Two Cheers for the New CHIPS and Science Act

On Tuesday, President Joe Biden will sign the CHIPS and Science Act. The $280 billion bill was passed with a solid bipartisan majority in both the House and Senate, which is a rare feat. But these are unusual times: A major shortage of semiconductors that has obstructed industrial production for two years has also underscored the nation’s dire situation regarding the chips that drive everything from cars to ovens to computers. The United States invented the microprocessor only to see its manufacture and development migrate to other nations.

The bill is, on balance, a benefit to the U.S. It is expected to ramp up the production of microchips by providing $52 billion to chip makers and subcontractors to build facilities in the U.S. The majority of the bill’s funding goes toward scientific research.

There are assorted guardrails in the bill to ensure that the semiconductor money only goes to the domestic production of chips. While guardrails tend to be overrun, this is, at least, a start. Without the federal infusion of cash, the U.S. will find it even harder to catch up to Taiwan and China.

Unfortunately, the act that Biden will sign doesn’t curb the tactics that have reduced our ability to produce vital goods.

It’s a familiar story. Manufacturers shutter plants in the U.S. and offshore much of their capacity to one or two locations, creating an extreme concentration of industrial production. When production is that concentrated, supply chains become impossibly fragile, which happens with semiconductors. During the pandemic, much of the used and new car shortages have been semiconductor shortages. Modern cars can have hundreds in a single vehicle; no chips, no car.

In particular, the chip industry, motivated by the goal of returning value to shareholders, took advantage of the liberalization of global trade, which made it easier to move production facilities to a few locations abroad.

Many of these corporations looked for single-source suppliers and employed just-in-time distribution to cut costs, increasing the fragility of the chip supply chain. A new report from the Open Markets Institute points out that a single source dominates critical nodes in the supply chain. (I work at OMI and worked on this report.)

Eighty percent of the coolants needed for the chip industry come from one plant in Belgium and 10 percent from one plant in Italy. Together, China and Taiwan account for at least 66 percent of the chip assembly, test, and packaging (ATP) market. Japan controls 90 percent of the market for photoresists, which create circuit patterns on chips. DuPont, with facilities in Taiwan and Japan, has 78 percent of the market for CMP slurry, which prepares microchips for lithography. The Dutch company ASML has a 90 percent market share in lithography needed for chip making, while 55 percent of the required sputtering process for chips is controlled by one company, JX Nippon, in Japan. NuFlare Technology has 50 percent of the market in electron beam mask writers and has one listed facility in Yokohama, Japan. Mycronic Technologies, based in Sweden, is the sole source supplier of laser mask writers. You get the point.

This dangerous concentration of production doesn’t just exist in the chip sector; it’s also in every other industry the Biden administration has identified as needing a resilient supply chain.

Take pharmaceuticals. In 1984, generic drugs made up 19 percent of prescriptions in the U.S., but by 2019 they accounted for 90 percent. The passage of the Hatch-Waxman Act in 1984 led to this rise in the use of generic drugs by streamlining the regulatory approval process. While the act increased competition and lowered drug prices, corporations such as Pfizer, GlaxoSmithKline, and Novartis moved production to Asia to take advantage of lower operating costs and government support. This shift had such an impact that, until this year, the last major facility that produced active pharmaceutical ingredients in the U.S. was built 30 years ago. Now, China and India produce, by some estimates, 80 percent of the active ingredients used to make generics sold in the U.S.

While the CHIPS Act’s emphasis on domestic production of semiconductors is welcome, Washington should also ensure that chip makers diversify production and suppliers in the U.S. and abroad as a condition for receiving taxpayer funds.

Additionally, restrictions on stock buybacks, executive payouts, mergers, and offshoring should be imposed. Since the 1980s, corporations’ investment in capital expenditures and labor as a percent of profits and debt has declined dramatically. Stock buybacks are reaching record levels, with $319 billion in March alone.Meanwhile, the Chinese semiconductor company SMIC announced last month that it had achieved production of 7nm microchips despite U.S. sanctions against the company. The advanced microchips will be the basis for emerging technology ranging from quantum computing to artificial intelligence. More concerning is that the American manufacturer Intel has yet to introduce 7nm chips. According to reports, SMIC copied the process technology of the Taiwanese manufacturer TSMC, which holds 90 percent of the market share in these advanced chips. So now, only two countries can manufacture 7nm chips, and the U.S. isn’t one of them. That’s why the CHIPS Act is a start—but only a start.