Since 2017 Congress has repeatedly asked the executive to be more decisive in halting economic support of the People’s Republic of China. It failed to happen during the Trump administration and, to date, has failed to happen during the Biden administration. But we may now see a role reversal. Last year, Congress passed the CHIPS Act with inadequate safeguards to keep taxpayer money from benefiting China. The Department of Commerce has taken a step to address that.

Commerce, and the Department of the Treasury, have just requested public comment on the safeguards component of CHIPS implementing regulations. Commerce’s draft safeguards improve on the Act, where some Members of Congress may have rushed to help their constituents while listening a bit too much to major semiconductor-makers eager for subsidies.

To prevent taxpayer money from supporting production in countries of concern, recipients of CHIPS funds can’t invest more than $100,000 to expand single-plant output by more than five (for older chips 10) percent in such countries. Depending on how the market evolves, small facilities could become salient and the $100,000 figure difficult to monitor. A substitute could be a percentage of the funding received through CHIPS, which should be below 1 percent.

An auxiliary restriction concerns permitting investment in older chips if at least 85 percent of ensuing output serves the host market. This level is somewhat arbitrary but the idea is sound. On top of the risk from China making advanced chips, it’s likely that a flood of low-end chip exports will eventually emerge from the PRC, similar to steel, phones, and so on. While this may be unavoidable, the US should not assist in the process.

There are also research safeguards. Restrictions apply to joint research or technology licensing of any scale, if the foreign party is an “entity of concern.” Identifying these draws on existing US government lists, including the largely worthless Entity List. Its use here raises the stakes for designating new foreign entities of concern. This is more of a challenge since the PRC can easily create small entities that are hard to track but can become involved in joint research.

Sadly, there’s also possible gaming on the American side. The CHIPS Act should not be used to retroactively force disinvestment, but new facilities could be created just prior to firms accepting CHIPS money. If this begins to unfold, both the administration and Congress should make clear these firms are making themselves ineligible for taxpayer support. The same applies to a late rush of research projects.

Related, potential funding recipients may seek leverage by calling requirements too onerous for them to participate. Implementation of subsidies is unavoidably flawed, which is a reason to minimize their use. However, making it easier for recipients to expand in countries of concern would be a serious error. If some firms don’t want to participate, fine, others will.

Commerce makes at least one mistake, concerning supply chains. While there are presently only a handful of firms with existing or planned facilities that safeguards apply to, that will change as the PRC’s industry expands. In particular, smaller non-Chinese firms will be offered incentives to help greatly expand and improve China’s chip supply chain. Safeguards will affect more firms as time goes on.

Even if final Commerce regulations are somehow perfect, there’s a potential problem on the Treasury side. The biggest punishment for violating safeguards is recapture of tax benefits received. Treasury’s entirely normal request for comment includes the extent of recapture and business community responses will translate to recapture is bad for America. If enforcement of safeguards lacks teeth, it doesn’t matter how well-designed they are.

Commerce has already been accused of trying to do too much with CHIPS Act money. It will be accused of doing too little (by me) if subsidies focus on final output, thus leading us to produce more yet become dependent on the PRC’s supply chain. But the draft safeguards reduce the odds American money will help build Chinese chips. A win.

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