CHIPS Act distracts from bigger China challenge

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The CHIPS Act that Congress is considering would spend $52 billion to “reshore” computer chip manufacturing to the United States. The Biden administration claims it would “create tens of thousands of good-paying U.S. jobs, support U.S. technological leadership, and promote security and resilience in global semiconductor supply chains.”

Unfortunately, market realities indicate that giving billions to tech manufacturers is unlikely to achieve much of that aforementioned good stuff. Policymakers would be wise to focus more on allowing manufacturers to outcompete our rivals decisively.

When Washington wants to hand out money, a line forms. Today, some chipmakers claim they were considering investing abroad but could be swayed to do so at home. Others are issuing ultimatums that their reshoring requires Congress to greenlight the subsidies. The line includes a $20 billion Ohio plant by Intel, a $12 billion Arizona plant by Taiwan Semiconductor Manufacturing Company, and a $5 billion Texas plant by GlobalWafers, a Taiwanese maker of silicon wafers.

To be fair, reshoring is going to cost U.S. taxpayers. TSMC reportedly asked the U.S. government for “a subsidy to cover the difference in operating costs between the U.S. and Taiwan.” The honesty is almost painful. Location decisions by multinationals are complicated. Evidence overwhelmingly suggests that private firms are best positioned to make these decisions. Socialist countries, including China, regularly allocate taxpayer funds to priority sectors, and their citizens pay dearly for underwhelming results. Subsidizing research and development sometimes can work, but U.S. attempts at industrial policy have mostly failed.

Even if the federal largess isn’t steered toward influential legislators’ districts or swing states, will government officials really dole out $52 billion to the “right” companies? Only 1 in 8 interventions change a company’s location choice. Any resulting new operations would still face deep-rooted issues hindering American manufacturing. Large-scale environmental assessments will be required, but over the years, the costs and delays have become excessive. Recent trends promoting or requiring unionized workers for federal contracts, combined with the current labor shortage, will hinder chipmakers’ ability to find talents and could exacerbate the cost of domestic production.

And then what happens when fluctuating economic conditions lead to a glut of chips?

The worst of the pandemic-related supply chain disruptions appear behind us. Still, manufacturing plants can take years to build. As these plants ramp up production, one can imagine a flurry of complaints about continuing, low-priced foreign competition, legitimate or otherwise. Having already paid upfront, the government will be tempted to protect the new plants — at the expense of U.S. consumers and taxpayers. The computer chip problem will likely resolve over time. The underlying challenges posed by China are here to stay. Instead of giving away $52 billion, why not address why a multibillion-dollar chipmaker doesn’t choose America to begin with?

First, we should streamline regulatory burdens on building manufacturing plants. The Business Roundtable has proposed ways to do that responsibly. Second, stop forcing ties between a subsidized private sector and labor unions. The Justice Department’s multiyear corruption investigation into the United Auto Workers Union should give us reason for pause. Third, scale back on trade policies, especially so-called Section 232 and 301 tariffs, that prevent all U.S. manufacturers from accessing inputs and from competing with China at globally attractive prices.

Countering the China challenge requires an ultracompetitive American manufacturing sector. Handing out $52 billion doesn’t get you there — so why not keep it and put it to better use?

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University and former deputy assistant secretary at the Treasury Department. Weifeng Zhong is a senior research fellow with the Mercatus Center at George Mason University.

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