What’s in the CHIPS Act, Aimed at Childcare Expansion and National Security

The Biden administration unveiled rules Tuesday for its “Chips for America” program to build up semiconductor research and manufacturing in the United States, beginning a new rush toward federal funding in the sector.

The Commerce Department has $50 billion to hand out in the form of direct funding, federal loans and loan guarantees. It is one of the largest federal investments in a single industry in decades and highlights deepening concern in Washington about America’s dependence on foreign chips.

Given the huge cost of building highly advanced semiconductor facilities, the funding could go fast, and competition for the money has been intense.

Here’s a look at the CHIPS and Science Act, what it aims to do and how it will work.

Funding chip production and research

The largest portion of the money— $39 billion — will go to fund the construction of new and expanded manufacturing facilities. Another $11 billion will be distributed later this year to support research into new chip technologies.

The bulk of the manufacturing money is likely to go to a few companies that produce the world’s most advanced semiconductors — including Taiwan Semiconductor Manufacturing Company, Samsung Electronics, Micron Technology and, perhaps in the future, Intel — to help them build U.S. facilities.

Some will go to makers of older chips that are still essential for cars, appliances and weapons, as well as suppliers of raw materials for the industry and companies that package the chips into their final products.

While some critics have questioned the wisdom of giving grants to a profitable industry, semiconductor executives argue that they have little incentive to invest in the United States, given the higher costs of workers and running a factory.

The administration does not plan to fund entire projects: Biden administration officials say they plan to offer grants of between 5 to 15 percent of a company’s capital expenditures for a project, with funding not expected to exceed 35 percent of the cost. Companies can also apply for a tax credit reimbursing them for 25 percent of project construction.

Limiting foreign dependence

Gina Raimondo, the secretary of commerce, describes the program as foremost a national security initiative.

While the United States is still a leader in designing chips, most manufacturing has been sent offshore. Today, more than 90 percent of the most technologically advanced chips, which are critical for the U.S. military and the economy, are produced in Taiwan. That has prompted concerns about the supply’s vulnerability, given China’s aggression toward Taiwan and the potential for a military invasion of the island.

At the same time, China has increased its market share in less advanced chips that are still critical for cars, electronics and other products. The United States manufactures 12 percent of chips, though none of the world’s most advanced.

Chip shortages during the pandemic forced factories to halt work and brought home in a tangible way how vulnerable the supply chain is to disruption. Workers at Ford Motor factories in Michigan and Indiana worked a full week just three times last year because of a chips shortage, Ms. Raimondo said in a speech at Georgetown University last week. That helped create a car shortage and raise the price of cars, stoking inflation.

The Commerce Department says the program will also provide the Department of Defense and the national security community with a domestic source of the world’s most advanced chips.

Building chip hubs

According to Ms. Raimondo, the goal is to build at least two U.S. manufacturing clusters to produce the most advanced types of logic chips, as well as facilities for other kinds of chips, and complex supply networks to support them.

Commerce officials have declined to speculate where these facilities might be, saying they must review applications. But chip makers have already announced billions of dollars in plans for new investments around the United States.

TSMC, which produces most of the world’s leading-edge chips, has been busy expanding in Arizona, while No. 2 Samsung is growing in Texas. Micron, which makes advanced memory chips, has announced big expansion plans in New York. And Intel, a U.S. technology giant that is investing heavily to try to capture a technological edge, has broken ground on a “megasite” in Ohio.

Ms. Raimondo has said the vision is to restore the United States to a position of leadership in semiconductor technology, to the point where every major global chip company wants to have both research and manufacturing facilities in the United States.

Still, there is skepticism about how much the program can do. One 2020 study, for example, found that a $50 billion investment in the industry would increase U.S. market share only to 14 percent.

Protecting taxpayer funds

The stakes are high for the Biden administration to prove this foray into industrial policy can work. Critics have argued that the federal government may not be the best judge of winners and losers. If the administration gets it wrong, it could face intense criticism.

The Commerce Department said it would look closely at companies that applied for funding, to try to ensure that they were not being given more taxpayer dollars than they needed.

In a decision that may irk some companies, the department said projects receiving grants would be required to share a portion of any unanticipated profits with the federal government, to ensure that companies gave accurate financial projections and didn’t exaggerate costs to get bigger awards.

The Commerce Department also said it would dole out funding over time as companies hit project milestones, and give preference to those that pledged to refrain from stock buybacks, which tend to enrich shareholders and corporate executives by increasing a company’s share price.

Companies are also barred from making new, high-tech investments in China or other “countries of concern” for at least a decade, to try to ensure that taxpayer money does not go to fund new operations in China.

But analysts said it remained to be seen how difficult it would be to enforce these provisions. Company finances can be opaque, and when a company saves a dollar in the United States, it may then choose to invest it elsewhere.

Helping workers by attaching big strings

The program also includes some ambitious and unusual requirements aimed at benefiting the people who will staff semiconductor facilities.

For one, the department will require companies seeking awards of $150 million or more to guarantee affordable, high-quality child care for plant construction workers and operators. This could include building company child care centers near construction sites or new plants, paying local child care providers to add capacity at an affordable cost or directly subsidizing workers’ care costs. Ms. Raimondo has said child care will draw more people into the work force, when many businesses are struggling in a tight labor market.

Applicants are also required to detail their engagement with labor unions, schools and work force education programs, with preference given to projects that benefit communities and workers.

Other provisions will encourage companies, universities and other parties to offer more training for workers, both in advanced sciences and in skills like welding. The department said it would give preference to projects for which state and local governments were providing incentives with “spillover” benefits for communities, like work force training, education investment or infrastructure construction.

This is part of the Biden administration’s “worker-centered” approach to economic policy, which seeks to use the might of the federal government to benefit workers. But some critics say it could put the program’s goal of building the most advanced semiconductor factories at risk, if it adds excessive costs to new projects.