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Why China Has U.S. Congress Focused on Computer Chips

Images of mobile devices at the Taiwan Semiconductor Manufacturing Co. (TSMC) Museum of Innovation in Hsinchu, on Tuesday, Jan. 11, 2022. TSMC reported a sixth straight quarter of record sales, buoyed by unrelenting demand by Apple Inc. and other customers for chips produced by the world’s largest foundry. Photographer: I-Hwa Cheng/Bloomberg (Bloomberg)

A desire to spend more than $50 billion to bolster the US semiconductor industry seemed to be a rare point of bipartisan consensus in Washington. But legislation to carry out that initiative -- with the goal of increasing US competitiveness with China -- now faces an uncertain fate, caught in a larger struggle between Democrats and Republicans over spending.

1. What does Congress propose to do?

Similar but not identical bills passed by the House and Senate would provide $52 billion over five years in emergency funding for semiconductor research and development, legacy chip manufacturing, packaging research and microelectronics development. (Legacy chips are frequently used in cars, aircraft and a variety of military hardware.) The vast majority of that money, $50 billion, would be distributed through a new fund overseen by the Commerce Department; the other $2 billion would be overseen by the Defense Department. On top of that, the House version authorizes $45 billion for grants and loans to support supply chain resilience and manufacturing of critical goods in the US. Both measures authorize billions more for research and development at the National Science Foundation, the Energy Department and the National Institute of Standards and Technology.

2. Why is this necessary?

While the U.S. is a leader in chip design, roughly 90% of global chip manufacturing capacity is elsewhere -- primarily in Taiwan and South Korea. That puts the U.S. at high risk of supply chain disruptions in the event of trade disputes, military conflicts or, as seen in the past two years, a pandemic. China’s state-led industrial policies, which aim to achieve self-sufficiency in all stages of chip production, also threaten U.S. competitiveness. The Chinese government plans to boost its domestic production using government subsidies and tax preferences.

3. How are the House and Senate bills different?

The House bill would contribute $8 billion over two years to the Green Climate Fund, a United Nations-overseen initiative to help developing countries address climate change. Republicans are opposed; Representative Michael McCaul of Texas said the money would go to an unaccountable “slush fund.” The two bills also take different approaches to creating a new directorate at the National Science Foundation, the federal agency that funds basic research in science and engineering. The Senate’s version would focus it on technology issues. The House bill would focus it on research and development to address societal issues such as climate change and inequality. Another sticking point is on trade -- the Senate bill would create a new exclusion process for tariffs on Chinese imports and reinstate previous exemptions that have expired. The House bill is silent on tariffs but would extend a trade assistance program for US workers displaced by foreign trade. 

4. In what way are the bills aimed at China?

Neither bill explicitly states the U.S. is in a race with China for semiconductor sovereignty, but lawmakers regularly describe the bills that way. The Senate bill “will allow the United States to out-compete countries like China in critical technologies like semiconductors,” Majority Leader Chuck Schumer said last May. Any doubt that China is the real target of the bills is put to rest by the many provisions unrelated to semiconductors.

5. What are those provisions?

Both bills include funding to develop alternatives to Chinese 5G telecommunications equipment, which the U.S. worries could be used to carry out cyberattacks or espionage. (China denies that.) Both bills would impose sanctions on China for its treatment of the predominantly Muslim Uighurs in the far-western region of Xinjiang and elevate the rank of U.S. special coordinator for Tibetan issues at the State Department. The Senate bill would require U.S. agencies to treat Taiwan’s elected government as the “legitimate representative of the people of Taiwan” and to stop using China’s preferred term, “Taiwan authorities.” The Senate would also impose additional sanctions on China for cyberattacks and theft of trade secrets. The House bill would allow Hong Kong residents to apply for temporary protected status in the U.S. and extend an export ban on certain crowd control equipment to the Hong Kong police. After the Senate passed its bill last June, Chinese lawmakers said the legislation “smears China’s development path and domestic and foreign policies” and “interferes in China’s internal affairs under the banner of innovation and competition.”

6. What are the prospects?

Lawmakers have been working on reconciling the two versions of the bill since May, and Democratic leaders want to bring a compromise measure to the floor by the August recess. But the bill hit a snag when Senate Republican Leader Mitch McConnell of Kentucky announced that he would pull his support for the bill if it’s tied to other Democratic domestic proposals, such as prescription drug price cuts and tax hikes on the wealthy and corporations. McConnell has been backed by other Senate Republicans, including John Cornyn of Texas, a key player in crafting the China bill. Some lawmakers, including Cornyn, have pushed to pass the chips funding by itself or as a part of priority legislation like spending bills or the annual defense authorization. Republicans are also pressuring Speaker Nancy Pelosi to hold a vote on the Senate-passed version of the bill without reconciling it with the House’s version, clearing it for the president’s signature.

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