Biden Admin’s CHIPS Guardrails Caught Between Labor Hawks and Industry Doves
How the CHIPS Program Office is threading the needle on national security
Thank you to ChinaTalk for cross-posting this article!
The Commerce Department’s September 22 CHIPS Act guardrails are not only the latest tool in US-China technology competition; they also offer an insider’s account of the tug-of-war taking place in the Hebert C. Hoover building.
Congress charted new territory in American industrial policy with the CHIPS and Science Act of 2022 in its attempt to restore America’s strategic industries and limit the PRC’s access to national-security-critical technology. The crown jewel of this law was $39 billion in grants for companies to expand semiconductor manufacturing in the US — but the subsidies came with a catch: recipients must agree not to expand chip production capacity in the PRC for ten years and must cut off research partnerships with groups posing national-security risks.
Finalizing the details of these “guardrails” on CHIPS subsidies revealed the Biden administration’s delicate effort to 1) prevent the PRC from attaining American technology, 2) address labor unions’ calls to prevent the offshoring of manufacturing, and 3) keep restrictions reasonable enough that chipmakers are not scared away.
A Unique Tool to Buy Loyalty
The context in which the CHIPS subsidy program was conceived sheds light on Congress’s intentions.
The COVID-19 pandemic caused a severe chip shortage in the U.S. due to unpredictable demand spikes and supply shortfalls. At the onset of the COVID-19 pandemic, automobile manufacturers around the world canceled their orders for new chips fearing a sudden drop in demand for new cars. Meanwhile, consumer electronics companies and cloud service providers sharply increased their demand for the most advanced chips used in cellphones and 5G infrastructure. After a few months, however, the demand for cars rapidly recovered, but production lines for auto chips needed months to switch back into gear. Factories could not finish production without semiconductor inputs, leaving consumers without new cars and auto workers without jobs. A slew of natural disasters then exacerbated the U.S.’s already tight supply of all sorts of chips. Longer term, the U.S.’s global share of chip manufacturing fell from 37% in 1990 to 12% in 2020. Even so, it still leads the global market for chip design at 46% of global value-add.
While the PRC’s chip industry has long been limited to the least advanced ends of the supply chain, Washington took a collective gasp when the Chinese Semiconductor Manufacturing International Corporation (SMIC) announced in August 2022 that it produced 7-nm node chips for the first time, placing the company just one generation behind the most advanced chips currently in commercial production globally. Then in September 2023, US officials’ fears from last year were realized when PRC smartphone maker Huawei released the Mate 60 Pro: the new Huawei phone featured a chip capable of 5G communications that was allegedly designed and manufactured by SMIC.
The Biden administration is responding to the rise in both China’s technological level and manufacturing capacity in chipmaking with what it calls the “protect and promote” agenda. “Promote” means offering support to American industry (as with the CHIPS grants), and “protect” means cutting off adversarial nations’ access to US technology. Lawmakers’ most recent crack at the “protect” agenda was a bipartisan bill establishing an outbound investment screening mechanism aimed at blocking any US investment in the PRC that threatens national-security interests. The bipartisan National Critical Capabilities Defense Act (NCCDA) would have covered industries ranging from semiconductors and pharmaceuticals to artificial intelligence. Adamant opposition from industry, however, sunk that most comprehensive “protect” effort.
For strategic reasons, semiconductor companies were much more controlled in their critique of the NCCDA (indeed, how could chipmakers oppose the “protect” agenda when they were about to receive $39 billion in subsidies from the “promote” agenda?). As the broader business community fought outbound investment review legislation, policymakers and chipmakers danced a more intricate tango over CHIPS guardrails.
Meanwhile, fearing that CHIPS grants would simply offset the cost of further expansion in the PRC, China hawks in Congress insisted that recipients of federal funds be subject to certain guardrails. Most significantly, Section 103 of the CHIPS and Science Act restricts grant recipients for ten years from “the material expansion of semiconductor manufacturing capacity in the People’s Republic of China or any other foreign country of concern.” The bill permits the expansion of “legacy semiconductor” capacity primarily serving the PRC market, leaving the PRC dependent on chips from US companies.
Restricting trade for national-security reasons is usually a zero-sum game that spurs unmitigated opposition by all industries involved. By targeting restrictions to only companies receiving grants, however, lawmakers turned this dynamic on its head: chipmakers can decide for themselves whether the economics make sense to sacrifice expansion in the PRC in return for subsidized expansion in the US.
“Recipients of CHIPS Act funds should not further that risk” — Bargaining With Chipmakers
After the Commerce Department released its initial guardrails proposal in March 2023, officials at the CHIPS Program Office (CPO) received twenty-seven comments from industry associations, companies, and labor unions. Each camp took a different stance in arguing whether the specific provisions of the CHIPS guardrails should be loosened or strengthened. Working under the leadership of a famously pro-labor president, Commerce officials paid special attention to the concerns of unions, which the next section will cover. Reviewing responses from industry, however, Commerce made its redlines clear, yielding as few concessions as possible to keep chipmakers excited about applying for CHIPS grants.
Guardrails Must Go Beyond Existing Export Controls
Both TSMC, the world’s leading contract chipmaker, and the Korea Semiconductor Industry Association (KSIA), which represents Samsung, argued fruitlessly to loosen the CHIPS guardrails’ restrictions on joint research — and in doing so they revealed one of the CPO’s redlines: under the guardrails, companies receiving CHIPS funds may not engage in joint research with “foreign entities of concern” — but TSMC and KSIA sought to narrow this restriction by arguing that only companies already blacklisted under the US’s export control laws should count as “foreign entities of concern.”
The CPO did not react generously to this request. Referring to restrictions on joint research, officials stressed the following:
The Technology Clawback intended to be broader in reach than the Export Administration Regulations. The Act creates a financial assistance program the goal of which is to incentivize investment in facilities and equipment in the United States. … The goals of the Act are more expansive than just mitigating national security threats posed by the export of technology. … It would be inconsistent with the goals of the Act for recipients of CHIPS funds to engage in joint research or technology licensing that was not in the national security interests of the United States, even if that activity was not prohibited by the Export Administration Regulations. (pp. 10-11)
The CPO’s starting point in reviewing industry feedback was accepting that CHIPS guardrails would be more stringent than the current US export control regime. All of the concessions the CPO accepted — including in the case of joint research restrictions (the Technology Clawback) and in spirit in the case of manufacturing expansions (the Expansion Clawback) — followed this principle to the letter.
Low-Hanging Fruit
Many of the concessions the Commerce Department made to industry involved highly technical, procedural quibbles. That characterization is not to say these concessions are insignificant; in fact, many could be decisive in key chipmakers’ calculations about whether CHIPS grants are worth the accompanying restrictions. Rather, these “low-hanging” concessions were on issues that would have introduced great costs to firms with few benefits for U.S. economic or national security. The concessions are corrections to barriers that the administration and Congress did not intend to impose.
Measuring Capacity: Grant recipients are allowed to keep existing facilities in the PRC, as long as the facilities do not undergo “significant renovations.” Grant recipients are also allowed to keep and even expand existing legacy semiconductor facilities in the PRC that primarily serve the PRC market, as long as such facilities do not undergo expansions above 10% capacity. The CPO agreed to requests made by SIA and TSMC that the measuring stick for renovations and expansions of these facilities be enumerated in physical cleanroom space and not output, as well as to a request made by SIA that these measurements be made annually (not monthly) to account for seasonal fluctuations.
Transfer agreements: The response from SIA did not challenge the guardrails’ statutory intent of preventing manufacturing expansions in the PRC. It stressed, however, that grant recipients may have agreed to the sale or purchase of facilities in the PRC before receiving CHIPS funds, and that these business deals may be impossible to reverse. The CPO responded by allowing purchase or sale agreements pre-dating CHIPS grant issuance to close.
Exempting patents: Respondents consistently berated the CPO for including patent licensing in the list of prohibited technology engagements with entities in foreign countries of concern. SIA, the US-China Business Council, and others argued that patents are already public documents, so restricting patent licensing does nothing to limit PRC actors’ access to technology and unnecessarily limits grant recipients’ profits. The CPO agreed to exclude patents from the scope of technology licensing restrictions.
Standards: Respondents, including SIA, similarly stressed that grant recipients must be allowed to share know-how in the context of standard-setting organizations (SSOs) that set frameworks for how different technologies interact in fields like telecommunications. Even though these SSOs often include foreign entities of concern, the CPO agreed that maintaining American and allied firms’ leadership in standard-setting is worthy of an exception to the Technology Clawback. But the CPO rejected a related request by KSIA for joint research with foreign entities of concern for open-source software also to be excluded, arguing that the entities could acquire sensitive know-how in the process of such joint research.
Intracompany transfers: SIA reminded the CPO that many chipmakers have corporate arrangements that require transfering intellectual property from one legal entity to another, and it urged that such intracompany transfers not be considered joint-research violations even if one of the entities is in a foreign country of concern. The CPO granted an exception to technology transfers between a company’s affiliates.
Implied licenses via sales: This concern was wonky, but SIA and some other individual companies reminded the CPO that “each part and piece of equipment sold for semiconductor manufacturing is sold with an explicit or implied license to use the intellectual property underlying the part or equipment.” The CPO responded by assuring recipients that such implied licenses are not violations of the Technology Clawback.
Warranty and servicing: SIA similarly expressed concerns by upstream equipment manufacturers that agreements to repair and service products sold to foreign entities of concern could be construed as violations of the Technology Clawback. If this were the case, American and allied countries’ equipment makers would lose a critical market if they accepted CHIPS grants. The CPO assured such firms that such warranty and servicing activities are not violations.
Reasonable Concessions to Keep Chipmakers Enticed
In contrast to the “low-hanging fruit” above, the CPO’s most notable set of concessions will likely allow grant recipients to maintain greater chip production in the PRC and to share technology with more PRC citizens. Here, Commerce agreed to loosen restrictions that posed disproportionately larger costs to chipmakers than offered benefits to US economic or national security.
Baseline manufacturing capacity: SIA, SEMI, and a law firm likely representing a chipmaker all reminded the CPO that facilities may not be running at their full designed capacity at the moment the company receives a CHIPS grant. In that light, they urged Commerce to consider the baseline capacity of an existing facility to be its “full designed capacity,” fearing that planned future installation of equipment for the facility could be construed as a violation of the Expansion Clawback. The CPO partially agreed to this request, saying that “the baseline manufacturing capacity of the existing facilities at the date of the award will be addressed in the covered entity’s required agreement.” In effect, this concession could lead to chipmakers to increase production in the PRC long after receiving CHIPS grants — but the Commerce Department will likely scrutinize these existing plans to ensure their original financial calculus did not account for an offset by CHIPS funds.
Outsourced Manufacturing: SIA and SEMI — but notably not any individual companies who perhaps did not want to admit reliance on foreign manufacturers — noted that chipmakers often outsource part of their fabrication or packaging needs to partners in the PRC and that such outsourcing requires sharing intellectual property (such a given chip’s design file). The two trade associations stressed that such outsourcing is widespread in the semiconductor supply chain, so considering the associated IP-sharing to be a violation of the Technology Clawback could mess up many potential grantees’ businesses. The CPO accepted this reality, agreeing to an exception for the exchange of know-how for product (fabrication activities) purchases or sales.
3D integration of legacy dies: No respondents publicly opposed Commerce’s original guardrails rule that recipients of CHIPS funds should not expand facilities using advanced packaging techniques like “through silicon vias” (TSV) and “through mold vias” (TMV). SIA, however, noted that the old rule could also prohibit decades-old packaging techniques that integrate legacy semiconductor dies on top of each other. It argued that, because these old 3D integrations do not enable advanced computing, AI, or communications applications, the guardrails’ expansion exceptions applying to legacy chip production should apply to this type of packaging as well. The CPO agreed.
PRC citizens: SIA and other respondents were concerned that the original guardrails’ definition of “foreign entity of concern” could prohibit research activities involving any PRC citizen anywhere in the world. (People born in the PRC account for 5% of high-skilled workers in the US in the “electronics components and products” industry.) The CPO clarified that this was not its intent and modified the definition of “foreign entity of concern” to cover only citizens of “foreign countries of concern” while they are in those countries. In other words, “the term would include an Iranian national working in Russia, but would not include a Chinese national lawfully working in the United States or the Republic of Korea.”
Requests Directly Challenging Congressional Intent, National Security, Economic Security Dismissed
The successful requests by industry described above involved major benefits to potential grantees at reasonable or no cost to the administration’s political priorities. Some requests, however, asked the CPO for major concessions with little in the way of argument.
The origins of these more ambitious requests are significant. One came from TSMC, a foreign chipmaking giant which the US government wants to ensure continues bringing advanced chipmaking capacity onshore. One of these requests came from both SIA and the Information Technology Industry Council (ITI), without matching requests in any of their member companies that submitted public requests. And the CPO said it received one request which did not appear in any of the public comments — and deduction leads me to view it as part of the confidential submissions of either Samsung or SK hynix.
TSMC — The Taiwanese foundry champion requested that the guardrails’ definition of “legacy semiconductors” exempted from the Expansion Clawback include planar transistors which are derivative of the 28-nm technology generation (the CHIPS and Science Act’s statutory cut-off for “legacy”) but which do not technically have a “gate length of 28 nanometers.” Perhaps at TSMC’s urging, SIA and the ITI included the same request in their submissions — but the CPO rejected this request as undermining Congress’s intent in prohibiting expansions in the PRC of technology more advanced than 28 nm.
SIA and ITI — At the end of a multi-part, thoughtful, and largely successful section which offered Commerce different avenues to revise the definition of “existing facilities,” SIA suddenly made a blunt request that the limit on expanding legacy facilities (“significant renovations”) be raised from 10 percent over ten years to “at least 15 percent.” ITI went as far as to ask for 25 percent. The CPO fully rejected these requests. Both asks stand out as rather blunt compared to the rest of the associations’ comments, which often left alternatives in case officials disagreed with the main request.
Confidential (Likely Korean) Comment — One request the CPO said it received but rejected did not appear in any of the public submissions on regulations.gov. By deduction and considering the nature of the requests, it likely came from one or both of the two Korean memory chip giants, Samsung and SK hynix, which both submitted business confidential responses not available to the public. On page 13 of the final rules, the CPO said “[c]ommenters suggested that the definition of ‘legacy semiconductor’ be expanded to include more advanced memory technology.” It flatly rejected this request, suggesting that the Biden administration does not think it needs to make further concessions — beyond the export control waivers it has already granted — to Korean memory chipmakers to lure them to expand in the US.
“Destabilize global semiconductor markets” — Biden Admin Channeling Labor
In their response to Commerce’s original guardrails, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) called it “lamentable” that the CHIPS and Science Act provided an exception for legacy chip expansion in the PRC. Alongside UNITE HERE — a union representing workers in a range of industries — the UAW urged Commerce to “severely limit funding recipients from expanding legacy chip production in countries other than the United States.” While the CPO’s national-security concerns expressed in the last section derive major inspiration from China hawks, the rust-belt-born president’s Commerce Department seems to draw its economic concerns from labor.
The first fight the CPO had to referee between chipmakers and the UAW was about the guardrails’ legacy chip exception. Under the CHIPS and Science Act, recipients of CHIPS funds may expand legacy chip production in the PRC so long as that production “predominantly serves” the domestic PRC market. Congress’s reason for that provision was that keeping the PRC dependent on US or allied countries’ chipmakers aligns with American interests — and, if a “predominance” of the new chip capacity in China stays in China, there would be little risk of cheap Chinese chips flooding international markets.
The legislation left it to the Commerce Department to define “predominantly serves,” which officials first set at 85 percent of production. Industry rallied against this high bar, with SIA recommending it be reduced to 70 percent and TSMC urging 51 percent. The UAW, however, encouraged the CPO to stick with its 85 percent bar, arguing that it leaves chipmakers with enough room for profit growth while weaning the US off foreign legacy chips overall. The CPO ultimately sided with the UAW to keep its original 85 percent definition because it feared that a lower bar “would potentially destabilize global semiconductor markets.”
The CPO’s second round as referee came over the definition of “affiliated groups.” The Technology Clawback originally forbade grant recipients “and their affiliated groups” from engaging in joint research or technology licensing with foreign entities of concern relating to technologies that raise national-security concerns. TSMC argued that the Technology Clawback simply does not apply to affiliates according to statute, while SIA more mildly argued that the 50 percent voting threshold Commerce used to define affiliates in the original rule should be 80 percent according to statute. At the other end of the spectrum, UNITE HERE gave an anecdote about a major co-owner of Intel’s Arizona fab that is also a major asset manager in the PRC. It warned that the Commerce Department’s current 50 percent voting threshold for “affiliated groups” would fail to capture this co-owner, whose influence over the Arizona fab’s governance is considerable due to its corporate voting arrangement. Ultimately, the CPO decided to compromise on this issue by removing the 50 percent threshold defining “affiliated groups” but warning chipmakers that it would use legal principles like the “law of agency or single enterprise liability” to hold CHIPS grantees accountable for technically non-“affiliated groups.”
China Hawk, Pro-Labor Subsidizers
As they draft these final rules this summer, the team at the CHIPS Program Office suffered the “cool-kids problem.” Their doors at the Herbert C. Hoover building were likely close to falling apart in the face of countless stakeholders seeking to pull them one way or another. Officials had to keep the guardrails palatable enough for chipmakers to accept US subsidies but also stringent enough to prevent the PRC from quickly advancing in either capacity or technology. Such compromise was a complex task, and this already-long article left out many other tantalizing conundra posed by respondents.
Many questions remain about how effectively these guardrails can be implemented. (For example, will the PRC erect obstacles before companies conductingalreadydifficult due diligence for the guardrails’ “predominantly serves” requirement?) Nonetheless, these guardrails are fascinating becauseno other semiconductor-producing nation has ever implemented such a “money for national-security compliance” program in their chip subsidization scheme. This American exceptionalism primarily derives from the fact that no other semiconductor-producing region is as invested in limiting the PRC’s advancement. Succeed or flop, America has brought a new tool in the economic warfare toolkit to bear.