Judge the CHIPs Act as defense policy, not industrial policy

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The United States faces a forbidding global landscape. Russia’s rebuilt war machine assaults Ukraine, while Communist China looms over our Asian allies. China’s military expansion threatens our security, and its predatory trade practices and intellectual property theft hurt our economy. Amidst these challenges, one technology — semiconductors — is critical to keeping America’s economic and defense edge.

American leaders long have understood that chips are pivotal for our national security. Indeed, securing semiconductor supply chains undergirded President Reagan’s successful pushback against Soviet power in the 1980s.

Reagan’s defense strategy had two parts. The first is well known: massive investment in technologically advanced weapons systems, which forced the Kremlin into a ruinous arms race. The second is less appreciated, but as important: Reagan didn’t merely outspend the Soviets, he also sought to out-innovate them. 

In that, semiconductors were central. Reagan pushed hard to retain our lead in chips, which powered the stealth jets, guided missiles, satellites and other weapons that inflicted unsustainable costs on the Soviets — so that no matter how much Moscow might spend on its military, it could never match America’s advanced weapons. To boost the U.S. chip industry in the face of sliding production, Reagan imposed harsh tariffs on Japan, then the market leader. U.S. pressure led to a 1986 agreement in which Japan agreed to rebalance bilateral trade in chips. Reagan knew that free markets depended on a strong military — and that the military depended on a secure semiconductor supply.

Today, America faces an even starker long-term challenge. The Soviet Union was militarily strong but economically decrepit. China, however, has built a powerful military and a productive, technologically advanced economy. It has mastered key technologies and bestrides global supply chains. In this competition, whoever gains a technological edge will hold a decisive military and economic advantage.

The good news: China is not yet a power player in chipmaking. Unfortunately, America no longer leads, either. Instead, a single company — the Taiwan Semiconductor Manufacturing Corporation (TSMC) — holds a majority of global semiconductor “foundry” capacity.

Taiwan is a close partner of the United States, but it is only 110 miles from the Chinese mainland. The Chinese Communist Party regards Taiwan as a renegade province and has vowed to reclaim it, by force if necessary. A Chinese invasion would remove TSMC’s output from world markets, creating a supply-chain crisis that would dwarf recent disruptions. 

Even worse, if China’s invasion succeeded, it would capture TSMC’s world-leading facilities, giving China control of a vital input for the U.S. economy. Two other advanced chipmaking countries, South Korea and Japan, are also vulnerable to aggression from Beijing.

Fortunately, Congress is poised to act to mitigate this risk. In the CHIPS Act, Congress authorized $52 billion for domestic chip production and research; both the Senate and House have passed versions of the bill, but they need to resolve differences. Much of the funding would support new semiconductor research facilities and fabrication plants in the United States.

Some have opposed the CHIPs Act as industrial policy that will distort markets. We sympathize; the market, not the government, is the most efficient and productive capital allocator. In strictly commercial terms, a more-domestic, more-diversified supply will be less efficient than a supply chain dominated by one hyper-efficient Taiwanese giant. 

Merely as industrial policy, then, the CHIPs Act would be questionable — but as national security policy, it is essential. The United States must not be dependent for a vital military and commercial commodity on a single supplier that could be cut off at any time by the People’s Liberation Army.

There is some good news: experts note that China has struggled to compete in high-end chipmaking. Still, it would be hubris to assume that China can never lead in chips. Chinese leader Xi Jinping has pledged to make China self-sufficient in key technologies, including semiconductors, and is backing that call with vast subsidies.

For that reason, the CHIPs Act is best viewed not as industrial policy, but as part of our full-spectrum competition with China. Even with CHIPs Act subsidies, the market ultimately will decide which U.S. chip producers survive and thrive. But that competition will be possible only if there are enough companies making advanced chips in the United States.

How the Biden administration implements the act will be critical. The Department of Commerce should be careful not to create another concentrated point of failure. Clustering investments in one region would raise the risk of supply-chain disruption from weather events, hostile acts, or some other force majeure. By contrast, multiple, competing regional clusters will disperse risk and create a more dynamic competitive environment. Funding an array of geographically dispersed competitors also will reduce the chance that CHIPs Act funding will entrench politically favored incumbents.

China is using every conceivable tool to overtake us. Semiconductors are at the heart of that competition. If we wish to preserve our freedom and sovereignty, we cannot stay on the sidelines — this race must be run.

William Inboden is executive director of the Clements Center for National Security and associate professor at the LBJ School of Public Affairs, University of Texas at Austin. His previous service includes the State Department and National Security Council in the George W. Bush Administration.

Adam Klein is deputy director of the Strauss Center for International Security and Law, and a faculty member at the University of Texas School of Law, Austin. He previously served as chairman of the U.S. Privacy and Civil Liberties Oversight Board, which oversees U.S. intelligence and homeland security programs.

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