Amid a global semiconductor shortage, and as lawmakers dithered over a bill to boost U.S.-based chip manufacturing, Intel went to the Biden administration with a proposal that some officials found deeply alarming.

Intel told Commerce Department officials that it was considering expanding its manufacturing capacity for chips by taking over an abandoned factory in Chengdu, China. The new facility, the company said, could help ease a global chip crunch that was shuttering car and electronics factories and beginning to fuel inflation.

Intel ultimately shelved the plan. But for lawmakers and the administration it became a vivid example of the need to pass legislation aimed at luring the global chip industry back to the United States. It was also an argument for giving the federal government significant influence over the industry, according to lawmakers, congressional aides and administration officials, many of whom requested anonymity to discuss private deliberations.

The sprawling bill that Congress finally passed last week, the CHIPS and Science Act, gives the federal government a primary role in deciding which chip makers will benefit from the legislation’s funding. The bill contains $52 billion in subsidies and tax credits for any global chip manufacturer that chooses to set up new or expand existing operations in the United States, along with more than $200 billion toward scientific research in areas like artificial intelligence, robotics and quantum computing.

With concerns growing about China’s economic and technological ambitions, the bill includes strict new guardrails for firms considering expanding into China. Chip manufacturers that want to take U.S. funding cannot make new, high-tech investments in China or other “countries of concern” for at least a decade — unless they are producing lower-tech “legacy chips” destined only to serve the local market.

The legislation will hand significant power over the private sector to the Commerce Department, which will choose which companies qualify for the money. Already the department has said it will give preference to companies that invest in research, new facilities and work force training, rather than those that engage in the kind of share buybacks that have been prevalent in recent years.

“This is not a blank check to these companies,” Gina Raimondo, the secretary of commerce, said in an interview. “There are a lot of strings attached and a lot of taxpayer protections.”

Ms. Raimondo’s department also has the authority to review future company investments in China and to claw back funds from any firm that it deems to have broken its rules, as well as the ability to make certain updates to the rules for foreign investment as time goes b

It’s an embrace of industrial policy not seen in Washington for decades. Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics who has surveyed U.S. industrial policy, said the bill was the most significant investment in industrial policy that the United States had made in at least 50 years.

But China’s increasing dominance of key global supply chains, like those for rare earth metals, solar panels and certain pharmaceuticals, has generated 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 woo semiconductor factories. And the production of many advanced semiconductors in Taiwan, which is increasingly under risk of invasion, has become for many an untenable security threat.

Semiconductors are necessary to power other key technologies, including quantum computing, the internet of things, artificial intelligence and fighter jets, as well as mundane items like cars, computers and coffee makers.

“The question really needs to move from why do we pursue an industrial strategy to how do we pursue one,” Brian Deese, the director of the National Economic Council, said in an interview. “This will allow us to really shape the rules of where the most cutting-edge innovation happens.”

Disruptions in the supply chains for essential goods during the pandemic have added to the sense of urgency to stop American manufacturing from flowing overseas. That includes 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 manufacturing rose to 15 percent from almost nothing in the same time period.

Posted in: USA