SIA Urges Balanced Approach to Implementation of CHIPS Act ‘Guardrails’

Monday, May 22, 2023, 5:50pm

by Alex Gordon, Policy Associate

by David Isaacs, Vice President, Government Affairs

The CHIPS and Science Act, landmark legislation enacted last year to reinvigorate domestic semiconductor production and innovation, has already sparked over $200 billion in commitments by companies to invest on U.S. shores—commitments that will create jobs and strengthen America’s economy, national security, and global competitiveness. As part of our ongoing effort to provide input to government leaders during the implementation of this critical new law, SIA today filed public comments in response to the Department of Commerce’s proposed regulations to implement the CHIPS Act “guardrails,” which place certain restrictions on companies that receive CHIPS manufacturing incentives. The SIA comments seek to modify the proposed regulations in targeted respects to advance the economic and national security goals of the CHIPS Act while avoiding unnecessary supply-chain disruptions and enabling the continuation of appropriate, ordinary business activities.

The CHIPS guardrails prevent recipients of CHIPS funding from engaging in certain expansions of manufacturing capacity in “foreign countries of concern” (the “expansion clawback”) and joint research and technology licensing with “foreign entities of concern” (the “technology clawback”). The Act requires the return (“clawback”) of CHIPS funds in the event of a violation of these restrictions. In addition, the separate advanced manufacturing investment credit established under the CHIPS Act also includes a “recapture” provision, which requires the return of tax benefits from companies claiming the credit under circumstances generally aligned (though including certain exceptions) with the guardrails adopted by the Commerce Department. So, along with filing comments today on guardrails pertaining to companies receiving CHIPS Act incentives, SIA also filed comments on the proposed regulations issued by the Treasury Department to implement the advanced manufacturing investment credit.

The guardrails in the CHIPS Act were enacted in recognition of the complex role of China in the global semiconductor ecosystem, the global supply chain and economy as a whole, and the national security landscape. For the global semiconductor industry, China is simultaneously: (1) an enormous market, comprising approximately one-third of all chip sales; (2) a major part of the semiconductor supply chain, with about 20% of front-end capacity and nearly 40% of back-end capacity; and (3) a major competitor, with a growing industry in all segments of semiconductor research, design, fabrication, packaging, equipment, and materials.

Given this multifaceted and complex relationship, Congress drafted the CHIPS Act in a balanced manner to ensure that, as the U.S. provided incentives to attract investments in new semiconductor fabrication facilities to strengthen the economy and make the domestic supply chain more resilient, it would restrict certain new investments and limit the flow of sensitive technologies to China and other “foreign countries of concern” to address national security concerns and supply chain dependence.

Consistent with this approach, the guardrails adopted by Congress focus primarily on limiting increases in advanced semiconductor manufacturing capacity in China and the transfer of know-how of certain semiconductors to China by grant recipients. At the same time, the CHIPS Act expressly allows for the continued operation of existing legacy facilities and the construction of new or expanded legacy facilities predominantly serving the China market. These exceptions to the guardrails are necessary to avoid causing disruption to the global chip supply chain and protect prior substantial investments.

Certain aspects of the Commerce Department’s proposed regulations implementing this framework are more restrictive than Congress intended. For example, while Congress expressly exempted existing facilities for manufacturing legacy semiconductors from the “expansion clawback,” certain aspects of the Commerce proposal impair the ability of funding recipients to maintain the commercial viability of their existing legacy facilities. Similarly, while Congress restricted funding recipients from engaging in joint research or technology licensing with a foreign entity of concern, Commerce proposal extended this restriction in an overly broad manner to include ordinary business activities such as patent licensing and participation in standards development organizations. SIA’s comments seek to advance the economic and national security goals of the CHIPS Act while enabling funding recipients to continue these ordinary business activities, as intended by Congress.

SIA looks forward to continued engagement and partnership with the Commerce Department as it advances its important work in crafting the program’s guardrails and in implementing the historic CHIPS and Science Act.