Andrew Harnik/AP Photo
President Joe Biden speaks with Sen. Sherrod Brown (D-OH), right, as they leave after speaking about Intel’s plans to invest in semiconductor manufacturing in the United States, January 21, 2022.
The Commerce Department may as well have put out a Bat-Signal on Tuesday. An agency survey of 150 companies that deal with semiconductors found that, on average, manufacturers have only five days of available supply. Semiconductor chips are critical components in a host of electronic devices from cellphones to cars, and with tight inventories, the slightest disruption can force slowdowns or shutdowns across the manufacturing sector. This has led to a black market for chips, with brokers squeezing manufacturers with “unusually high prices.” The companies surveyed expect the problem to linger for at least the first half of the year.
Semiconductor supply has not budged in two years, which isn’t surprising given the deep reliance on one producer, Taiwan Semiconductor Manufacturing Company (TSMC), with finite capacity. TSMC and most other fabrication plants are operating at full tilt (there’s a reason why the company has the most valuable stock in Asia), with no reserve or spare ability to produce more in the near term.
This dynamic of outsourcing production to capacity-constrained fabs has become a main factor in rising inflation and shortages. Industries that need chips are 40 percent more likely to raise prices than ones that do not, according to a St. Louis Federal Reserve Bank paper. And with TSMC sitting in a part of the world China has claimed as its own, it was a ticking time bomb anyway.
We should have some humility in saying that not much will be able to happen in the near term on this quandary. Intel’s $20 billion factory in Ohio announced last week won’t actually be producing any chips until 2025. It takes time to build out capacity.
That makes it all the more important to get that capacity in place now, before the next shoe drops. Seven months ago, the Senate passed the U.S. Innovation and Competition Act (USICA), which had as its main feature $52 billion for semiconductor research, design, and manufacturing subsidies. Having that in place last year would have staved off vulnerability to shortages that much quicker, and it’s certainly a hell of a lot better than raising interest rates and throwing a bunch of people out of work to bring down demand for cars and electronics.
The House has sat on this bill since Senate passage, for some good and some dubious reasons. But late on Tuesday, Democrats released their counteroffer, called the America COMPETES Act (don’t even ask what the acronym stands for). We might actually see some federal support for industrial policy soon, as the White House desperately wants; the Commerce Department study’s timing was no accident.
Having the U.S. Innovation and Competition Act in place last year would have staved off vulnerability to shortages.
The section-by-section summary of the bill runs to 109 pages, and the different “divisions” in the text are primarily the names of the 11 committees that had a hand in the bill. This is part of an irritating trend in Democratic politics, fostered by endless gridlock in the Senate. Since only a handful of bills ever get past that bottleneck, those likeliest for passage end up becoming Christmas trees, with all sorts of extraneous riders. That’s how you get a manufacturing and competitiveness bill with a provision establishing a mentoring program for less experienced federal contractors. Or an initiative to rescue Arctic mammals, or coral reef conservation. Or a measure to collect demographic information from patent inventors. Or a hundred other things.
Some of these out-of-scope measures I actually like. For example, a Judiciary Committee bill that holds e-commerce platforms liable for counterfeit products sold on their websites is critical to cleaning up the Wild West Amazon and others have created. But you do lose some clarity in the exchange. Already you see snickering pieces from Democratic opponents about the lack of focus.
“You know how it goes, that always happens with a bill that’s going to pass,” said Rep. Ro Khanna (D-CA), one of the major supporters in Congress of domestic reshoring. Khanna says that the tangential pieces should not distract from the urgent priorities in the bill: encouraging advanced manufacturing in the U.S. for items like semiconductors, and prioritizing federal science and technology research. Khanna also led the way on a $4 billion measure that gives grants for research and advanced industries to distressed local labor markets outside of high-tech hubs.
The topline message has always been described as a story about competition with China. That has led House committees to toss whatever China-related thing they had hanging around into the bill. The Natural Resources Committee proposed a ban on shark fin soup sales. The Financial Services Committee wants to combat Chinese ransomware and direct the World Bank and Asian Development Bank to vote against assistance that flows to China. The Education and Labor Committee wants to take a look at foreign gifts to universities.
A rather belligerent Foreign Affairs Committee subsection, most of it ported over from the Senate bill, demands reports on fentanyl tracking in China, a $500 million appropriation for U.S.-run media to “counter Chinese disinformation,” another $225 million for military training in the Indo-Pacific, a program to counter Chinese influence at the U.N., democracy promotion in Hong Kong, an inflammatory “sense of Congress” statement on policy in the South China Sea, and a bunch more. Khanna was hopeful that this section was actually softer than the Senate version. “We don’t want to inhibit scientific cooperation, or medicine, or cultural exchanges that are necessary to avoid a new Cold War,” he said.
Still, the $52 billion for semiconductor manufacturing, and the establishment of a new directorate for technology and research at a bulked-up National Science Foundation, is worthwhile. But the supply chain snarl has led to an even broader thinking about what needs to be done to protect U.S. security and overall resiliency.
The House throws another $45 billion to support manufacturing and supply chains of “critical goods,” which includes products used in public health, bio-preparedness, IT and communications, energy, transportation, and agriculture. The $45 billion could be used to relocate factories, construct new ones, or build stockpiles of equipment. It also adds a new office at the Department of Commerce with $500 million in seed money to monitor supply chains and identify gaps. The summary explicitly says that the funding will help “establish diverse and secure sources and locations for the production of critical goods to ensure that regional conflicts or disasters—such as tsunamis, hurricanes, or cold waves—do not incapacitate the nation’s ability to produce and acquire critical goods.”
In addition, there’s extra funding to improve supply chains in domestic solar manufacturing, grid equipment, prescription drugs, and wireless services. It also seeks to strengthen the Strategic National Stockpile, which infamously pulled out ventilators that were hopelessly outdated and broken at the height of the pandemic.
Labor appears to have also banked several wins in the House version. A Trade Adjustment Assistance overhaul that was part of Build Back Better here returns in a much stronger form (the BBB version was scaled back because it was part of budget reconciliation). A bipartisan bill to beef up tariff enforcement that aims to prevent offshoring to “adversaries” (that’s China for the purposes of this bill) also popped up. A bill to close anti-dumping rules that didn’t make it into the Senate’s USICA is in COMPETES. The House bill would also end the de minimis loophole that exempts tariffs on products under $800, and include pro-labor versions of changes to various tariffs.
It’s unclear whether those will make it through the process, however. Khanna believes COMPETES will pass the House, albeit without many Republican votes, and then after a conference committee to reconcile the two pieces, the compromise will be broadly bipartisan.
We’ll have to wait until that process plays out to fully judge the legislation. But while the COMPETES Act is overstuffed, it does offer a somewhat serious attempt to improve our industrial base and reduce reliance on far-flung, unstable suppliers. Hopefully, some of the more tangential and overly inflammatory pieces will get wrung out.
