Home Manufacturing The US 2022 CHIPS and Science Act, explained

The US 2022 CHIPS and Science Act, explained

Joe Biden's latest piece of legislation aims to restrict foreign semiconductor manufacturers from selling certain chips to China and encourages investment at home

by Joe Cash
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Both China and the US want to see their countries become world leaders in the chip industry, but now the Biden administration is upping the ante in US-China chip-related trade tensions, with measures to prevent American citizens working on Chinese chip design and manufacturing, writes Joe Cash

On 24 October, a notice went around Chinese chip maker Yangtze Memory Technologies Co Ltd (YMTC): the company had terminated the contracts of all US citizens and green card holders. Just like that, a number of senior employees in core research and development positions were forced out of the company as YMTC rushed to ensure compliance with the US CHIPS and Science Act. As Foreign Policy remarked: “after four years of watching Donald Trump inflict flesh wounds on China with his ineffectual trade war, US President Joe Biden appears to have found the jugular.”  

The CHIPS and Science Act (CHIPs stands for ‘Creating Helpful Incentives to Produce Semiconductors’)  is a new US export control, effectively undermining China’s ability to import, manufacture and export the semiconductors that run the world. The legislation not only restricts foreign semiconductor manufacturers from selling specific chips to China or providing Chinese firms with the technologies required to manufacture them, but also encourages them to invest in facilities in the US through the issue of subsidies. The Act will unlock some $280 billion worth of financing provided the recipient does not build any similar facilities in China. It is a major piece of legislation that marks the most significant shift in US policy toward shipping technology to China since the 1990s, given that it suggests that President Biden now wants to contain China’s advances rather than just level the playing field. 

It is a policy that harks back to the tough regulations implemented at the height of the Cold War. And while “China isn’t going to give up on chipmaking… this will set [them] back years,” says Jim Lewis, a technology and cybersecurity expert at the Centre for Strategic and International Studies (CSIS).


In 1947, researchers at Bell Labs, a subsidiary of the telecommunications giant AT&T, invented the transistor, a switch that controls electric current and is a building block of modern electronics. Within the decade, researchers were placing several transistors on a slab of silicon to make an “integrated circuit” or chip. Today, chips are used in everything from mobiles to missiles and have become fiendishly complex. 

Prior to the Covid-induced supply chain bottlenecks brought about by port closures in various countries – including China – and a spike in shipping costs, the fact that the Taiwanese Semiconductor Manufacturing Company (TSMC) and Samsung manufacture almost all of the global supply of the most advanced chips did not seem to bother American policymakers all that much. Trump-era export controls prevented either company from manufacturing chips for firms on the government’s trade blacklist, plus it seemed inconceivable that Beijing would use military means to level the playing field with America, South Korea and Taiwan. 

Now, however, all the labs and ‘fabs’ – short for fabrication (read: manufacturing) facilities – seem far more strategically vulnerable, leading the Biden administration to try and entice some of that capability back to the US.

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The race to self-sufficiency 

China has big ambitions in the chip race. Beijing currently spends more on importing semiconductors than it does on importing oil, according to a new book titled Chip Wars by Chris Miller. Since 2014, President Xi Jinping has made tens of billions in state subsidies available to improve indigenous capability. By measure of new chip companies registered, this innovation drive has been hugely successful: some 22,000 new chip companies registered in China in 2020. But China still imports most of its advanced chips, and Chinese firms continue to rely heavily on imported manufacturing technologies to produce less-advanced semiconductors. The industry has also witnessed several corruption scandals. 

The US is not hanging about either. As the White House press statement accompanying the CHIPS and Science Act points out: “America invented the semiconductor, but today produces about 10% of the world’s supply — and none of the most advanced chips.” That being so, the Biden administration matches Beijing’s sense of purpose when setting out its vision: construction of manufacturing facilities has increased 116% over the past year; total business investment in semiconductor manufacturing is at $150 billion, and US companies have announced a further $50 billion following the announcement of the policy; US semiconductor manufacturing will grow by more than 50% over the next five years; and government expenditure on R&D will return to levels not seen since NASA put a man on the moon. 

Neither China nor the US is likely to be particularly successful. Putting the rhetoric to one side, self-sufficiency, at least, will probably continue to elude the pair of them. Despite all the money the Biden administration is offering TSMC and Samsung, both companies plan to keep the bulk of their investment and know-how at home, only agreeing to build new fabs for conventional chip manufacturing in Arizona and Texas. And while China holds the upper hand in terms of its ability to leverage the advantage that scale brings to chip manufacturing, that remains negligible as long as the blueprints for advanced chip manufacturing machines remain beyond its grasp.

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Technological power meets geopolitical power 

The CHIPS and Science Act represents a painful blow to China’s ambitions to rival the US in the semiconductor industry, and President Biden delivered it just as President Xi was setting out to delegates at the 20th Party Congress how China’s “great rejuvenation” would be achieved at least in part through making great technological strides. The CHIPS and Science Act demonstrates that “the US continues to hold tremendous economic and technological advantages over China, which, as Biden has signalled, Washington is becoming more willing to use against its Communist competitor,” according to long-time China watcher Michael Schumann. And whether China can retaliate in such a way that hurts US interests to the same extent without harming itself remains unclear. Beijing could, theoretically, target Apple’s manufacturing hubs in China, or rare earth materials exports to the US, but other markets (such as India and Vietnam) would jump at the chance to plug the gap at Beijing’s expense. 

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Could this come back to bite the US?

Recently, German Chancellor Olaf Scholz travelled to Beijing accompanied by a delegation of German businesses, even though European leaders have jointly questioned Scholz’s decision to unilaterally meet with President Xi. US allies in the Asia-Pacific region have also demonstrated they are not always in alignment with the White House through various means. Chinese policymakers will probably be watching closely to see whether the US can corral its allies into adopting similarly tough measures designed to contain China’s technological development. US senior government officials briefed Reuters on the CHIPS and Science Act ahead of its announcement. They admitted that not only had the US not secured any promises that allied nations would implement similar measures and that discussions with those nations are ongoing, but also that the measures “risk harming US technology leadership if foreign competitors are not subject to similar controls” and can continue to collaborate with China and Chinese firms. 

The CBBC view

The race is on, and both the US and China will be eager to rally support to their sides. The US will probably find that its chip-manufacturing or exporting allies are somewhat reluctant to join in curtailing the capabilities of one of their biggest customers. It’s also hard not to detect a whiff of protectionism in the measures. That said, foreign know-how is already being forced to abandon Chinese firms, so even if the US acts unilaterally, the CHIPS and Science Act will have some effect. The measures could be fairly devastating if Washington is able to align allies with its cause. UK companies should monitor their compliance obligations vis-à-vis US-China trade tensions and watch to see if the UK government announces any similar regulatory changes.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research services can help you build knowledge and understanding of the Chinese market prior to investment.

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