State Department Needs to Spend Its CHIPS Fund Wisely

Amid the flurry of recent legislative and executive actions to promote and protect U.S. technological advantage is a little-noted provision of the CHIPS and Science Act, which gives the State Department funding to promote resilient digital infrastructure and technology supply chains globally. This small but significant funding needs to be spent wisely if the United States and its allies are to stay ahead in the global technology competition with China.

In addition to the much discussed $53 billion appropriated for domestic semiconductor production and research, the CHIPS Act assigns $500 million over five years to a new International Technology Security and Innovation (ITSI) Fund. The goal of the fund is to “provide for international information and communications technology [ICT] security and semiconductor supply chain activities, including to support the development and adoption of secure and trusted telecommunications technologies, secure semiconductor supply chains, and other emerging technologies.” The secretary of state has broad authority to allocate ITSI funds and transfer them to accounts within the Department of State, U.S. Agency for International Development (USAID), Export-Import Bank (EXIM), and U.S. International Development Finance Corporation (DFC), as appropriate. The act also requires that these U.S. agencies coordinate with allies and like-minded partners and with private-sector stakeholders.

The act gave the Biden administration little time to come up with a plan for how it plans to spend the first $100 million of the ITSI Fund in the current fiscal year. The State Department must submit to Congress a detailed strategy on programming, projects, and activities within 90 days of the President’s signing of the CHIPS Act on August 9, i.e., by early November. A similar report will need to be submitted as part of the State Department’s annual budget submission for each of the remaining four fiscal years that the ITSI Fund is appropriated.

A $500 million fund is a meaningful addition to the State Department’s assistance arsenal, but it will not go far if not spent wisely. A fund of this size is not going to make much of a contribution to the goal of boosting semiconductor production when a single semiconductor chip fabrication plant, also known as a fab, can run to $10–20 billion. In any case, the CHIPS Act provides sizeable funding to other branches of government, such as the Commerce Department and National Science Foundation, which are better placed to boost domestic manufacturing, research on critical technologies, and development of alternative digital infrastructure solutions. The State Department—along with USAID, DFC, and EXIM—should focus instead on its comparative advantage: supporting projects internationally that boost ICT solutions and innovative capacity in developing countries and strengthen these countries’ policies to protect critical technologies.

In soliciting internal U.S. government proposals for projects worthy of receiving funding allocations in year one, the State Department has reportedly divided projects into three buckets: “semiconductor promote,” “semiconductor protect,” and “secure telecommunications.” In the first of the buckets, the focus should be on raising technology skills and innovative capacity in developing countries. In the second, the U.S. government can offer advice on investment screening laws and procedures, export controls, and other policies, including information security and data protection to ensure that critical technologies do not fall into the wrong hands and that allies and partners’ policies in these areas are aligned. As for the third, telecommunications, the State Department should aim to use targeted government funds and policies to incentivize private funding of digital infrastructure projects and, again, to enhance a common understanding and align policies on secure digital connectivity.

Four principles should guide the State Department’s selection of suitable projects for ITSI Fund support:

  • Developmental benefit: There is a strong demand signal from developing countries for U.S. support to bolster their digital infrastructure and innovative capabilities. Projects that tangibly advance these development objectives should be favored. Other valuable U.S. offerings are workforce training, STEM education, project feasibility studies, and governance and related legal support. Projects should reflect needs on the ground, relying on the information provided by U.S. embassies, private companies, and partner country institutions.
  • Focus and impact: The amount of money in the ITSI fund is a fraction of what it will take to achieve the ambitious goals of the CHIPS Act. Rather than spreading the funding across dozens of countries and projects, the State Department should pick 1–2 representative projects in each of three target regions: the Indo-Pacific, Africa, and Latin America. A concentrated effort on half a dozen projects where U.S. support can have a measurable impact will create a proof of concept that can later be scaled through further U.S., allied partner, and private-sector funding.
  • Division of labor with partners: The United States cannot build out secure global semiconductor supply chains or digital infrastructure alone; it will need support from key allies and partners, particularly in Asia and Europe. An array of bilateral and plurilateral forums—the G7, the U.S.-EU Trade and Technology Council (TTC), the Quad, Partnership for Global Investment and Infrastructure (PGII)—have established similar objectives to those of the ITSI Fund. The State Department should work with the White House and other agencies to use these forums to encourage U.S. partners to step up their financial and policy support and to coordinate efforts so that partners play to their comparative advantages and avoid duplication of effort.
  • Flexibility: The State Department and its partners should embrace the ability to fail—not all projects can be successes. There is a myriad of reasons why a project can fail: local governance issues; health, climate, or other natural disruptions; lack of local private sector capacity; or inability of the recipient country to absorb the type of assistance given. The United States should also see where others have succeeded, including China, and where they have failed to help shape the approach to the ITSI fund. There should be a degree of flexibility and a mechanism to quickly evaluate why a project failed, determine if it was unique to this project or country, and if there is a way to pivot and scale elsewhere. The metric for success is not return on the dollar but displacing Chinese influence.

Again, the State Department’s new ITSI Fund is significant but not sufficient to take on the challenge of global competition in critical technologies and digital infrastructure. The United States will have to make many other investments to rebuild its innovative capacity at home and coordinate with allies and partners to promote the technological solutions and standards globally that they prefer. But with smart economic statecraft, the State Department can effectively leverage the limited funds it has been charged to deploy.

Erin Murphy is senior fellow and deputy director of the Economics Program at the Center for Strategic and International Studies in Washington, D.C. Matthew P. Goodman is senior vice president with the CSIS Economics Program. James Andrew Lewis is senior vice president and director of the CSIS Strategic Technologies Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2022 by the Center for Strategic and International Studies. All rights reserved.

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Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics
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James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program