A new industrial and innovation policy is emerging in the USA

United States Congress, Washington

An intense debate has been held in the USA in recent years about how the country should face the growing technological and industrial competition from China, which in the long run also has security political significance. Both the Trump and Biden administrations have taken steps to limit Chinese companies' access to critical technologies developed in the United States. President Biden further focuses on strengthening the USA's own capabilities in research, innovation and industrial manufacturing. The Senate and the House of Representatives agreed during the summer of 2022 on a historic initiative for research and innovation (FoI) and industrial policy: Chips and Science ActDen's new law consists of two separate parts: one (chips) on funding for investments in the semiconductor area, and one (science) on strong expansion of federal research funding that goes through National Science Foundation (NSF), the Department of Energy (DoE) and the Department of Commerce (DoC). The Science part also provides an expanded role, particularly for NSF.

The semiconductor industry in the front line of geopolitics

Although American companies are leaders in the development and design of microelectronics and accounted for nearly 50 percent of semiconductor component sales in 2019, only about 12 percent of the world's semiconductors were manufactured in the United States. In 1990, 37 percent was produced in the country. The production of the most advanced semiconductors is today instead concentrated in Taiwan and South Korea. At the same time, China has built up an extensive industry that amounts to about a quarter of world production. Technologically, however, Chinese companies are still a couple of generations behind the leading companies in the world.

As microelectronics is a critical technology for a range of industries and for performance in supercomputers, AI applications and in many defense systems, key actors in the US believe that the supply situation for the most advanced semiconductors is unsustainable. This applies not least to the dependence on Taiwan. There is therefore great political agreement on the need to strengthen domestic production of these products. At the same time, they want to slow down the development of the semiconductor industry in China and the opportunities for the country's companies to import advanced semiconductors.

The semiconductor industry and its suppliers of equipment and materials constitute a highly complex and highly globally distributed and integrated innovation system, with no country controlling more than part of the value chain. The USA's China policy in the area is therefore dependent on other countries and companies also introducing restrictions in the exchange of technology with China and coordinating the measures with the USA, in order for them to have an effect. The picture is further complicated by the fact that China is an important market for leading non-Chinese companies in the global semiconductor ecosystem. Many of these also have significant manufacturing in China.

Chips and Science Act require that companies that want to be considered for financial support do not invest in the expansion or modernization of their own production facilities in China. In October 2022, new restrictions were also introduced for the export of technology and skills to China. All exports of advanced semiconductor technology originating in the United States are now essentially prohibited. For US citizens and US permanent residents, it is also a criminal offense to work in China upgrading semiconductor production facilities.

In the short term, the restrictions are considered to hinder the development of China's semiconductor industry. The question is, however, what ability China has to develop production on its own in the longer term.

Reconstruction of manufacturing and new R&D organization for semiconductors

The CHIPS portion of the new law includes support for rebuilding domestic manufacturing of advanced semiconductors. Over five years, 54 billion dollars will be invested in investment grants, research and development (R&D) and competence development in the semiconductor area. Another 24 billion dollars goes to tax credits for investments in manufacturing. Of the grants, $39 billion is set aside for investments in production facilities, while $11 billion goes to R&D. The funds are channeled almost entirely via the DoE, which previously had a marginal role in terms of funding for both investments and R&D. This new central role for the Department of Commerce is a sign that new paths are being sought for American R&I and industrial policy.

How the new resources will be used is still being discussed. The President's Council for Science and Technology (PCAST) recently published a report: Recommendations for how the funds for R&D should be usedFor support, the council has had representatives of six leading American semiconductor companies, an incubator in the semiconductor area and researchers from Massachusetts Institute of Technology (MIT), Stanford, UC Berkeley and Princeton. One of the report's ten proposals is to build facilities with the capacity to produce and test prototypes. These so-called Coalitions of Excellence (CoE) must be geographically distributed and focus on different technologies.

Three "Grand Challenges” has special strategic importance:

• semiconductors that make it possible to build supercomputers that are 1000 times faster and a hundred times more energy efficient per operation than today's.
• methods and tools that increase productivity tenfold in construction work.
• an energy-efficient, scalable and secure platform architecture for the use of semiconductors in health diagnosis and treatment.

The investment will also contribute to securing the supply of skills for the semiconductor industry.

However, there is a risk that the shortage of semiconductors during the pandemic will be replaced by overcapacity. The majority of the dominant semiconductor manufacturers have announced plans for large investments in the USA. At the same time, other countries, such as Germany and Japan, have started subsidy programs for investments in domestic manufacturing. In addition to this, the EU has launched European Chips Act.

New directorate within NSF to promote innovation

The largest part of the law text in Chips and Science Act is devoted to the science part. This provides new assignments for NSF, DoE and DoC and specifies a desirable budget development in 2023–2027 in order to carry out the tasks. While the budget for the CHIPS initiative refers to committed grants, the budget figures in the science part must be confirmed in the annual budget process. The figures nevertheless give a clear picture of how Congress wants to see the development of federal research funding and how it prioritizes between the various parts.

The most notable innovation in the law's science part is NSF's new Directorate for Technology, Innovation, and Partnerships (TIP). The directorate expands NSF's traditional role from funding research at universities to also supporting activities in the border area between academic research and company technology development and innovation. The Act stipulates that, in order to guide its activities, the TIP Directorate must identify and annually review a list of no more than five domestic or geostrategic challenges for the United States that can be addressed with the help of technology, and no more than 10 focus areas in terms of key technologies.

TIP will run a number of programme, where one of the flagships is Regional Innovation Engines, which NSF has already started. The term region can stand for everything from a large city with surrounding countryside to several adjacent states. NSF's first call for proposals supports “ecosystems for innovation” based on their degree of maturity. Ecosystems that have reached a high degree of maturity have the opportunity to compete for up to five ten-year grants, each of which can amount to a total of $160 million. The grants are significantly larger and longer-term than the NSF has distributed so far. The support is a paradigm shift for NSF to the extent that society's needs will form an important starting point for the research and innovation activities that are supported. (*Quote from Erwin Gianchandani, Head of the TIP Directorate:)

Importantly, partnerships seeking funding should have a broad composition of stakeholders, including those normally underrepresented in research and innovation contexts. This is in line with the keynote of the importance of inclusion that permeates Chips and Science Act. NSF also emphasizes prioritizing ecosystems that are not yet well established.

In the law, it is proposed that the new TIP directorate will already receive a budget of 3.35 billion dollars in 2024. This corresponds to 28 percent of NSF's total budget for FoI project, which in turn is proposed to increase by 30 percent compared to 2021. As previously mentioned, it is highly uncertain whether these expansive budget plans will be fulfilled. But they give a clear indication of the importance which the Congress attaches to the new directorate.

Investments in freedom from fossil fuels

Chips and Science Act also influence the focus and scope of research and innovation funded by the DoE. The changes are intended to more clearly and forcefully involve the large national laboratories that DoE funds to advance the US innovation system in key technologies. A clear ambition is to strengthen coordination and cooperation between these national laboratories, the research supported by NSF and research and innovation in business. The DoE's Science Office is proposed to receive an increased budget of 50 percent in 2027 compared to 2021 to then include $10.8 billion. Research areas to be prioritized include: "sustainable chemistry", use of advanced data processing in chemistry, materials and geosciences, as well as artificial photosynthesis, storage of electricity, carbon-based materials, carbon storage in geological formations, nuclear and high-energy physics and quantum technology. For example, six "bioenergy centers" are to be established, each with an annual budget of 30 million dollars.

The Act proposes to provide an additional $11.2 billion to DoE through 2027 to fund climate-focused R&D and demonstration projects that utilize the key technologies that are the focus of the TIP Directorate under NSF.

The Biden administration has already invested large resources in energy-related R&Dand demonstration through Infrastructure and Jobs Act, which Congress passed in November 2021. In total, this support amounts to $38.5 billion over a five-year period, of which $25 billion is for demonstration projects. The biggest investments are made in the capture, storage and use of carbon dioxide, fossil-free hydrogen, batteries and resilient and reliable electricity grids.

To invest in climate change, the Biden administration has also gone a step further than supporting R&D and demonstration projects. In August 2022, Congress adopted Inflation Reduction Act:Inflation Reduction ActMan is thus allocating historically large resources for support for energy and climate investments in households and companies. The support is estimated at a total of 370 billion dollars in the years up to and including 2031, of which nearly three quarters are in the form of tax deductions. Support is provided, among other things, for the purchase of electric vehicles and investments in solar cells, wind turbines and heat pumps. The support is designed so that it favors manufacturing in the USA of the products covered and also the manufacturing of input goods for these. This has met with strong criticism from the EU and South Korea where industry representatives see an acute risk that companies will now choose to invest in production in the US rather than produce the goods in Europe or South Korea for export to the US.

The decisions on spending in Infrastructure and Jobs Act and Inflation Reduction Act are in both cases finally approved by Congress and are therefore not dependent on the annual capricious budget processes. But the laws were passed unilaterally by the Democratic Party's majority in both chambers. After the midterm election changes in the House of Representatives in the fall of 2022, it cannot be ruled out that the Republican Party may oppose the implementation itself.

What impact does Chips and Science Act have?

The current administration has stated that it views industrial and innovation policy as an important and integral part of a broader political agenda to defend America's global power position. The direction of the policy must also cope with climate change and utilize this for re-industrialisation and to create a more equal and inclusive society. Parts of this ambitious agenda have cross-party support, but there is hardly any total agreement.

Most things suggest that the investments in semiconductors and demonstration projects in the energy field will come to fruition to the extent decided by Congress. On the other hand, there is uncertainty about the extent to which the budget targets in the science part of Chips and Science Act will be met. Although the establishment of the new TIP directorate is in itself a big step, comingthe impact and significance of this change to be dependent on what new resources are brought to the NSF for the Directorate. The outcome of the ongoing congressional negotiations on the 2023 budget will be an important indication of how strong the political support is for renewing the American innovation policy.

*The head of the TIP directorate, Erwin Gianchandani: “Our ambition here is to foster a paradigm shift. Rather than emphasis on pushing research results, including new technologies, out of the laboratory and out into the market and society, we'd really like to encourage the market to inspire research questions, and specifically to draw out research results.” from 'Engines' Program Shifts NSF Regional Diversification Efforts Into High Gear | American Institute of Physics (aip.org)

Read the policy brief as PDF: USA Chips act - policy brief no. 7 2022