Biden’s Semiconductor Plan uses state aid to change corporate behavior

WASHINGTON – President Biden’s plan to pour billions of dollars into semiconductor manufacturing represents a sharp turn in American economic policy aimed at countering China by building a single, crucial industry. But Mr. Biden goes even further. He uses the money to change how companies behave.

If semiconductor makers want some of the nearly $40 billion in aid that Mr. Biden’s administration began distributing on Tuesday, they must provide childcare for employees, run their plants on low-emission energy sources and pay union wages for construction workers, avoid share buybacks and potentially share certain profits with the government.

This decision is a bet on the federal government’s power to transform private industry. But it’s also a clear break with the way the United States has traditionally treated American businesses. The president is essentially merging disparate policy goals into a large spending bill that has been sold as an attempt to secure a supply of semiconductors vital to the economy and national security.

The approach could amplify the impact of the CHIPS Act and other economic legislation Mr. Biden has signed into law over the past two years by hitting multiple goals at once. Government officials say the money and policies will move American industry toward Mr. Biden’s vision of an economy with more US manufacturing, better conditions for workers and fewer emissions from fossil fuels that drive climate change.

But in testing the limits of a new industrial policy, the strategy can also harbor significant risks. Some economists, even some who advocate solid federal spending to bolster strategic industries, say Mr. Biden risks drowning his key economic goals.

“Everyone recognizes what we’re trying to do here, trying to build a larger, more globally competitive U.S. semiconductor industry, is a difficult challenge,” said Adam Ozimek, chief economist at the Economic Innovation Group, a nonpartisan think tank in Washington. “We’re making this challenge a lot harder by trying to do another dozen unrelated things at once.

“Advocates of industrial policy should worry that not only will this fail, but it will also discredit industrial policy for a generation,” Mr Ozimek said.

Biden officials say they are not asking companies to do anything outside of their own commercial interests and the steps they are taking are not intended to be punitive. They are encouraged by the amount of money they have to spend and confident that the companies will accept it with the strings attached. If anything, these officials are essentially saying they don’t unduly burden companies; You help them do what is necessary to attract workers and avoid wasting federal money.

In an interview, Commerce Secretary Gina Raimondo repeatedly identified lack of access to childcare as an economic problem and a key factor in the labor shortages that American manufacturers often complain about. The ingrained bias against working women has prevented companies and the government from tackling this issue in a way that has hurt businesses, she said.

“I challenge them to pay attention because I know that’s what they need to be successful,” Ms. Raimondo said.

Ms. Raimondo has outlined the financial rules for companies accepting federal funds to ensure taxpayers’ money is not wasted. Requiring companies to share some unexpected profit benefits with the government will encourage companies to be accurate and honest with their financial projections so the department can send dollars where they’re needed most. The restrictions on share buybacks will prevent taxpayers’ money from enriching the company’s shareholders and directors, administration officials say.

But after reviewing the rules, industry lobbyists and some economists said they feared companies would be forced to divert money from the new law’s key goals. Several complained that administration officials failed to tie the CHIPS funding announcements to efforts to shrink, not expand, environmental and other government regulations on construction projects.

“We should be focused on removing regulatory roadblocks – particularly in the permitting space – and we must be cautious about adding additional new requirements that will only increase costs and delay the start of production,” said Neil Bradley, executive vice president at the US Chamber of Commerce, a leading business organization in Washington.

And some Republicans in Congress accused the administration of undermining the bill’s intent by attempting to impose liberal priorities on companies competing for subsidies.

Oklahoma Representative Frank D. Lucas, who chairs the Science, Space and Technology Committee, said the government had been “adamant” that the United States had to incentivize chip production or companies would choose to invest in build other countries that offer more attractive policies.

“So it’s worrying that now that the government has the requested $52 billion in funding,” Lucas said, “it’s focusing less on the urgent need for chip production and more on imposing its work agenda on this critical industry.”

For some foreign chipmakers, investing in the United States is already raising concerns about high costs and management challenges. And other countries have continued to aggressively subsidize their own chip fabs, offering a potentially attractive alternative to investing in the United States.

Economists largely agree that both the scale and practices of Mr. Biden’s industrial policies are indicative of how dramatically Washington’s thinking about government’s role in the economy has changed.

A key reason for this shift is what is happening in East Asia, particularly China, where governments have often resorted to state subsidies to prop up industries and capture global market share. Since American researchers invented the integrated circuit in the 1950s, Taiwan, South Korea, China, Israel and other countries have invested heavily in chips and helped move manufacturing out of the United States.

The US share of global chip production has now shrunk to just 12 percent. American companies still design many of the world’s most advanced chips; They only make them abroad.

The shortage of chips and other critical products in the pandemic has helped underscore the country’s dependence on foreign factories. More broadly, US dependence on China for key products such as electric vehicles, solar panels, steel and rare earth metals has helped turn the tide in Washington towards more interventionist economic policies and dampened concerns about government intervention in the markets.

Both political parties are now largely behind the use of industrial policy to counter China’s economic dominance. Members of the Trump and Biden administrations, as well as Democratic and Republican lawmakers, helped draft the CHIPS and Science Act, which Congress passed by a wide margin last summer.

The draft law contained several tough provisions for companies receiving subsidies, including a ban on using state funds for share buybacks and dividends and a ten-year limit on investments in cutting-edge chip facilities in China. The bill also encouraged companies to offer workforce training initiatives and to associate with unions and educational institutions.

The Biden administration seems confident that the $52 billion it is offering to chipmakers, suppliers and research institutions is a large enough incentive for companies to squash any corporate grievances about government efforts to influence their behavior. Officials note that some chipmakers are already meeting some of the needs in other locations: Taiwan Semiconductor Manufacturing Company, which is building a new facility in Arizona, is offering child care at several of its Taiwan plants. Chipmakers operating in other countries, such as China, may need to make significant efforts to support government initiatives or national security goals.

Business leaders have privately grumbled about the restrictions, but most continue to publicly praise the program. Most major semiconductor manufacturers have already laid the groundwork for expensive new US plants. Since the beginning of 2020, companies have committed nearly $200 billion to US chip manufacturing projects, many pending funding.

One of those companies, Intel, said in a press release Tuesday that the CHIPS guidelines released by the Department of Commerce “represent an important step for American semiconductor companies to compete globally and would help restore balance to the global chip manufacturing industry.” The Semiconductor Industry Association said it was “carefully reviewing” the rules, but welcomed the Commerce Department’s moves to kick-start the program.

Clyde V. Prestowitz Jr., a former trade official and labor economist who has championed industrial policy, said he understands the Biden administration’s goals of maximizing the program’s benefits to the public rather than the company’s shareholders.

“The policy is designed to ensure safety and increase the well-being of all Americans,” he said. “It’s not meant to be a special gift to the semiconductor companies.”