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What Led To Congress Passing the “CHIPS” Act?

Addressing America’s Semiconductor Shortage

You might have heard there is a global shortage of semiconductor chips, the tiny wafers that have specific electrical properties enabling them to serve as a foundation for electronic devices. The shortage has further exasperated already stressed supply chains, and disrupted entire industries. Chip shortages rose from the pandemic, but conflicts between China and Taiwan, where most of the world’s chips are made, prompted Congress to support domestic chip production. They passed the CHIPS and Science Act in late July 2022. The act provides more than $50 billion in subsidies to boost U.S. semiconductor production, plus billions of dollars more for related tech research and development.

How we got here
As the COVID 19 pandemic stretched into months, then years, businesses shut down and people stayed home. Consumer demand in some sectors tanked while others saw unprecedented growth. Industries slowed or stopped production and cut costs, regularly scheduled orders were put on hold. Companies that make components for industry, like semiconductors, slowed or stopped production as well. When pandemic concerns eased, our economic recovery grew at an unprecedented pace, with tremendous product demand. However, problems that existed before the pandemic—labor shortages, equipment scarcity, and global supply chain bottlenecks, exasperated recovery efforts. This also drove up inflation, resulting in significantly higher prices on goods and services.

A good example of these issues can be found in the automotive industry. Modern cars may use over 1,200 semiconductor chips, from simple to complex. Even when North American plants went back into operation after the pandemic, they were stymied by a lack of essential chip components, causing production on many models to grind to a halt. Supplies of new cars remained low, driving up prices. Today, the global supply chain continues to be extremely disrupted for the automotive, consumer electronics and many other industries, with full recovery far in the future.

Add to this increasing concerns over the reliance on Taiwan for semiconductors, this means American manufacturing, as well as reliable supply imports, is in serious trouble.

Several chips

Current impacts
Semiconductors are an essential component of almost all of today’s electronic devices, from kitchen appliances and air conditioners to cell phones, digital cameras, TVs, personal computers, and just about everything in between that has a plug or battery.

But these chips are not limited to consumer electronics. They play a key role in the operations of our daily life. This includes bank ATMs, the internet, communications systems, medical devices in healthcare, train operations, and much more. Semiconductor chips help us lead comfortable lives. When there is a mass shortage, it affects the overall economy and we feel it in our wallet.

What the CHIPS Act will do
The bill passed by Congress, and signed by the President on August 9, 2022, aims to lower costs, create jobs and strengthen supply chains. The act also will counter China’s influence on availability of essential micro processing chips by creating more U.S. resources in what is considered a keystone industry for economic and national security.

While this seems like a reaction to a recent problem, the final iteration of the bill took years to develop. However, the pandemic and supply chain shortages created a sense of urgency that helped push this legislation through, with good bipartisan support.

The $280 billion-dollar CHIPS and Science Act includes about $52 billion in manufacturing incentives to make a wide variety of chips used in different products from motor vehicles and consumer electronics to medical equipment and military weapons. Also included in the budget is a 25% investment tax credit to create new manufacturing facilities. As shortages are resolved over time, price hikes experienced during the pandemic should ease.

The bill also earmarks about $100 billion to be applied over five years for programs such as regional technology hubs to support startups in underserved areas of the county, and expanding the National Science Foundation’s work. This bolsters tech research and development that has seen a significant decline in investments since 1978, according to Sen. Maria Cantwell (D-Wash.), chair of the Senate Commerce, Science and Transportation Committee.

Tens of billions of dollars will also be dedicated to research and development, creating good paying STEM jobs. America will also reclaim a stronger foothold in a keystone industry.

White House Commerce Secretary Gina Raimondo noted the U.S. used to make 40 percent of the world’s chips but now makes about 12 percent—and “essentially none of the leading-edge chips,” which are almost entirely produced in Taiwan.

Meanwhile, other countries have been subsidizing semiconductor companies to build factories while the U.S. has invested nearly nothing. The bill’s incentives will encourage companies to expand production in the U.S., and prevent those receiving federal funds from building manufacturing facilities in certain foreign countries for a decade, Raimondo said.

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Breakdown of the budget
While published information does not quite reach the $280 billion total, here is what has been released regarding the budget:

  • $52 billion for manufacturing incentives
  • $2 billion for legacy chips used in automobiles and defense systems
  • $13.2 billion in R&D related workforce development
  • $500 million for international information communications technology, security and semiconductor supply chain activities
  • $24 billion (approximately) in investment tax credits for capital expenses for manufacturing of semiconductors and related equipment 
  • $1.5 billion for promoting and deploying wireless technologies that use open and interoperable radio access networks. 
  • $1 billion to alleviate persistent economic distress and support long-term comprehensive economic development and job creation in the most distressed communities.
  • $10 billion in regional innovation and technology hubs
  • $170 billion in research and development

The CHIPS and Science Act has many lofty initiatives, including re-establishing a priority on technology research and development, recognizing and underwriting the need for a significant increase in STEM training and job creation, and focusing critical industry manufacturing in the U.S., rather than abroad. There is even an attempt to spread the project budget around to underserved parts of the country and spur economic growth. The overall effects on the economy, including easing supply chain issues and curbing inflation, will take time to realize. While some claim the act is a boondoggle, the U.S. is investing strongly in its domestic science and tech industries, something that has been lagging for decades.

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