The United States was an early pioneer in semiconductors, but today produces only about 10 percent of the world’s supply.
Since the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) was signed into law in August 2022, the Biden administration has taken numerous actions that both create opportunities and pose challenges for businesses in the semiconductor sector. As discussed below, while the CHIPS Act authorizes more than $280 billion to incentivize U.S. semiconductor manufacturing, provides tax incentives and boosts research and development, the Biden administration has recently enacted stringent export controls that will make it very difficult, if not impossible, for U.S. companies to export semiconductors and related manufacturing equipment and technology to China.
The United States was an early pioneer in semiconductors, but today produces only about 10 percent of the world’s supply. Instead, the United States has relied on Asia (mainly Taiwan and China) to satisfy domestic semiconductor demand. U.S. companies across multiple industries are dependent on chips made abroad for production, and the fragility of those supply chains has been exposed during the pandemic. A good example is the U.S. auto industry, which suffered major supply-side disruptions arising from chip shortages. Moreover, estimates point to an increased demand for semiconductors.
Overview of the CHIPS Act
The CHIPS Act provisions were mostly extracted from the U.S. Innovation and Competition Act (USICA) and its House alternative, the America COMPETES Act, which Congress failed to pass. Unlike its predecessors, the CHIPS Act received bipartisan support, passing in the Senate by a 64-33 vote. However, important aspects of other sought-after trade remedies in the USICA and Competes Act (e.g., 301 tariffs exclusion, AD/CV duties and trade preference programs GSP) were left out of the CHIPS Act.
The following is a breakdown of the key elements of the CHIPS Act.
The CHIPS Act provides $52.7 billion for American semiconductor research, development, manufacturing and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development and $500 million to provide for international information communications technology security and semiconductor supply chain activities.
The CHIPS Act also provides a 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. These incentives are intended to secure domestic supply, create high-skilled manufacturing jobs and catalyze hundreds of billions more in private investment.
Safeguards and Restrictions for Expanding Manufacturing Capacity in China
The CHIPS Act requires recipients to demonstrate significant worker and community investments, including opportunities for small businesses and disadvantaged communities. The guardrails’ purpose is to ensure that entities that receive the semiconductor incentive funding or tax incentives do not use the funding to buy back their own stock, provide shareholders with dividend payments or expand advanced semiconductor manufacturing capabilities in foreign countries of concern like China. Failure of recipients to abide by the restrictions will result in clawback of granted funds and/or forfeiture of tax credits.
Research and Development
In total, the CHIPS Act directs $280 billion in funding over the next 10 years to government agencies for research and development. The agencies include the Department of Commerce, the Department of Energy, the National Science Foundation and the National Institute of Standards and Technology.
The CHIPS Act will provide significant opportunities (incentives and tax breaks) to major semiconductor companies in the next few years. The benefits will have significant limitations tied to them. Those limitations will include a mandatory notification, agency review and mitigation measures.
This Alert will be followed by another focusing on the interaction between CHIPS Act, the Inflation Reduction Act and incentives offered to electric vehicles manufacturers.
Executive Branch Actions to Implement the CHIPS Act
On August 25, 2022, President Biden signed an executive order to implement the semiconductor funding in the bipartisan CHIPS Act. The order created the CHIPS Implementation Steering Council, which will coordinate the implementation of the CHIPS Act across the administration. The council will be co-chaired by National Economic Director Brian Deese, National Security Advisor Jake Sullivan and acting Director of the Office of Science and Technology Policy Alondra Nelson. Other members will include:
- Department of State Secretary Antony Blinken;
- Department of Treasury Secretary Janet Yellen;
- Department of Defense Secretary Lloyd Austin;
- Department of Commerce Secretary Gina Raimondo;
- Department of Labor Secretary Marty Walsh;
- Department of Energy Secretary Jennifer Granholm;
- White House Office of Management and Budget Director Shalanda Young;
- Small Business Administration Administrator Isabel Guzman;
- Office of the Director of National Intelligence Director Avril Haines;
- White House Domestic Policy Council Director Susan Rice;
- White House Council of Economic Advisers Chair Cecilia Rouse;
- White House Office of the National Cyber Director Chris Inglis; and
- National Science Foundation Director Sethuraman Panchanathan
The Six Implementation Priorities of the Steering Council Created by the Executive Order
- Protect taxpayer dollars. The CHIPS program will include rigorous review of applications along with robust compliance and accountability requirements to ensure taxpayer funds are protected and spent wisely.
- Meet economic and national security needs. The CHIPS program must address economic and national security risks by building domestic capacity that reduces U.S. reliance on vulnerable or overly concentrated foreign production for both leading-edge and mature microelectronics, and increasing United States economic productivity and competitiveness. U.S. long-term economic and national security require a sustainable, competitive domestic industry.
- Ensure long-term leadership in the sector. The CHIPS program will establish a dynamic, collaborative network for semiconductor research and innovation to enable long-term U.S. leadership in the industries of the future. The program intends to support a diversity of technologies and applications along many stages of product and process development.
- Strengthen and expand regional manufacturing and innovation clusters. Long-term competitiveness requires large economies of scale and investments across the supply chain. Regional clusters containing manufacturing facilities, suppliers, basic and translational research and workforce programs, along with supporting infrastructure, will be the foundation for a competitive industry. The CHIPS program intends to facilitate the expansion, creation and coordination of semiconductor manufacturing and innovation clusters that benefit many companies.
- Catalyze private sector investment. A successful CHIPS program will respond to market signals, fill market gaps and reduce investment risk to attract significant private capital. The role of government in the CHIPS program is to shift financial incentives to maximize large-scale private investment in production, breakthrough technologies and workers. The CHIPS program intends to encourage new ecosystem partnerships that reduce risk, build on U.S. strengths and facilitate such investments.
- Generate benefits for a broad range of stakeholders and communities. A successful CHIPS program will create benefits for startups, workers, socially and economically disadvantaged (SEDI) businesses, including minority-owned, veteran-owned and women-owned businesses and rural businesses, universities and colleges, and state and local economies, in addition to supporting semiconductor companies. The CHIPS program intends to encourage linkages to underserved regions and populations to draw in new participants to the semiconductor ecosystem.
New Semiconductor-Related Export Controls
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) is implementing a series of targeted updates to its export controls as part of its efforts to protect U.S. national security and foreign policy interests. These amendments to the Export Administration Regulations (EAR) administered by BIS will restrict the ability of the People’s Republic of China (PRC) to purchase and manufacture certain high-end chips used in military applications and build on prior policies, company-specific actions and less public regulatory, legal and enforcement actions taken by BIS. The bureau published an interim final rule to implement these semiconductor-related amendments to the EAR in the Federal Register on October 13.
The interim final rule addresses U.S. national security and foreign policy concerns in two key areas. First, the rule imposes restrictive export controls on certain advanced computing semiconductor chips, transactions for supercomputer end-uses and transactions involving certain entities listed under supplement No. 4 to part 744 of the EAR (aka the Entity List). Second, the interim final rule imposes new controls on certain semiconductor manufacturing items and on transactions for certain integrated circuit (IC) end uses. Specifically, the interim final rule:
- Adds certain advanced and high-performance computing chips and computer commodities that contain such chips to the Commerce Control List (CCL);
- Adds new license requirements for items destined for a supercomputer or semiconductor development or production end use in the PRC;
- Expands the scope of the EAR over certain foreign-produced advanced computing items and foreign-produced items for supercomputer end uses;
- Expands the scope of foreign-produced items subject to license requirements to 28 existing entities on the Entity List that are located in the PRC;
- Adds certain semiconductor manufacturing equipment and related items to the CCL;
- Adds new license requirements for items destined for a semiconductor fabrication “facility” in the PRC that fabricates ICs meeting specified standards. Licenses for facilities owned by PRC entities will face a “presumption of denial,” and facilities owned by multinationals will be decided on a case-by-case basis;
- Restricts the ability of U.S. persons to support the development or production of ICs at certain PRC-located semiconductor fabrication “facilities” without a license;
- Adds new license requirements to export items to develop or produce semiconductor manufacturing equipment and related items; and
- Establishes a temporary general license to minimize the short-term impact on the semiconductor supply chain by allowing specific, limited manufacturing activities related to items destined for use outside the PRC.
In response to many questions posed by industry, BIS has recently issued guidance relating to the interim final rule. The guidance provides important clarifications relating to such things as the definition of a covered “facility,” the scope of the “activities of U.S. persons” restrictions and the impact of the rule on deemed exports and encryption-related items.
The PRC’s response to the new export controls was framed as an abuse by the United States to block and suppress Chinese companies. The export controls are expected to be just the first in a series of actions from the United States before the end of 2022, including possible executive branch actions to strengthen federal oversight of U.S. investment in China and to limit data collection from Chinese firms.
About Duane Morris
Attorneys in the firm’s International Practice Group have considerable subject matter experience on issues involving regulatory compliance, export controls and international supply-chain related issues. Such work includes obtaining export licenses, advising on compliance-related matters, regulatory monitoring of the constantly evolving enforcement changes to merchandise classification, advising clients on pertinent duty mitigating strategies, performing risk assessments and assisting clients in developing and implementing cost-effective compliance policies and taking remedial actions when necessary. Duane Morris has offices in Singapore, Vietnam, Myanmar and China and maintains desks for other Indo-Pacific countries to facilitate alternate sourcing needs. Our professionals’ wide-ranging experience and the geographic location of our offices are perfectly situated to assist clients developing supply chain strategies to reduce disruption risks.
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