from investing in China, he is dooming the bill to irrelevance. No foreign company would accept these terms, for the simple reason that they can get just as good a deal, or better, from other nations, without the restrictions. The United States might have been big enough and powerful enough two decades ago to be able to imposes its will on the rest of the world with these kinds of restrictions. Today it no longer is. The sooner U.S. policymakers accept this reality that the U.S. must compete equally hard as other nations, the better off America will be.

Lohman’s logic gets even more convoluted when he writes that U.S. semiconductor companies have no interest in “constraining future competition from China.” I thought Heritage supported capitalism. In capitalism, management must respond to shareholders, whose main interest is to maximize profits. And a sure way to do that is to try to beat their competitors. But for some unexplained reason Lohman does not think that U.S. semiconductor firms are interested in beating their competitors.

Finally, Lohman channels free-market populism when he writes these are “rich tech companies that already have market incentives for diversifying out of China.” First, this misses the point. Given that China’s national and provincial semiconductor subsidies amount to around three times more than the proposed CHIPS Act, exactly where is the incentive for foreign chip companies to get out of China? Second, even if semiconductor companies want to get out of China, why, in the absence of incentives, would they place that investment in the United States when other allied nations are bidding for their business?

Finally, he repeats tired nostrums that the only way to beat China is to double down on the U.S. government doing nothing, which has worked well if the goal was to radically shrink domestic chip production. Even worse, he attempts to rewrite the history of the Reagan administration, implying that President Reagan rejected an active role for the federal government to support a strong, technologically competitive U.S. economy. In fact, while Reagan supported free markets, he more strongly supported U.S. advanced technology competitiveness and overall global military and economic leadership. That is why the President established his National Commission on Industrial Competitiveness, supported the public-private consortium Sematech, signed legislation establishing the R&D tax credit, and negotiated voluntary import limits on Japanese memory chips being sold below cost in the U.S. market. Reagan was a pragmatist who put American leadership about ideology.

Rather than hide the ball and proffer illogical complaints about CHIPS, Heritage should just admit that it buys into the notion “potato chips, computer chips, what’s the difference?” If Congress agrees, they shouldn’t pass CHIPS. But if they disagree and think that U.S. semiconductor production capabilities are critical to America’s future then they should pass and fully CHIPS.

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