The CHIPS for America Act: Why It is Necessary and What It Does

By: Gregory Arcuri

In January of 2021, Congress passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act. This legislation, enacted as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, authorized a series of programs to promote the research, development, and fabrication of semiconductors within the United States.

Ever since the Trump administration’s call for a “whole-of-government" approach to address the United States’ strategic competition with the People’s Republic of China, ensuring U.S. economic competitiveness and dominance in critical technologies has been at the top of the legislative agenda. Specifically, policymakers want to make certain that the United States maintains a robust manufacturing base in strategic industries, protecting high-priority supply chains in the event of international conflict or unforeseen crises like the COVID-19 pandemic.

Semiconductors, or “chips,” the silicon-based computational building blocks for everything from at-home dishwashers to hypersonic guided missiles, have garnered significant attention from lawmakers as a technology warranting significant domestic manufacture.

While the programs under the CHIPS for America Act exist on paper, the NDAA for FY2021 did not allocate funding for any of them. Congress, over a year since the Act’s passing, is yet to agree on a bill that would provide appropriations for the programs’ effectuation despite bipartisan consensus on the need for the expanded domestic manufacture of silicon chips.

So, what problems does the CHIPS for America Act seek to address, what programs does it authorize, and what is preventing Congress from following through with funding?

Status of U.S. Semiconductor Manufacturing
According to the Congressional Research Service (CRS), the United States’ share of global semiconductor fabrication capacity has been on a steady decline for decades, falling from roughly 40% in 1990 to around 12% in 2020. Given the high costs and complexity of chip manufacturing, many U.S. semiconductor firms transitioned to a “fabless” model, maintaining the higher-value design elements for new, more capable chips  while outsourcing their fabrication abroad, primarily to East Asia, which is now home to nearly 80% of global chip fabrication. Some of America’s largest tech firms, including Google, Apple, and Amazon, rely on Taiwan’s TSMC alone for nearly 90% of their chip production.

Even before the COVID-19 pandemic, some U.S. firms complained of difficulties in obtaining semiconductor components while demand for chips continued to rise to accommodate the burgeoning electric vehicle industry and the 5G telecommunications rollout.  Further, amid the strains in international supply chains caused by coronavirus lockdowns and border closures, shortages developed among some types of semiconductors, as producers allocated production to meet growing demands for electronic devices that require more complex, higher-margin chips, leaving more traditional industries such as automobiles with inadequate supply.

Beyond the dislocation for U.S. producers and consumers, policy makers have increasingly recognized the geopolitical and economic risks of the growing concentration of chip fabrication overseas—primarily in Taiwan and Korea. Numerous strategic technologies such as quantum computing and artificial  intelligence rely on advanced semiconductors. Reflecting this reality, the People’s Republic of China has declared self-sufficiency in semiconductor production a national priority. In short, many U.S. policymakers and lawmakers increasingly believe that American economic and strategic competitiveness requires a secure and significant domestic chip fabrication capacity.

What the CHIPS Act Does
Reflecting this emerging consensus, the CHIPS for America Act authorizes several programs to both expand U.S. semiconductor fabrication capacity and to support continued research and development of advanced chips.

Incentives: The Act provides financial assistance for the construction, expansion, or modernization of a semiconductor fabrication plant, or “fab,” in the United States. Section 9902 of the Act allows for private firms and public institutions, or a consortium of both, to submit an application to the Secretary of Commerce for a federal grant not to exceed $3 billion unless approved by the Secretary in consultation with other federal stakeholders. In addition to proving a demonstrated ability to construct, expand, or modernize a new or existing ‘fab,’ applicants must show that they have made commitments to worker and community investment, that they have secured agreements with regional educational entities to provide workforce training, and that they have an executable plan to sustain the fab after federal support ends.

Research and Development: The Act establishes a Multilateral Semiconductors Security Fund, a common funding mechanism among the United States and its international partners to promote the development of “secure semiconductors and secure microelectronic supply chains.”

Domestically, CHIPS for America authorizes the creation of a Subcommittee on Microelectronics Leadership (SML). The Subcommittee, composed of key stakeholders in the President’s cabinet, is tasked with developing a national strategy for the creation of a robust microelectronics industry in the United States and setting research and development priorities for the maintenance of U.S. leadership in advanced chip design and manufacture.

The National Semiconductor Technology Center, a public-private consortium of participating private firms, the Department of Energy, and the National Science Foundation, is responsible for conducting semiconductor research, particularly in prototyping of cutting-edge chips, in accordance with the national strategy developed under the SML.
Finally, the National Institute for Standards and Technology (NIST) will lead a National Advanced Packaging Manufacturing Program, “to strengthen semiconductor advanced test, assembly, and packaging capability in the domestic ecosystem,” and will also conduct its own R&D program similar to the National Semiconductor Technology Center.

Barriers to Passage
As noted earlier, the legislation creating these programs has already been signed into law. However, Congress has not yet reached consensus on a bill that would provide funding for them, despite broad bipartisan support for the CHIPS Act.

In June of 2021, the U.S. Senate passed the United States Innovation and Competition Act (USICA), which appropriates funds to finance the programs outlined in the CHIPS for America Act. USICA includes $39 billion in financial assistance for chip plant construction over five years, and another $11.2 billion for the CHIPS Act research and development activities. Officials argued at the time of its passing that such funding could lead to the construction of 7 to 10 new semiconductor factories in the United States.

USICA is a sweeping piece of legislation which includes a range of initiatives meant to boost innovation within the United States, including investment in regional technology centers across rural and micropolitan America. Despite passing the Senate with a 68-32 vote, Some House Democrats disagreed with portions of the bill dealing with funding for federal research and technological innovation. After a failed attempt to attach USICA to the FY22 National Defense Authorization Act in November 2021, Senate Democrats agreed to wait until 2022 reconcile the bill with their House counterparts.

In late January, House Democrats unveiled their own version of USICA, titled the America COMPETES Act, which includes identical funding for the CHIPS Act ($52 billion) but cuts roughly $200 billion which USICA dedicated towards other programs like regional technology hubs. The bill received praise from Senate Democratic leaders and President Biden, but the America COMPETES Act will still likely face a lengthy reconciliation period as lawmakers deliberate over provisions that the House bill omits.

Funding for the CHIPS for America Act, therefore, remains in legislative limbo as Congress struggles to harmonize a series of measures to support innovation and advanced manufacturing in the United States. However, providing public funding to ensure a more robust semiconductor manufacturing base in the United States commands support from both Republicans and Democrats in the House and Senate, suggesting that its eventual passage may only be a matter of time.

Gregory Arcuri is a research intern with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC. 

The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at 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). 

Gregory Arcuri
Program Manager and Research Associate, Renewing American Innovation Project