Turning point for American industrial policy or one-hit wonder?

By Robert D. Atkinson

As American politics sinks farther into the hole of partisan vitriol and dysfunctionality, we can be reminded of former George W. Bush administration Secretary of State Condoleezza Rice's statement that "we need a common enemy to unite us." In this case, a common adversary ― China ― united Republicans and Democrats last month to pass landmark legislation: the CHIPS and Science Act. The two main features of the bill are to provide critical support for semiconductor firms and to boost science funding significantly, especially targeted to key technologies for U.S. competitiveness.

The motivation for the semiconductor component was twofold. First, the United States has lost a massive global share of a key industry it created. Since 1990, America's share of global semiconductor manufacturing has declined by 70 percent, falling from 37 percent to 12 percent. And a significant portion of the growth in semiconductor production capability, besides being in Korea, was in Taiwan and China. Policymakers knew that China could weaponize that advantage, especially if they invade and take over Taiwan.

The $39 billion in the CHIPS Act for domestic semiconductor manufacturing investment incentives is designed to offset and level the playing field with regard to foreign incentives. The funding will go into the form of grants and loans to companies headquartered in the United States, or allied countries like South Korea, to help offset their costs of building a chip factory ("fab") in the United States. The legislation also includes an advanced manufacturing investment tax credit equal to 25 percent of the cost of building a fab or a factory to produce semiconductor manufacturing equipment.

In addition, the bill authorizes $11 billion for semiconductor-related R&D, with most through the Department of Commerce, including a National Semiconductor Technology Center, National Advanced Packaging Manufacturing Program and a Manufacturing USA Semiconductor Institute.

The legislation includes a proposal made by my think tank, the Information Technology and Innovation Foundation, to fund Regional Technology Hubs to help more U.S. regions become leaders in key technology sectors. The bill directs the Department of Commerce to designate at least 20 hubs for eligibility for substantial investments into regional consortia. The bill also funds several manufacturing support programs through the National Institute of Standards and Technology.

Finally, the bill significantly increases funding for the National Science Foundation (NSF), but most significantly creates a new NSF Directorate for Technology, Innovation and Partnerships. The TIP directorate will focus on 10 key technology-based areas, including artificial intelligence, quantum computing, robotics, biotechnology and advanced materials science. This focus is important because virtually all NSF funding is for scientists conducting basic research in whatever area they choose. The TIP directorate adds a new approach, with funding targeting critical national concerns and activities likely to lead to commercialization, as opposed to only the publication of an academic journal article.

Going forward, there are important questions about both the legislation and the overall direction of U.S. industrial policy. With regard to the legislation, anyone who follows Washington knows that there is a big difference between the authorization of funds and actual appropriation. Given that in general, Republicans are less supportive of government spending, even for science, than Democrats, it's not clear that future Congresses will provide full funding for either CHIPS grants or the science spending components.

Second, the intent of the new NSF Directorate for Technology was to provide somewhat later-stage funding than pure basic research and to work to ensure that more of the research is commercialized. To put it kindly, this kind of funding is not what the National Science Foundation either wants to do or is good at. At its core, it is an agency that funds scientists to do research the latter decides is interesting. As such, it is not at all clear that NSF will manage the program in a way that matches the legislative intent of spurring more applied research and commercialization of key technologies.

When it comes to the future of U.S. industrial policy, most pundits have argued that the CHIPS and Science Act represents a turning point: that Washington has finally come around to understanding the need for industrial policy, as it did in the 1980s to respond to the Japanese economic challenge. But for those who support a sophisticated American industrial policy for advanced industries, this argument is likely unfortunately wishful thinking. To see why, it is important to understand why CHIPS and Science passed in Congress.

First, CHIPS was sold as a defense provision. Given China's threats to take over Taiwan by force, coupled with its own intention to lead globally in semiconductors, a number of members of Congress voted for CHIPS, not because it was industrial policy, but because they were convinced it was needed for national security, especially given the centrality of semiconductors to advanced weapon systems. Going forward, it will be harder to make the case for support for other advanced industries on a national defense basis.

Second, the Science component is mostly just that: money for science. Much of this will be spent on advancing basic science, and economic studies suggest that because of knowledge spillovers, other nations around the world will get around half of the benefit. Both Republicans and Democrats are more in favor of supporting university scientists than they are corporate engineers.

Many Republicans decry the latter as industrial policy, while many Democrats reject it as "handouts to big corporations." Couple that with the massive U.S. national debt and many Democrats' focus on industrial policy only for clean energy firms, and the prospect for continued and needed industrial policy measures is not all that bright.

This situation will likely not change unless a president is elected who is committed to the United States staying as the global economic and technology leader ― over China ― and who understands that the only way for that to happen is for the federal government to adopt a robust, well-funded advanced industrial policy. As of now, in my view, there is no one in either party that seems to fit this bill.

Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation (ITIF), an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy.