Earlier this week, Senator Joe Manchin and Chuck Schumer surprisingly revived a Democratic energy and healthcare bill that placed significant emphasis on clean energy spending, both for using such energy and producing it. Also this week, the Senate approved another bill, this time about semiconductors. This second bill has been in the making for years, and now that it is approved, if it passes the House vote, it will provide billions in funding not just for microchip research—but for microchip production—at home.
The first bill features $260 billion in spending for clean energy tax credits, $80 billion in tax rebates for EV purchases and things like rooftop solar installations, as well as $30 billion in clean electricity grants and loans. It also includes $20 billion for EV manufacturing. The second bill features $52.7 billion for semiconductor manufacturing.
A free-market purist would oppose such generous incentives for the domestic production of EVs and semiconductors, but free-market purists are being overshadowed by people with other concerns: energy security and energy transition security.
In an article following the Senate vote on the semiconductors bill, the CHIPS and Science Act of 2022, the Wall Street Journal’s Greg Ip noted that subsidies and tariffs have become a tool of restoring security in the supply of crucial goods such as microchips by bringing production back home.
The argument to bring critical production back home has been highlighted by the current gas standoff between the European Union and Russia, with the WSJ’s noting that if the EU was not so dependent on Russian gas, there would hardly be a standoff. The U.S., in its turn, has become overly dependent on China for products that are critical for the economy, including semiconductors.
“Real world circumstances are a lot more complicated than the economic models that I learned at the University of Chicago and have become more complicated with the emergence of our near-peer rival, and its state capitalist economic model,” said Senator Todd Young, a Republican and one of the sponsors of the CHIPS bill.
Treasury Secretary Janet Yellen has also spoken in favor of subsidies and tariffs as means of reducing the United States’ dependence on Chinese imports, echoing the sentiment of President Donald Trump, who imposed tariffs on a wide range of Chinese products. It is worth noting that Trump’s successor kept many of these in place, including for solar panels.
Just how dependent the U.S. energy industry is on Chinese—and other—imports was recently made clear by the White House’s move to lift Trump-era solar panel tariffs on Canada and Mexico because of a panel shortage, and by President Biden’s two-year moratorium on new panel tariffs.
The microchip dependence is even more worrying, hence the ambitious government support bill for local manufacturing. But this ambition is part of a bigger one, reversing decades of building long international supply chains. Offshoring is out. Friend-shoring is in.
Treasury Secretary Yellen has been a vocal proponent and an international promoter of the concept. Earlier this year, she described it as follows: “So friend shoring is the idea that countries that espouse a common set of values about international trade, conduct in the global economy should trade and get the benefits of trade so we have multiple sources of supply and are not reliant excessively on sourcing critical goods from countries where especially where we have geopolitical concerns.”
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During a recent visit to South Korea, Secretary Yellen said that “We do not want a retreat from the world, causing us to forgo the benefits it brings to the American people and the markets for businesses and exports,” but noting earlier that “Working with allies and partners through friend-shoring is an important element of strengthening economic resilience while sustaining the dynamism and productivity growth that comes with economic integration.”
The push for friend-shoring is part of the bigger push for greater independence of countries that the U.S. considers adversaries or in any way unfriendly, meaning at some point in the future, a conflict could arise between them, leaving the U.S. vulnerable.
This is what domestic production of solar panels and microchips is all about, really—reducing the risk of having what happened with Europe’s gas happen with U.S. microchips. Or EV batteries. Just how hard this would be in reality was hinted at in the WSJ article. In it, Greg Ip noted that for all its ambition, the CHIPS bill does little to reduce actual U.S. dependence on Chinese semiconductors
The bill focuses on advanced technology such as artificial intelligence and data center chips but does not seek to stimulate local production of more low-end products, including car chips and things such as dyes for MRI imaging and rare earth magnets. As Ip puts it, “This will continue as long as China can ignore profits while Western companies can’t and thus have no incentive to diversify toward more expensive suppliers.”
By Irina Slav for Oilprice.com
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