Policy

IBM’s policy lead: The Chips Act is no sure thing

Christopher Padilla, vice president of Government and Regulatory Affairs at IBM, spoke to Protocol about the global race to onshore semiconductor supply chains.

Chips on chips

The U.S. and EU are attempting to strike a complicated balance between national security and domestic goals.

Illustration: Christopher T. Fong/Protocol

The national race to re-shore chips is slowly ramping up — but the story isn’t as simple as nations just competing against one another to bring factories within their borders. This year’s Trade and Technology Council illustrated that point as the U.S. and EU attempted to strike a complicated balance between advancing collective national security interests and promoting their independent domestic economic goals.

To better understand the dynamics underpinning the chip race, we spoke to Christopher Padilla, vice president of Government and Regulatory Affairs at IBM. Padilla previously served as assistant secretary of Commerce at the U.S. Department of Commerce and as chief of staff and senior adviser to Deputy Secretary of State Robert Zoellick.

Padilla told Protocol why the Chips Act is no sure thing, how national security interests are driving the race to onshore and how the U.S. and Europe might go about avoiding a subsidy race.

This interview was edited for clarity and brevity.

In this year’s TTC, the U.S. and EU agreed they want to collaborate to avoid a subsidy race. Does that scare you?

There's clearly a global recognition that we need to build up semiconductor supply chain capabilities, particularly in the U.S., Europe and Japan. There's a recognition that over-reliance on Taiwan is neither economically wise nor prudent from a national security standpoint. The reality is the war in Ukraine, while it has nothing to do with chips in Taiwan, has reminded everybody — as COVID did — that supply chains need to be robust.

The language about “let's not have a subsidy war” — in a way, it makes me chuckle a little bit, because at the moment, we don't have anything in the U.S., and prospects for getting the Chips Act are more difficult with every passing day as we get closer to the midterm elections. So in a way, the bigger problem is the U.S. fails to act, rather than that we get into a subsidy war. On the European side, they're not interested in trying to out-subsidize the U.S. either.

Christopher Padilla Christopher PadillaPhoto: IBM

Why is the Chips Act in danger? Isn’t it widely popular?

The risk to the Chips Act is not the Chips Act itself; it's that it's part of a bigger package that seems to be the only legislative vehicle likely to move before the midterms. The House and Senate have both passed bills, but they're very different. The House spends [around] $400 billion in total and the Senate spends $250 billion — that's not a small difference. The Senate has language in its bill calling for removal of some China tariffs; the House doesn't have that. There is a dispute about outbound investment protections. So none of this has anything to do with chips. But there's a risk that these other issues become so politically contentious that the thing doesn't proceed.

With every day that we get closer to the midterms, that risk increases. There's also a risk that people say: “Ah, this is the only vehicle that's moving, so I want to attach my immigration provision [or] my spending provision [to it.]” You put too many decorations on the Christmas tree and it falls over. That's the real risk. Secretary Raimondo is doing a great job of keeping minds focused on the importance of this. And in all the meetings my team does on the Hill, nobody has said, “We're opposed to the Chips Act.”

Is the onshoring race more about national security or securing adequate supply for economic purposes?

It’s both, obviously. Politicians want both. [But] I have to say, the level of urgency that we're seeing from government leaders in the U.S., Europe and Japan is driven mostly by the national security concern.

Frankly, the Chinese actions and statements with regard to Taiwan haven't helped either. It's gotten a lot more nationalistic. Every government meeting I have, almost the first thing that an official says is, “We cannot rely on just Taiwan for chips. It's inimical to our economic and national security.” So that's the first thing, and maybe, you know, later on as the fourth or fifth thing, someone says, “Yeah, I want to create jobs in Ohio or France,” or what have you. But that's not the No. 1 driving factor in my view. If it were just a jobs thing, I don't think we would have to get $52 billion in the Chips Act that passed both the House and Senate.

Do you think that sense of urgency means these leaders anticipate a serious escalation in the U.S.-China conflict?

No, I don't think there's any sense of imminent threat. But it took a long time to get ourselves into this situation through market forces, where the manufacturing essentially migrated to one place. It's going to take a while to get ourselves out of it. So I think the sense of urgency is that we need to start today because it takes several years to build a fab or develop the next generation of semiconductor technology. That to me is where the urgency comes from: It's not that we think China's going to invade Taiwan tomorrow … It's more [that], after COVID and after the Ukraine war, we really recognized that supply chains can really affect us.

Are there any advantages to the U.S. taking an ownership model — similar to that of China — since it’s providing so much subsidy to private semiconductor manufacturers?

None. If that were the right model, China would be the world leader in semiconductor technology. They have poured hundreds of billions of dollars into this sector over a decade or more and they can't make most chips — they're still reliant on imported chips. The reason for that is that a lot of that money is wasted, a lot of it goes to state-owned enterprises.

The right way to do this is to promote innovation in the private sector and academic university ecosystem, which is what the Chips Act would do. It would, for example, create a national semiconductor technology center that I would envision would include industry [and] academia, as well as government, in a public-private partnership.That's the right model; the Chinese model failed.

The Europeans who sometimes in the past have taken — certainly not a Chinese approach — but a little bit more of a statist approach on this, they're not saying we need to create a French National Semiconductor company. The French would like to have more investment in France to do this, but they want it to be private-sector-led. Same with the Japanese: I think the Japanese are likely to create a public-private consortium that will include a fair bit of government money, but will rely on private sector actors, including foreign companies, to help rebuild the Japanese semiconductor ecosystem.

Would those nations want to prop up companies other than TSMC and Samsung, since those two are so far ahead in advanced chipmaking?

I don't think anybody wants to displace Samsung or TSMC. The administration in the U.S. has worked really hard to get both those companies to invest in the United States, and they've been successful. That's a good thing. I don't think the concern is so much what flag is flying over the headquarters, as opposed to where things are being made, and can we get access to them in a time of need. And will there be new players created? Yeah, I think there probably will be, [but] not at the scale of Samsung or TSMC.

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