Industrial policy is back with a bang. The coronavirus pandemic has exposed vulnerabilities in global supply chains and sparked a heated debate in Congress about the role of government in the U.S. economy. In response, support for advantageous domestic industries is being stepped up. But these decisions portend another problem.
The debate centers on concerns that some foreign governments are strategically supporting and directing their own industries, potentially undermining the global market share and competitiveness of the United States and other countries. is. Among the various industrial policies, CHIPS (Creating Incentives to Help Semiconductor Manufacturing) and the Science Act of 2022, which supports the re-landing of computer chip manufacturing, stand out.
According to a study by the Semiconductor Industry Association, the United States' share of global semiconductor manufacturing fell from 19% in 2000 to 12% in 2020. This is primarily due to the United States' increased reliance on offshore semiconductor production, and there are particular concerns about its increase. China as a global player in chip manufacturing.
As Western countries become more skeptical about the benefits of globalization and given geopolitical tensions between the United States and China, U.S. policymakers want the nation to become self-reliant in semiconductor production. . They also claim U.S. national security concerns. The CHIPS Act aims to increase domestic semiconductor manufacturing capacity in the United States by more than 1 million semiconductors per month. This includes subsidies, with the promise of US$39 billion in manufacturing incentives in addition to a 25% investment tax credit.
Why is this important? Because, as our colleague Wayne Crews has attested, government funding comes with strings attached. Huge government spending and investment has already reshaped, and will continue to reshape, large corporations and trading industries. The resulting complexities and distortions make a mockery of the concept of free enterprise.
Cutting-edge advances in infrastructure, artificial intelligence, smart cities, and space exploration now primarily take the form of partnerships with governments rather than relying on free enterprise. But the partnership approach is a mistake. As Wayne says, “It's not the government's job to pick winning racehorses.” [technologies]but to improve the track [the business, legal and regulatory environment] To help all horses run faster. ”
Instead, the horse is mired in bureaucracy. Since the CHIPS Act was passed in August 2022, the Department of Commerce has received approximately 200 applications and concept proposals. But of the $39 billion allocated by the law, only a few hundred million dollars have actually been spent. The challenge lies in how to ensure that funding is effectively used to strengthen the semiconductor industry and drive technological progress.
Despite its noble intentions, the CHIPS Act is fundamentally flawed due to two key issues. The first is a question of knowledge. Without market guidance on profits, losses, and prices, government officials remain in the dark about which projects are worth investing in. The second issue is one of national choice. The influence of lobbyists and the tendency of policymakers to prioritize projects that appeal to voters and the media over those with real merit. The CHIPS Act has a very low chance of success because of the double hurdles of knowledge and public choice.
The CHIPS Act allocates $280 billion over the next 10 years, $200 billion of which is for scientific research, development and commercialization. An additional $52.7 billion will be earmarked for semiconductor manufacturing, research and development, and workforce development, as well as $24 billion in tax credits for chip production. But reshoring just enough production to meet 2019's output would cost the industry $1.2 trillion. This does not include ongoing costs associated with research and development, innovation, and establishing state-of-the-art manufacturing facilities for cutting-edge chips. Achieving self-sufficiency in chip production to meet existing market demand seems implausible and the wrong use of scarce resources.
Paradoxically, accepting subsidies under this law may actually increase regulatory compliance costs. This could make U.S. companies less competitive with Asian manufacturers and increase demand for further subsidies.
Policy makers need to be aware of both the limitations and harms that result from politically driven R&D approaches. In contrast, a strategy focused on competitiveness, not politics, would promote innovation, support commerce, secure supply chains, promote clean energy, ensure consumer welfare, and improve U.S. global competitiveness. It will prove more agile and effective in improving.
Subsidying existing companies or allowing government intervention in the industry is unlikely to do that.
