The CHIPS Act represents a significant foray by the U.S. government into utilizing direct investment in industry to promote national security interests (Ip, 2023). The $53 billion allocated is intended to incentivize domestic semiconductor manufacturing and reduce reliance on imports, particularly from geopolitically vulnerable Taiwan (WSJ video, 2023). Targeted subsidies and government funding harkens back to the Cold War era when massive military R&D spending seeded innovations with civilian applications like computing and telecommunications (Ip, 2023). However, the scale of the CHIPS Act eclipses past industrial policies and signals a paradigm shift. It remains to be seen if the CHIPS Act proves a template for similar legislation in sectors like batteries, biotech, or machine tools.
The strategic importance of semiconductors, the risks of import dependence, and the bipartisan consensus on countering China made government intervention compelling (WSJ video, 2023). Semiconductors’ dual civilian-military applications and the concentration of advanced chip fabrication in Taiwan presented a unique security vulnerability (Ip, 2023). Proponents argue that market forces failed to provide incentives to re-shore production, necessitating subsidies (WSJ video, 2023). Whether this logic extends to other industries depends on objective assessments of import reliance risks balanced against the inefficiencies of government intervention. Absent security externalities, most economists favor market competition to direct public investment. There are concerns that industrial policy could become a slippery slope to protectionism absent judicious criteria (The Economist, 2023). However, the complexity of global supply chains makes assumptions that domestic production guarantees security simplistic. Moreover, even with compelling security reasons, subsidies risk distorting markets if not properly designed and targeted. Furthermore, the easy political appeal of reshoring rhetoric could lead to industrial policies being approved based on speculative theories rather than empirical rigor.
Previous government efforts to bolster specific industries have proved risky, with failures like Solyndra reminding us of the difficulty in government attempting to pick winners better than markets (WSJ video, 2023). The CHIPS Act aims to avoid this by funding multiple companies rather than targeting just Intel or TSMC. The focus on leading-edge fabrication also steers funding where market concentration poses the greatest risks (WSJ video, 2023). Opening subsidies to foreign firms operating in the U.S. maintains competition. Safeguards against favoritism and requiring commercial viability can help ensure the effective use of public funds. However, executing industrial policy well remains challenging even with sound principles. The costs must be carefully weighed, given budget deficits and vast infrastructure needs.
The return to muscular industrial policy requires recalibrating traditional aversion to government intervention in markets (The Economist, 2023). However, the scale of Chinese industrial subsidies challenged notions of free market competition already. Faced with this reality, doing nothing was seen as posing unacceptable security risks. The CHIPS Act’s impacts will shape attitudes toward similar future policies. However, bipartisan cheering for reshoring and self-sufficiency suggests the political winds are now behind industrial policy. This enthusiasm warrants caution, as protectionist pressures often escalate beyond initial security justifications. Rigorous assessment and sunset provisions could help prevent overreach. Nevertheless, once breached, ideological barriers against subsidies rarely rebuild.
The expansive scope of the CHIPS Act sets a precedent and potential template for future industrial policy efforts aimed at shoring up domestic production capacity in sectors deemed important for national security. The legislation was passed with bipartisan support and backing from business interests, demonstrating there is an appetite for government intervention beyond just semiconductors (Ip, 2023). However, each industry presents unique considerations, and the production risks may not rise to the level seen with cutting-edge chip fabrication concentrated in Taiwan. While the CHIPS Act could embolden calls for analogous efforts to subsidize domestic manufacturing of batteries, solar panels, machine tools, and other products, policymakers would need to evaluate the costs and benefits of such proposals on their specific merits (The Economist, 2023). Automatic replication of the CHIPS model could lead to inefficient protectionism, so oversight is warranted. However, the Act does provide a basic framework of direct investment and tax incentives that could be adapted for industries where intervention is deemed essential for security.
Policies purportedly to enhance security should carefully diagnose specific market failures rather than maximize self-sufficiency, which risks economic inefficiency and global confrontation. A balanced strategic approach requires nuance to determine where industrial policy use is justified relative to tools like trade agreements, stockpiling, and diplomacy. While the CHIPS Act sets a precedent for leveraging industrial policy to serve national security interests, policymakers should be cautious about applying this model more broadly without sufficient justification. Only some industries present the same concentration risks seen with advanced semiconductor fabrication centered in Taiwan (WSJ video, 2023). The complexity of global supply chains means domestic production does not guarantee security, and import dependence is not inherently dangerous (The Economist, 2023). Industrial policy risks fostering inefficient redundancy, protectionism, and zero-sum confrontation if improperly balanced with international trade and cooperation. Leaders should refrain from reflexively equating self-sufficiency with security absent rigorous assessment of specific vulnerabilities. A principled strategic approach requires objectively determining where markets fail to provide for essential security needs due to externalities like information asymmetries. Even when government intervention is warranted, transparency, oversight, and sunset provisions that force reevaluation help guard against political favoritism and bureaucratic overreach. Industrial policy may, at times, serve security, but only if implemented judiciously, sparingly, and in alignment with broader economic interests.
Industrial policies to advance national security interests could become co-opted as tools for protectionist ends. Historically, protectionism has often arisen and been justified based on exaggerated or unfounded threats used as political pretexts (Ip, 2023). For instance, the semiconductor industry was subjected to trade restrictions and domestic content mandates in the 1980s, predicated on fears of Japanese dominance that proved largely unfounded and economically costly (Ip, 2023). Today, subsidies or local production requirements limiting foreign competition could be pushed through under the guise of security based on speculative arguments about vulnerabilities. However, such protectionism tends to breed inefficiency, raise costs to consumers and industry, stifle innovation, and harm international cooperation.
To avoid the pitfall of protectionism masquerading as security-driven industrial policy, policymakers should rely on impartial, empirical assessments of supply chain risks and vulnerabilities rather than unfounded fears or industry lobbying. Transparency about the rationale and process for awarding subsidies helps guard against political favoritism influencing decisions. Rigorous criteria should be established to determine where market failures genuinely impose externalities versus industries where competition and openness drive growth. For the CHIPS Act, the concentration of advanced semiconductor fabrication in Taiwan presented a fairly clear supply vulnerability, justifying intervention (WSJ video, 2023). However, conditions warranting support on national security grounds may only exist in some sectors. Excessive use of industrial policies could undermine security by hampering economic dynamism and fostering international tensions. Therefore, policymakers should be judicious and strategic in deploying such interventionist tools, limiting use only to where needed to remedy market failures. Sunset provisions forcing periodic reevaluation of subsidies and similar programs help prevent permanent inefficient allocation of resources. Cooperation and coordination with allies to avoid unnecessary duplication also reduce risks of industrial policy devolving into welfare for protected industries.
References
Ip, G. (2023, February 28). Past U.S. Industrial Policy Offers Lessons, Risks for Chips Program. Wall Street Journal. https://www.wsj.com/articles/past-u-s-industrial-policy-offers-lessons-risks-for-chips-program-df48c4d1#:~:text=The%20lesson%20is%20that%20industrial
The Economist. (2023). Subsidies and protection for manufacturing will harm the world economy. The Economist. https://www.economist.com/leaders/2023/07/13/subsidies-and-protection-for-manufacturing-will-harm-the-world-economy#:~:text=As%20we%20report%20this%20week
WSJ. (n.d.). Why the Chips Act Signals a Return to “Industrial Policy” | WSJ. Www.youtube.com. https://www.youtube.com/watch?v=S8xwEB_co2o
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