CONGRESS MUST HELP U.S. INDUSTRY COMPETE WITH CHINA
The emerging bipartisan consensus for a more competitive posture toward China has taken legislative form: the Innovation and Competition Act of 2021, which passed the Senate by an impressive 68-to-32 margin on June 8. The bill tackles China on the diplomatic and political fronts, urging a U.S. diplomatic boycott of the 2022 Winter Olympics in Beijing and funding $300 million worth of countermeasures against Chinese global propaganda. Now under consideration in the House, the bill’s most ambitious provision is billions in funding to maintain this country’s technological edge over Beijing, while insulating the U.S. economy from disruptions in global supply chains of strategic items.
The private sector perennially underinvests in basic research, because, though exploring fundamental scientific questions is beneficial for society, it usually yields less in the way of short-term profitability than applied research. The Senate bill’s provision of $81 billion over five years for the National Science Foundation, $29 billion of which will go to a new directorate targeting artificial intelligence, quantum computing and other cutting-edge fields, would therefore be welcome even without the China challenge.
Despite haggling over details, this spending should make it through the House. More controversial is the bill’s provision of $52 billion in aid to the semiconductor industry, $39 billion of which would go to subsidize new factories in the United States. These computer chips are essential inputs for everything from toys to tanks, and the United States only has 12% of the world’s production capacity, down from 37% three decades ago. Meanwhile, pandemic-related disruptions in chip supply have exposed a key U.S. vulnerability, idling auto and other factories. And in
August, China announced a $150 billion program to create a domestic semiconductor industry, which would seek to attract U.S. and other firms — and their advanced technology — to China.
Supporters of the Senate bill argue that, for strategic and industrial reasons, the United States has no choice but to match China’s incentives. One problem is that a new government-funded effort to move chip production to the United States could send an equivocal signal about Washington’s commitment to Taiwan, South Korea and Japan — the vulnerable U.S. allies on China’s periphery whose companies dominate the industry. If the Senate bill’s subsidies work, these allies, not China, would lose production share to the United States in the short run. (Taiwanese, Korean and Japanese companies would be eligible for subsidies too.) Also, the money would come as outright grants of up to
$3 billion per project, with few strings attached. That’s a stark contrast to the equity stake the Treasury took in return for supporting General Motors, or even to the job-creation conditions that firms must often meet in return for economic development aid.
The debate in the House of Representatives, followed possibly by a conference to iron out any differences with the Senate version, creates an opening to address these concerns, both for taxpayers and allies. Meanwhile, the Biden administration has started to shore up ties with Taiwan by opening talks on a long-delayed trade and investment framework agreement, a wise step to show China that the United States seeks to protect strategic supply chains, not abandon Asia’s democracies.