The United States Innovation and Competition Act and the Return of US Industrial Policy

The US government just got one step closer to passing its largest piece of industrial policy since the Cold War. And like the industrial policies of the Cold War era, this piece of legislation was crafted with a major geopolitical competitor in mind.

On June 8, the US Senate overwhelmingly passed S.1260, or the United States Innovation and Competition Act of 2021, with a margin of 68-32. The Bill received significant bipartisan support, a rarity for large investment packages in contemporary US politics. As many as 19 Senate Republicans, including Senate Minority Leader Mitch McConnell, joined Democrats in voting for the Bill. Democratic presidential candidate Bernie Sanders, an independent, notably voted against the Bill. This uncanny episode of bipartisanship speaks to the growing sense of threat stemming from China and the widening consensus that a robust and secure domestic technology industry is foundational to curbing that threat.

The Bill calls for significant investments in America’s technology industry, including $52 billion in subsidies for semiconductor manufacturers, to combat perceived threats from China and to secure the industry from future shortages and disruptions. The ongoing chip shortage, market dominance of chip manufacturers TSMC (Taiwan based) and Samsung (South Korea based) over cutting-edge processes, and massive Chinese investment in semiconductor technology to reach self-sufficiency, all contributed to a sense among legislators that the US government must boost America’s domestic production of semiconductors to avoid overreliance on a geographically consolidated supply chain. New foundries are already underway, with Intel investing $20 billion to construct two new units in Arizona and TSMC breaking ground in the same state for a $12-billion foundry, with more potentially on the way. Meanwhile, Samsung is reportedly considering construction of a $17-billion foundry in Texas. These developments are a good start, but the US will have to start issuing subsidies fast if it wants to attract more cutting-edge production facilities – the cost of production for TSMC in the US is reportedly two to three times more than in Taiwan.

However, the Bill still has some distance to cover before it becomes law, and chip manufacturers like TSMC may have to wait for subsidies in the meantime. The Bill must pass through the House of Representatives, where it is likely to face challenges over subsidies to big technology companies at a time when this industry is being heavily scrutinized by both Democrats and Republicans. Additionally, out of fear that sensitive information could end up in Chinese hands, House Republicans are likely to question whether foreign firms with connections to China should be eligible for subsidies (TSMC and Samsung both have production facilities in China). Throughout this process, the Bill is likely to pick up new amendments, just like it did in the Senate, which will then have to be agreed upon by both the Senate and House before reaching the President’s desk.

The subsidies provided in this Bill are a good idea – both the US and the global economy would benefit from having a more robust and geographically diversified supply of cutting-edge chips. The current supply chain is too consolidated and incidents in one locale have an outsized influence on the globe, demonstrated by the impact of the Texas snowstorm on production at a foundry, as well as fears that low water levels may impact production in Taiwan.

The political posturing, however, is risky. The possibility of China cornering the semiconductor industry is far from imminent – the country remains a major importer of chips, signaling that it will be quite some time until it is self-sufficient, especially on leading-edge chips. Instead, political theatrics threaten to escalate tensions between the world’s two largest economies and place significant pressure on trading partners to choose sides.

The post-war geopolitical order was built on the liberal idea that economically interdependent states are less likely to wage war on one another. If the United States and China are serious about avoiding confrontation in the future, they must ratchet down the rhetoric, work towards ironing out genuine grievances on issues such as theft of intellectual property, and avoid decoupling their economies, especially on strategically vital resources like semiconductors. Self-sufficiency for these resources does not guarantee security; rather, it makes the possibility of confrontation more feasible, as the costs of engagement are not as severe. The two countries should work towards creating a more resilient, interdependent and geographically diverse supply chain for semiconductors, which will mitigate risks the world over.