The CHIPS and Science Act is a revolutionary and important industrial policy. We make targeted investments in critical industries to strengthen America’s manufacturing base, protect our workers, and strengthen America’s national and economic security. It can help reverse the decades-old trend of offshoring jobs and supply chains and contribute to inclusive growth.

The law, signed into law by President Joe Biden after passing both houses of Congress with bipartisan support, has two motivational ideas. The first is the understanding that economic competitiveness, especially in advanced manufacturing, often requires systematic government support. “Public goods” issues are endemic and need support. Second, the perception that the United States lacks reliable access to critical semiconductor manufacturing capacity creates economic and national security risks.

Advanced manufacturing is based on scientific discoveries, transforming those discoveries into prototype products and production processes, appropriate standards and tests to control quality, and a well-trained workforce. Private actors cannot reap the full benefits of investment in these prerequisites, for example by keeping scientific ideas secret or by allowing well-trained workers to take other jobs. The level of private investment for each prerequisite is inadequate, as it is difficult to prevent The CHIPS and Science Act includes initiatives to remedy these market failures and enable U.S. manufacturers to develop technologies and products that would otherwise be out of reach. In addition, it is designed to promote economic development and make access to higher paying employment more inclusive in different regions.

The Act substantively supports basic and applied scientific research in cutting-edge fields such as artificial intelligence, quantum computing, communications, energy and materials science. We fund 20 regional technology centers dedicated to helping companies access discoveries and prototype new products. State governments, universities, and other nonprofits will receive funding to help small businesses upgrade their technological capabilities, expand their manufacturing ecosystems, and create job opportunities. Expand STEM education and lower barriers to hiring and advancing women and minorities. Standards and tests receive much-needed support.

Risks to the economy and national security are also a focus of the law. A continued slowdown in domestic car production due to chip shortages presents an economic risk. National security risks include the need for the Department of Defense to source critical components of defense electronic systems from locations in Asia.

Both risks are substantial given the existing global division of labor in semiconductor production. The United States dominates semiconductor design, but its share of chip manufacturing is relatively small and declining. Taiwan has a dominant position in manufacturing, operating state-of-the-art chip “foundries” that manufacture to customer specifications. Semiconductor assembly, testing and packaging are mainly done by contract manufacturers in Taiwan and China. This means that a key element in the semiconductor supply chain is susceptible to events in other countries and, in the case of Taiwanese and Chinese companies, to interference by the Chinese government.

Foreign government intervention has had a significant impact on the geography of semiconductor production. For example, Taiwan provides subsidies for land, construction and manufacturing equipment, reducing manufacturing costs by 25% to 30%. China gave her $24 billion in subsidies to one of her companies, Yangtze River Storage Technology, and he allocated $100 billion to support 60 new manufacturing facilities.

To change the production map and reduce risk, the law authorizes the Department of Commerce to build, expand, or modernize domestic facilities and equipment for semiconductor manufacturing, assembly and packaging, and research and development. We are authorizing you to provide $100 million in financial support. This support, combined with the statutory investment tax credit of 25%, provides significant incentives to localize and expand manufacturing within the United States. Moreover, if a company invests in advanced production in a country such as China within 10 years, the money and credits will be recouped, so the strategic gains will not be immediately undone.

In short, the CHIPS and Science Act will have very broad and significant benefits. American manufacturing increases productivity and competitiveness. This will create high-paying employment opportunities and broaden access to STEM education, ensuring that these benefits are shared more inclusively. The functioning of the economy is less at risk from unforeseen global events and less dependent on anti-democratic countries. These results are a reminder of the power of well-designed economic policies to improve the lives of all Americans.

Marc Jarsulic is Senior Fellow and Chief Economist of the Center for American Progress (americanprogress.org), a liberal public policy research and advocacy organization in Washington, DC.

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Mark Yarslik





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