The United States Innovation and Competition Act (USICA) passed the Senate last year. The House equivalent, the America COMPETES Act, was introduced Tuesday and may pass next week. They have been identified as China bills, aimed at increasing economic competitiveness versus the PRC. But if the final, reconciled version does not include proper protections, it will actually help China, possibly a great deal.

The core of USICA is more federal money for research. This is a sound reason for government spending, but federal research to maintain America’s innovation edge over China should not be shared with China. Academic and other recipients of support should be restricted in direct and indirect interactions with Chinese counterparts. If this is unacceptable, they are free to decline funding.

The House bill currently sidesteps this problem by not including research funds, a large gap to be overcome. It does include another USICA component: subsidies to build semiconductor plants in the US. This idea is naturally popular among those whose states or districts would gain from the plants, while others worry about the precedent of costly federal intervention picking winners and harming more innovative companies.

If subsidies are at all acceptable, semiconductors are a good candidate, in part because they are used in military and dual-use equipment. For that same reason, the US should go to great lengths not to assist Chinese semiconductor development. Helping China in chips, of all things, mocks the idea that we are competing, as both bills and the Biden administration claim.

Three “guardrails” should accompany chip and any other subsidies.
The first may be a surprise: tighter export controls. The Congress, by overwhelming majorities, tried to tighten export controls in
summer 2018. The Department of Commerce hasn’t acted once to control
foundational technologies, a key concept from the law, for
which semiconductors are the poster child. Congress can bolster
subsidies by linking them to tighter semiconductor export controls, remedying
part of the Department of Commerce’s dereliction of duty.

An obvious guardrail concerns outbound investment, especially in technology. American investment in Chinese stocks and bonds hit $1.15 trillion at the end of 2020. While much of that may not be a concern, it is clearly a concern if chip companies take subsidies to expand capacity in the US then also expand capacity in China. That would be companies playing Congress and preventing gains in American capability versus the PRC.

Related is overdue action to ensure key American supply chains can’t be intentionally or unintentionally disrupted by China. The bipartisan National Critical Capabilities Defense Act, part of America COMPETES in the House and introduced separately in the Senate, aims at identifying and protecting critical chains, extending to the human capital and intellectual property involved. It includes a review for outbound investment that may move supply chains to countries of concern.

If a supply chain guardrail is not in the final bill, it will help China. It would be especially foolish if subsidies are included without supply chain protections. Just one example: The new American chip plants being created will be part of a supply chain. The PRC’s clear pattern is subsidizing its way into chains, here most likely at the packaging stage, which would give Beijing some control over US supply. Supporting American firms can’t include giving China a greater supply chain role.

Parts of the business community will intensely oppose
such protections. Their opposition can border on anti-American. If that sounds
extreme, clamoring for government assistance with no protection of the national
interest makes clear the intent of many firms: take money available to “compete
with China” and immediately seek more profit in China. No defense of critical
capabilities, chips not just for America, and research that also improves the
PRC’s innovation and competitiveness.

No company or university is required to participate in these programs. If a firm must expand its China business further, it is dependent and can be coerced by Beijing. This is a situation the US should try to end, not help maintain. Business has no ground to stand on here, and if members of Congress claim to be tough on China but just engage in handouts, they will harm all of us.

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