The CHIPS and Science Act Guardrails’ Implications for the U.S. Trade Agenda
The CHIPS and Science Act invests $280 billion to strengthen the United States’ semiconductor capabilities, bolster research and development efforts, and develop a highly skilled STEM workforce. The economic benefits of the act are evident—however, the legislation is also part of a greater strategic push to ensure the United States stays ahead of China in the advanced technologies realm, starting with semiconductors. In that spirit, the CHIPS Act includes a “guardrails” provision, the specific rules for which were proposed by the Department of Commerce in late March. The guardrails provision aims to restrict the funds from the CHIPS and Science Act from bolstering enterprises posing a threat to the United States, and constitutes another sign that policymakers increasingly view economic policy and national security as interrelated.
Q1: What is the content of the CHIPS guardrails?
A1: According to the Department of Commerce, the CHIPS guardrails are intended to guarantee that the act’s funding is not used to contravene U.S. national security interests. To that end, the U.S. government aims to ensure that any entity receiving CHIPS Act funding enters into an agreement that it will not engage in any “significant transaction” to facilitate a “material expansion of semiconductor manufacturing” in foreign countries of concern. These countries of concern are defined in the legislation as China, North Korea, Russia, and Iran. However, in consultation with the secretaries of defense and state as well as the director of national intelligence, the secretary of commerce can determine if other states fit into that category.
While legacy chips are not included in the “significant transaction” definition, thus excluding 28-nanometer (nm) logic chips or older or memory semiconductors with a half-pitch greater than 18 nm, the Department of Commerce’s proposed rule released last month also states that chips regarded as critical to national security are not considered legacy chips. The list of such chips, developed in coordination with the Department of Defense and the Intelligence Community, includes “current-generation and mature-node chips . . . for other specialized military capabilities.” The definition of a “covered entity” receiving CHIPS funding is also broad, as it includes nonprofits, private enterprises, as well as public-private entities or any “affiliated groups” with a “demonstrated ability to substantially finance, construct, expand, or modernize a facility” related to the “fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”
The Commerce Department’s interpretation of the CHIPS guardrails builds upon rules outlined in the October 7 semiconductor export controls. The October controls focus on chokepoints associated with, for instance, artificial intelligence chip designs, electronic design automation software, semiconductor manufacturing equipment, and equipment components. They do so by adding these items to the Commerce Control List of the Export Administration Regulations (EAR), as well as novel licensing requirements for use in supercomputers and chips production, in addition to restricting U.S. persons from engaging in activities to produce integrated circuits and broadening the range of items being “subject to the EAR” under the foreign direct product rules (FDPR). The National Institute of Standards and Technology (NIST) stated that the CHIPS guardrails are more stringent than the October 7 controls on advanced semiconductors, which already constituted a sea change in U.S. policy According to NIST, the Department of Commerce’s proposed CHIPS implementation rule not only “align[s] prohibited technology thresholds for memory chips” between export controls and CHIPS guardrails but also applies a more restrictive baseline for logic chips.
Q2: What do the CHIPS guardrails say about the Biden administration’s trade and economic agenda?
A2: Increasing diversification of supply and reducing dependencies fit the new narrative that economic security is indistinguishable from national security. One of the novel aspects of the CHIPS guardrails is that they bring Congress into the equation by enshrining advanced technology controls in legislation, rather than working through executive action. The guardrails are in line with the new national security doctrine regarding the United States’ strategy toward China and emerging technologies. National Security Advisor Jake Sullivan stated that “given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.” The CHIPS guardrails effectively follow that shift of doing away with the sliding scale approach to export controls, which argues the United States only needs to stay a couple of generations ahead of competitors, opting instead for a broader strategic degrading of China’s capabilities. In light of the People’s Republic of China’s (PRC) technology acquisition policies for military end-uses, including advanced semiconductors, the United States government has accelerated the infusion of national security considerations into economic and trade policy.
The Biden administration’s National Security Strategy articulates the importance of economic statecraft tools, such as enhanced investment screening and export controls. In a joint letter to Congress ahead of the CHIPS and Science Act’s passage, Secretary of Commerce Gina Raimondo and Secretary of Defense Lloyd Austin emphasized how semiconductors were ground zero in the U.S.-China technological competition given their capacity to drive innovation in emerging technologies and their national security implications—advocating both for heavy subsidies as well as robust guardrails to curb China’s access to any funding. However, the growing link between trade and national security, bringing export controls closer to the center of U.S. foreign policy, predates the current administration. The Export Control Reform Act (ECRA) of 2018, for instance, renewed the president’s authority to control dual-use exports for national security purposes and mandated agencies to identify emerging and foundational technologies that do not fit into traditional export control categories.
Q3: Can the United States promote a multilateral export controls agenda with its trade allies and partners while pursuing industrial policy?
A3: The United States’ significant subsidy programs through landmark pieces of legislation such as the Inflation Reduction Act (IRA) and the CHIPS and Science Act have strained its trade partnerships. Dutch trade minister Liesje Schreinmacher described the IRA as “very worrying” and the German finance minister Christian Lindner decried it as “enormously protectionist.” Likewise, French president Emmanuel Macron expressed concerns that the United States’ subsidy programs could hurt the transatlantic relationship by favoring domestic industries, including the U.S. semiconductor sector. While the United States seems to be addressing some of the most prominent issues raised by its trading partners, such as the EV battery minerals tax credit, the Biden administration’s turn toward a new era of U.S. industrial policy has harmed its relationships with potential export controls allies.
Nevertheless, U.S. authorities have been able to score some big wins in the multilateral export controls realm. The administration recently secured deals with the Netherlands and Japan to join its October 7 controls. Both countries had criticized the perceived unfair advantage provided to U.S. companies by the IRA and CHIPS packages, showing that the diplomatic fallout caused by U.S. industrial policies may not deter allies from joining in U.S.-led multilateral export controls.
The past year has presented an extraordinary array of security challenges that may have forced U.S. allies’ hands. China’s financial backing of the Russian war effort through hydrocarbons imports, as well as Western worries that the PRC may be providing lethal aid for the Ukraine invasion, have pushed U.S. allies to set aside ongoing trade disputes to effectively deny China its technological innovation tools. Japan and the Netherlands’ cooperation are an early example that European attitudes toward the PRC are evolving, and they increasingly align with the United States on regarding China as a source of future economic and security challenges. The United States would likely make more progress toward a common approach on national security if it did more to ensure its industrial policy also aligns with its allies. Some of the most evident ways to do so would be, for example, to avoid the kind of domestic content requirements that caused the most stringent rebukes from its allies.
William A. Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Thibault Denamiel is an intern with the Scholl Chair at CSIS.