U.S. Government’s Policy Updates

Policies for Reorganizing a U.S.-Centered Global Supply Chain Part 3 – Notice of Proposed Guardrails for the CHIPS Act



Legislative Background of the CHIPS Act
 

The U.S. has been striving to bolster the U.S. competitiveness against China in the technology race by strengthening its semiconductor manufacturing and supply chains and expanding the research and development of its advanced technologies.

Since 2021, the Senate and House of Representatives have introduced and promoted bills to boost semiconductor competitiveness. However, these bills were not able to clear procedural hurdles due to disagreements over the details between the Republicans and Democrats. Accordingly, the Democrats have pushed for a separate bill specifically designed to bolster U.S. semiconductor manufacturing capabilities. This bill, called the CHIPS Act¹, is a simplified version of the United States Innovation and Competition Act (the “USICA”) that provides government assistance to the semiconductor industry. The Senate voted to advance this bill on July 19, 2022, then successfully invoked closure on the bill with a 64-32 vote on July 26, 2022. The bill officially passed the Senate by a vote of 64-33 on July 27, and passed the House by a vote of 243-187 the next day on July 28. President Joe Biden signed the CHIPS Act into law on August 9, 2022. 

 

1. The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022

Overview of the CHIPS Act

The CHIPS Act comprises the following provisions: ① Provides USD 52 billion worth of federal grants to the U.S. semiconductor industry; ② Provides a 25 percent investment tax credit for capital expenses for advanced facilities and equipment; ③ Directs USD 200 billion in spending over the next decade to support scientific research and development related to semiconductors; and ④ Prohibits U.S. federal funding recipients from constructing or expanding facilities for advanced semiconductor manufacturing in foreign countries of concern (so-called “guardrail” provisions) that raises national security concerns for 10 years. 

On March 21, 2023, the U.S. Department of Commerce announced rules outlining the guardrails of the CHIPS Act. This report will breakdown the key guardrail provisions included in the Act.



Overview of Guardrails of the CHIPS Act

The guardrail provisions of the CHIPS Act can be largely divided into five parts. First, the Act includes limitations on certain corporate activities, including: (i) Restrictions on the Material Expansion of Advanced Semiconductor Manufacturing Facilities in Foreign Countries of Concern; (ii) Restrictions on the Expansion of Legacy Facilities in Foreign Countries of Concern; and (iii) Restrictions on Joint Research and Technology Licensing Efforts with Foreign Countries of Concern. Other provisions include (iv) Designation of “Semiconductors Critical to National Security.” Each part will be explicitly explained in the following sections.



Restrictions on the Material Expansion of Advanced Semiconductor Manufacturing Facilities in Foreign Countries of Concern

The “Foreign Countries of Concern” identified in the CHIPS Act guardrails are the People’s Republic of China (PRC), Russia, Iran, and North Korea. The statute prohibits recipients of the CHIPS Incentives Program funding from partaking in significant transactions involving the material expansion of semiconductor manufacturing capacity for leading edge and advanced facilities in foreign countries of concern for 10 years from the date of award. Accordingly, companies are prohibited from making transactions that are equal to or more than USD 100,000, nor shall they increase the manufacturing capacity of a semiconductor facility in a foreign country of concern by five percent or more.



Restrictions on Joint Research and Technology Licensing Efforts with Foreign Entities of Concern

Recipients of the CHIPS Incentives Program funding are also prohibited from engaging in any research and development undertaken by two or more persons from foreign entities of concern as designated by the Department of Commerce. Recipients are also banned from granting such entities with technology licensing for patents, trade secrets, and other know-how. 

“Foreign Entities of Concern” includes: (i) Terror organizations designated by the U.S. Department of Defense; (ii) Entities on the SDN list administered by the U.S. Department of the Treasury; (iii) Entities owned by, controlled by, or subject to the jurisdiction or direction of a foreign country of concern, (iv) Entities that have been convicted by the U.S. Attorney General, (v) Entities on the Department of the Treasury’s Chinese Military-Industrial Complex Companies (NS-CMIC) list; and (vi) Other entities that the U.S. Secretary of the Treasury may include in the future.



Designation of “Semiconductors Critical to National Security”

The following eight semiconductors are listed in the guardrail provisions as “Semiconductors Critical to National Security”: (i) Compound semiconductors; (ii) Semiconductor utilizing nanomaterials, including 1D and 2D carbon allotropes; (iii) Wide-bandgap/ultra-wide bandgap semiconductors; (iv) Radiation-hardened by process (RHBP) semiconductors; (v) Fully depleted silicon on insulator (FD-SOI) semiconductors; (vi) Silicon photonic semiconductor; (vii) Semiconductors designed for quantum information systems; and (viii) Semiconductors designed for operation in cryogenic environments. Provisions outlining the specific prohibitions for these semiconductors are expected to be provided in future announcements.



Violation of Prohibited Activities

Recipients of CHIPS Incentives Program funding that engage in activities prohibited in the statute may be subject to the clawback of the full amount of the provided funding by the U.S. Department of Commerce.




DR & AJU’s Comments

Currently, Samsung Electronics Co., Ltd. is operating factories in Xian, China, and SK Hynix has plants in Wuxi and Dalian, China. These companies are expected to be greatly affected by the guardrail provisions of the CHIPS Act. However, experts agree that uncertainties have partially been resolved following the release of these proposed rules. They note that while there is little cause for concern if Korean companies continue to operate at their current level, these guardrails imply that companies are subject to a potential clawback of the full amount of funds received by the CHIPS Act in the event that they engage in prohibited activities. Therefore, companies must plan their investments and expansions to comply with the boundaries set by the guardrails. 

Additionally, the U.S. Department of Commerce will be accepting public comment on the proposed rules for 60 days from the date that the notice was released on March 21, 2023. Companies and interested parties who expect to be greatly affected by these guardrails are encouraged to actively submit comment during this time.

DR & AJU's Washington, D.C. Liaison Office and D&A Advisory, Inc. provide services that deliver accurate and crucial information and help companies operating in the U.S establish effective response strategies to policies such as the CHIPS Act. 

DR & AJU will continue to closely monitor updates of the U.S. Congress and government policies on the Buy America policy in order to respond expeditiously through close cooperation with businesses when necessary.




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