It’s long overdue, but America has a 21st-century industrial policy. Unfortunately, it could do more harm than good.
President Biden aims to make America the leader in advanced manufacturing technologies and confront China’s challenge to national security.
Globalization, as promoted by post-World War II U.S. foreign policy, was premised on the theory of comparative advantage. Let nations import products where their resource bases are thin and export those utilizing what they have in abundance.
Too often, our trading partners targeted activities with subsidies and import barriers that excluded U.S. exports. For example, commercial aircraft in Europe, automobiles in South Korea, consumer electronics in Japan and most recently solar panels, windmills and semiconductors in China.
In 2022, the United States recorded a $654 billion deficit on trade in goods and services. We import not only what we can’t make cost-effectively but also what we should be able to sell abroad such as advanced-technology manufactures.
The United States pioneered the semiconductor industry; these days, however, 92% of leading-edge chips are made in Taiwan even though most are based on technology created at the University of California, Berkeley. Along with advanced computing, artificial intelligence and other activities critical to weapons development, semiconductors are now the intense focus of President Xi Jinping’s efforts to make China the dominant economic and military power globally.
Over the last few decades, too much U.S. wealth creation has been in software applications and novel communications platforms such as Facebook. Those don’t spawn the kind of broad-based opportunities for ordinary working Americans that automobile manufacturing once created in the Midwest.
The Chips and Science and Inflation Reduction Acts target semiconductor fabrication, electric vehicles and batteries, artificial intelligence and advanced computing, and green industries like hydrogen, wind power and solar generation.
The Chips Act seeks to create two geographically compact centers to produce the most advanced semiconductors together with their supplying industries. And the packaging of logic chips for product application, as well as the production of prior generation — but still in high demand — processors and memory chips.
Companies will be supported through direct subsidies, tax breaks and loans.
Nowadays, technology hardware attracts only 3% of American venture capital — down from 20% in 2005.
The Biden program seeks to reverse that trend and overall leverage $50 billion in public investments into at least $500 billion in new capital to support semiconductor and related manufacturing and R&D.
It’s a steep climb because over the decades, the hollowing out of U.S. manufacturing has discouraged the development and maintenance of the necessary engineering and plant design skills. Since the global financial crisis of 2007-2009, few manufacturers have built large new factories.
Goldman Sachs estimates production costs for a semiconductor fab are 44% higher in the United States than in Taiwan — about half from the higher building costs and half from operational disadvantages.
Though not as extreme, these mirror the higher cost of building and operating large infrastructure projects — such as mass-transit lines — in the United States as opposed to Europe and other advanced nations.
Those reflect myriad environmental assessments, permitting procedures, community engagement requirements, mandates to employ union labor, NIMBY abuse of litigation to delay projects and so forth that make the cost of constructing a subway station in New York three times as expensive as it is in Paris.
On top of all these disadvantages, the Commerce Department will require firms seeking assistance to provide childcare, create project labor agreements, invest in K-12 and higher education, set aside employment opportunities for women and minorities and serve other social justice initiatives. And seek assistance from state and local governments that will have their own social objectives.
It will also discourage firms from implementing stock buyback programs even though these are often the principal means high-tech firms reward investors for taking risks to support their activities.
Whatever the validity of these goals, those will more likely increase the 44% U.S. cost disadvantage in semiconductor fabrication than reduce it. Commercial viability will become a distant promise.
The attendant bureaucracy will make the building of the Second Avenue Subway look like a cakewalk compared with erecting a fab under the administrative guidance of Commerce Secretary Gina Raimondo’s social engineers.
We have competition.
Intel has received $7.2 billion from the German government to put up a single fab, and the European Union is mounting efforts to match the Chips Act. China is spending $150 billion to boost semiconductor production.
House Republicans propose cutting spending on the social initiatives in the infrastructure and industrial policy programs passed by the prior Democratic Congress.
Mr. Biden would do well to begrudgingly accept those as part of a bargain to raise the debt ceiling. In addition to the money directly saved, the vast bureaucratic morass and inefficiencies those will impose on the goals of the Chips and Science Act could well make the difference between success and failure.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.