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Congress Is Giving Billions to the Chip Industry. Strings Are Attached.

It’s an embrace of industrial policy not seen in Washington for decades. Gary Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics who: examined US industrial policysaid the bill was the most significant industrial policy investment the United States had made in at least 50 years.

American politicians from both parties have long praised the economic power of free markets and free trade, while highlighting the dangers and inefficiencies of government interference. Republicans and some Democrats argued that the government was a poor arbiter of winners and losers in business, and that its meddling in the private market was at best wasteful and often destructive.

But China’s increasing dominance of key global supply chains, such as those for rare earths, solar panels and certain pharmaceuticals, has sparked new support among both Republicans and Democrats for the government to nurture strategic industries. South Korea, Japan, the European Union and other governments have outlined aggressive plans to bring in semiconductor factories. And the production of many advanced semiconductors in Taiwan, which is increasingly threatened by invasion, has become an unsustainable security threat for many.

Semiconductors are needed to power other key technologies, including quantum computing, the Internet of Things, artificial intelligence and fighter jets, as well as everyday objects such as cars, computers and coffee makers.

“The question really needs to shift from why are we pursuing an industrial strategy to how we are pursuing it,” Brian Deese, the director of the National Economic Council, said in an interview. “This allows us to really shape the rules of where the most cutting-edge innovation takes place.”

Disruptions in supply chains for essential goods during the pandemic have heightened a sense of urgency to prevent US manufacturing from flowing abroad. So are semiconductors, where the U.S. share of global manufacturing fell to 12 percent in 2020 from 37 percent in 1990, according to the Semiconductor Industry Association. China’s share of production rose to 15 percent from next to nothing in the same period.

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