CHIPS Act – National Security Rules Issued

One little part, so many concerns…

The US Department of Commerce released today the final rule implementing the  national security “guardrails” of the CHIPS and Science Act. The rule elaborates on core provisions law. The first one prohibits CHIPS funds recipients from expanding material semiconductor manufacturing capacity in foreign countries of concern for ten years. The second provision restricts recipients from certain joint research or technology licensing efforts with “foreign entities of concern.” (AutoInformed: CHIPS Act – a Vision for America’s Technological Leadership; Significant 2022 Automotive Stories and Trends)

“CHIPS for America is fundamentally a national security initiative and these guardrails will help ensure companies receiving US Government funds do not undermine our national security as we continue to coordinate with our allies and partners to strengthen global supply chains and enhance our collective security,” claimed Secretary of Commerce Gina Raimondo.

As with all such bills emanating in Washington, the devil is in the details of how the stated goal of enhancing global supply chain resilience in coordination with allies and partners will be governed, at least on paper as published in the Federal Register. Nevertheless, it appears to be another successful implementation of awakened policies in the areas of national security, trade, jobs and the economy. It is also  a diplomatic victory.

This final rule follows consideration of comments submitted in response to the proposed rule, which was published in March 2023. Commerce said it reviewed and incorporated suggestions from representatives of the domestic and foreign semiconductor industry, academia, labor organizations, trade associations, and others in developing this rule. There are plenty of  real or potential conflicts of interest here in AutoInformed’s view made worse by the amount of taxpayer money involved.

Statute Details

• Prohibits recipients of CHIPS incentives funds from using the funds to construct, modify, or improve a semiconductor facility outside of the United States.
• Restricts recipients of CHIPS incentives funds from investing in most semiconductor manufacturing in foreign countries of concern for 10 years after the date of award.
• Limits recipients of CHIPS incentives funds from engaging in certain joint research or technology licensing efforts with a foreign entity of concern that relates to a technology or product that raises national security concerns.
• If these guardrails are violated, the Department can claw back the entire federal financial assistance award. How it would do so is not clear.

Today’s final rule provides details on and definitions for these national security guardrails. The rule:

• Establishes Standards to Restrict Expansion of Advanced Facilities in Foreign Countries of Concern: The statute prohibits 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. In addition to front-end and back-end processes, the rule clarifies that wafer production is included within the definition of semiconductor manufacturing. The final rule ties expanded semiconductor manufacturing capacity to the addition of clean-room or other physical space and defines material expansion as increasing a facility’s production capacity by more than 5%. This threshold is intended to capture even modest transactions to expand manufacturing capacity but allows funding recipients to maintain their existing facilities through normal course-of-business equipment upgrades and efficiency improvements, Commerce claimed.
• Limits the Expansion of Legacy Facilities in Foreign Countries of Concern: The statute places limits on the expansion and new construction of legacy facilities in foreign countries of concern. The rule provides details regarding this restriction, prohibiting recipients from adding new clean-room space or production lines that result in expanding a facility’s production capacity beyond 10%. The rule establishes a notification process for recipients that have plans to expand legacy chip facilities so the Department can confirm compliance with the national security guardrails.
• Classifies Semiconductors as Critical to National Security: While the statute allows companies to expand production of legacy chips in foreign countries of concern in limited circumstances, today’s rule classifies a list of semiconductors as critical to national security, thereby subjecting them to tighter restrictions. This designation covers chips that have unique properties that are critical to US national security needs, including current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities. This list of semiconductor chips was developed in consultation with the Department of Defense and US Intelligence Community.
• Details Restrictions on Joint Research and Technology Licensing Efforts with Foreign Entities of Concern: The statute restricts covered entities from engaging in joint research or technology licensing with a foreign entity of concern that relates to a technology or product that raises national security concerns. Foreign entities of concern include those owned or controlled by foreign countries of concern, those on the Bureau of Industry and Security (BIS) Entity List and Treasury Department’s Chinese Military-Industrial Complex Companies (NS-CMIC) list, and others as outlined in the statute. This restriction does not apply to several types of engagements which are necessary to existing operations and do not threaten national security, such as activities related to international standards, involving patent licensing, and to enable funding recipients to utilize foundry and packaging services, Commerce claimed.