More On: semiconductors
There has never been a time when opportunists didn't take advantage of a panic. That's why some of the most profitable U.S. companies want to use China's hawkishness to get huge subsidies from taxpayers.
Not wanting to look weak toward China, the Senate voted Tuesday to give $52 billion in subsidies to chip companies. These companies are making record profits, investing record amounts in research and development, and are already building new fabrication plants in the United States.
Industrial policy is alive and well in the United States. This is when tariffs, subsidies, or other measures are used to help an important industry. It's not right. Industrial policy, like giving money to the semiconductor industry, is rarely justified, rarely works the way it was supposed to, and is always expensive for taxpayers or consumers. China is the only place Congress needs to look.
Even though China has given billions of dollars in subsidies and help since 2014, a 2021 Brookings Institution report says that semiconductors are one of the few areas where the Chinese economy depends on the rest of the world rather than the other way around. China still doesn't have a company that can make cutting-edge semiconductors, so it still has to buy them from other countries. Brookings says that even if China were able to reach its goals, its companies would still be responsible for "less than 15% of the industry's overall R&D capacity." In the U.S., on the other hand, the industry has almost 50% of the market by revenue and has invested more than ever in research and development (R&D). Only pharmaceutical and biotechnology firms spend more on R&D than they do on sales. The leaders of the United States should accept victory instead of getting into a "arms race" with China to see who can spend the most on a failed policy.
Industrial policy gives companies strange reasons to do things, and CHIPS is a good example of this. In March 2021, Intel's CEO said that the company would spend billions of dollars to build a new manufacturing base in Arizona. At the time, he said, "It doesn't need a single penny from the government, the state, or anyone else to be successful." This year, Intel's CEO told Congress that if the company didn't get billions of dollars from taxpayers, it might give up on its strategy of bringing jobs back to the U.S. In January, when he told Bloomberg, "Let's not waste this crisis," the CEO gave away the game. Tens of millions of dollars have been spent by the semiconductor industry to lobby for CHIPS and other measures that would help them. They are perfectly allowed to do that. But too often, industrial policy doesn't amount to much more than giving money to big businesses.
At best, the federal government isn't very good at figuring out which businesses are important to national security. Section 232 tariffs were put on steel and aluminum by the Trump administration when they "threatened to harm national security." This was a broad requirement that eventually led officials to say that the domestic auto industry also qualified for Section 232 tariffs. Can it really be said that the Toyota Camry or the Volkswagen Jetta pose a threat to national security? Both parties use these kinds of legal tricks. In June, President Joe Biden gave permission for the Defense Production Act from the Korean War to be used to help the solar panel business. The business of solar panels? If these industries pass the "vital to national security" test, soon every widget maker in America will be lobbying Washington for the same status.
Industrial policy is very expensive. Some estimates say that Trump's tariffs have cost consumers $51 billion, and a recent Cato Institute study found that industrial policy protectionism has cost $620,000 per job saved. Again, most of this cost has been paid for by consumers, who can't afford to give $52 billion to tech giants when inflation is at its highest level in 40 years.
Since Alexander Hamilton gave Congress his Report on the Subject of Manufactures in 1791, people in the United States have talked about industrial policy. Almost every democratic country is having this debate, but the leaders of many other countries are trying to figure out how to get back the money they wasted on industrial subsidies and policies over many years. Japan gave up on industrial policy decades ago, and most of Europe's attempts to create national industrial leaders have failed. These policies may have slowed economic growth in India and Latin America. The White House should not do what they did. Biden could send a clear message by vetoing the $52 billion tax break for the semiconductor industry, but if you think he will, I'll sell you a plant in China that makes semiconductors.