Biden Admin Issues “National Security Guardrails” for CHIPS Act Advanced Manufacturing Income Tax Credit

On March 21-22, the second most powerful public official in China, Li Qiang, hosted an advanced manufacturing forum, where he stated that the Chinese government will ramp up its support of the infrastructure required to support such manufacturing. Also on March 21, the Biden administration issued two interrelated pieces of guidance — one from the Department of Commerce (DOC), the other from the Department of the Treasury (DOT) — concerning the CHIPS Act’s Advanced Manufacturing Investment Credit (CHIPS ITC).

The relationship between the two events happening on opposite sides of the globe resides in the provision of the CHIPS Incentives Program that prohibits recipients of CHIPS funding from investing in the growth of semiconductor manufacturing in four named “foreign countries of concern”: China, Russia, Iran, and North Korea. Additionally, regarding the CHIPS funding itself, recipients are prohibited from spending those funds anywhere but in the US. Finally, the most broad-sweeping (and vague) provision: CHIPS fund recipients will be barred against “engaging in joint research or technology licensing efforts with a foreign entity of concern that relates to a technology or product that raises national security concerns.”

Thus, advanced manufacturing companies, including all the businesses in the 3D printing sector, will have to do serious due diligence to make sure they can benefit from the CHIPS ITC, which the DOT press release notes “is generally available for qualified property that began construction after enactment of the CHIPS Act (August 9, 2022) and placed in service after December 31, 2022.” This means that companies that invest in the Intel plant in Ohio, for instance, will qualify for the CHIPS ITC — as long as they also meet the stringent foreign policy requirements, dubbed the “national security guardrails” by the DOC.

The danger for companies is not just that they will miss out on receiving funds, but that they could have funding clawed back at any point in the future, “if within 10 years of claiming the credit a taxpayer (or affiliates) engages in a significant transaction that materially expands the semiconductor manufacturing capacity of the taxpayer” in one of the blacklisted countries. So, to feel fully comfortable, companies that are serious about wanting to receive CHIPS funding would essentially need to make sure their business models can comply with a wholesale ban on doing business with China (along with the other three countries, but China is clearly the relevant one). That’s not easy!

There are countless interesting things going on here. Personally, I don’t care for the “malign actors” rhetoric, but at the same time, I don’t really buy it. Gina Raimondo is also frequently on the record saying more sensible things about China.

The most interesting part is the fact that the statute referred to in the policy guidance specifically prevents CHIPS ITC recipients from “expanding” the semiconductor sectors in the four banned countries. This implies that the existing semiconductor business relationships that US companies have with companies in China are presumably okay. This means that the point of the restrictions, as well as the funding, is really to prevent American companies, as much as is possible, from contributing to the creation of any new advanced manufacturing infrastructure in places other than the US.

Along these lines, this is essentially a mechanism for legally mandating an acceleration of the reshoring of US manufacturing. And that, itself, is mainly related to long-term resource scarcity, which will eventually necessitate the end of rampant overproduction and ever-increasing dependence on cheap goods being shipped in from all ends of the earth.

Image courtesy of Intel