The United States Innovation and Competition Act (USICA) is not vital to outrunning China. Depending on the conditions attached to research and semiconductor subsidies, it may not help at all. Congressional proponents, the companies and institutes eyeing federal funds, much of the media, and critics of Mitch McConnell exaggerate the bill’s value. If it passes, we’ll still need broad China legislation in 2023 to get American policy where it should be.

The best part of USICA is the original, bipartisan proposal to increase support for basic research. This is a legitimate function of the federal government, and it’s an important part of economic and possibly military competition. There must be restrictions on recipients of federal funds sharing research with Chinese counterparts, or American taxpayers will fund the PRC’s technological progress.

The need for such restrictions doubles up in the other popular element of USICA—subsidizing semiconductor output (originally the CHIPS for America Act). The subsidies could be long-term protection from another semiconductor supply shock, like the one helping cause car shortages for going on a year.

They could be protection but probably won’t be, because the
chips subsidies don’t address the supply chain. The public text, at least,
mentions supply chains only twice, with no requirements they be secured in any
way. The plants may get built yet rely on materials from overseas and possibly
even packaging services in China, because those are cheaper and Congress has
not emphasized supply chain resilience.

Then, when global production inputs are interrupted again,
we’ll get idle plants, the same car shortages, and $52 billion down the drain.
The obviously better step would be supporting all stages of the semiconductor
supply chain in the US, not just focusing on final output. Unfortunately, it’s
not hard to imagine the reason why money going to huge chip makers
is seen as vital and the supply chain isn’t.

A second justification for subsidies is they are necessary to outperform China. It’s true that resilient chip supply, which the PRC doesn’t have, would be a major American advantage. This can’t happen, though, without provisions to secure the supply chain. A less important but more irritating problem is the firms insisting on subsidies aren’t actually interested in helping the US.

Potential subsidies recipients have lobbied intensely for the bill to allow them to take taxpayer money, then choose to ramp up investment in semiconductor output in China more than here. Congress may be jumping on a treadmill where Beijing of course hikes its own subsidies and chip makers consequently demand more funds or they will be “forced” to favor production in the PRC (some might call this extortion).

So do nothing? No. If semiconductors are important enough for government intervention, and advanced semiconductors are, Congress should act, but not tilted in favor of a handful of large firms. The national interest is in the full supply chain, not unsecured final output. This means no unreliable participants, ruling out China, among others. This is not easy, and will certainly not be accomplished by CHIPS as it is.

The Department of Commerce isn’t helping. While Secretary Raimondo constantly endorses subsidies, Commerce has fought tooth and nail to ensure American firms can transfer semiconductor technology to the PRC, most recently saying there should be no such thing as the foundational technology controls Congress mandated in 2018. We must have subsidies to compete, but we also must keep helping China compete?

The Department of the Treasury chips in contributes by declining to publish the share of technology in US portfolio investment in China, which soared $780 billion 2017–20. Treasury has worked to block investment restrictions which might protect our semiconductor supply chain.The Biden administration repeatedly calls for greater oversight of outbound investment, as if it is someone else who controls the oversight.

More research is worthwhile and chips subsidies could be with the right provisions, but serious legislation would halt US investment in the Chinese chip makers we’re supposedly scared of. It would block transactions with firms benefiting from stolen intellectual property, such as that generated by new federally-funded research. It would cut China out of supply chains for truly critical goods. Maybe next year.

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