Why did China emphasize computer chips in the US Congress?

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The desire to spend more than $50 billion to bolster the US semiconductor industry seemed like a rare point of bipartisan consensus in Washington. But legislation to carry out that initiative — with the aim of increasing the United States’ competitiveness with China — now faces an uncertain fate, caught in a broader fight between Democrats and Republicans over spending.

1. What does the Congress propose?

Similar but not identical bills passed by the House and Senate would provide $52 billion over five years in emergency funding for semiconductor research and development, legacy chip manufacturing, packaging and the development of microelectronics. (Legacy chips are frequently used in cars, planes, and a variety of military hardware.) The vast majority of that money, $50 billion, would be distributed through a new fund overseen by the Commerce Department; the remaining $2 billion would be overseen by the Department of Defense. On top of that, the House version authorizes $45 billion for grants and loans to support supply chain resilience and the manufacturing of essential goods in the United States. The two measures authorize additional billions for research and development at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology.

2. Why is it necessary?

While the United States is a leader in chip design, around 90% of the world’s chip manufacturing capacity is located elsewhere, primarily in Taiwan and South Korea. This puts the United States at high risk of supply chain disruptions in the event of trade disputes, military conflicts or, as seen in the past two years, a pandemic. China’s state-led industrial policies, which aim to achieve self-sufficiency at all stages of chip production, also threaten US competitiveness. The Chinese government plans to boost its domestic production using government subsidies and tax benefits.

3. How are House and Senate bills different?

The House bill would contribute $8 billion over two years to the Green Climate Fund, a United Nations-supervised initiative to help developing countries fight climate change. Republicans oppose it; Representative Michael McCaul of Texas said the money would go to a “slush fund” with no liability. The two bills also take different approaches to creating a new direction at the National Science Foundation, the federal agency that funds basic science and engineering research. The Senate version would focus on technology issues. The House bill would emphasize research and development to solve societal problems such as climate change and inequality. Another sticking point concerns trade – the Senate bill would create a new process for excluding tariffs on Chinese imports and reinstating previous exemptions that have expired. The House bill is silent on tariffs but would extend a trade relief program to U.S. workers displaced by foreign trade.

4. How do the bills target China?

Neither bill explicitly states that the United States is in a race with China for semiconductor sovereignty, but lawmakers routinely portray bills that way. The Senate bill “will allow the United States to outperform countries like China in critical technologies like semiconductors,” Majority Leader Chuck Schumer said last May. Any doubt that China is the real target of the bills is dispelled by the numerous provisions unrelated to semiconductors.

5. What are these provisions?

Both bills include funding to develop alternatives to Chinese 5G telecommunications equipment, which the United States fears could be used for cyberattacks or espionage. (China denies this.) Both bills would impose sanctions on China for its treatment of predominantly Muslim Uyghurs in the far-western Xinjiang region and elevate the rank of U.S. special coordinator for Tibetan issues in the Department of State. The Senate bill would require U.S. agencies to treat Taiwan’s elected government as the “lawful representative of the Taiwanese people” and to stop using China’s preferred term, “Taiwanese authorities.” The Senate would also impose additional sanctions on China for cyberattacks and the theft of trade secrets. The House bill would allow Hong Kong residents to apply for temporary protected status in the United States and extend the export ban on certain crowd control equipment to Hong Kong police. After the Senate passed its bill last June, Chinese lawmakers said the legislation “smears China’s development path and domestic and foreign policies” and “interferes in China’s internal affairs.” under the banner of innovation and competition.

6. What are the prospects?

Lawmakers have been working to reconcile the two versions of the bill since May, and Democratic leaders want to present a compromise measure before the August recess. But the bill hit a snag when Senate Republican Leader Mitch McConnell of Kentucky announced he would withdraw his support for the bill if it was tied to other Democratic national proposals, such as prescription drug price cuts and tax hikes for the wealthy and corporations. McConnell was backed by other Senate Republicans, including John Cornyn of Texas, a key player in crafting the Chinese bill. Some lawmakers, including Cornyn, have pushed for chip funding to be passed on its own or as part of overriding legislation like spending bills or the annual defense authorization. Republicans are also pressuring Speaker Nancy Pelosi to arrange a vote on the Senate version of the bill without reconciling it with the House version, allowing it for the president’s signature.

More stories like this are available at bloomberg.com

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