The 2022 CHIPS Act May Be Repealed: What Does This Mean for You?

The CHIPS and Science Act 2022 was passed with bipartisan support under the Biden administration to strengthen semiconductor manufacturing in the United States and reduce reliance on foreign supply chains especially Taiwan which produces 90% of the world’s most advanced computer chips used for AI datacenters and defence applications.

However, during a recent speech, President Donald Trump urged Congress to repeal the Act completely, aiming to propel his onshoring efforts with a different approach, to replace spending tax dollars with tariffs.
Overall, it’s essential to understand the implications and complexities of this potential move and how it could affect key industry players.

What is the CHIPS Act?

In simple terms, the CHIPS Act is a law designed to boost the U.S. semiconductor industry by investing in domestic manufacturing, research, and workforce development. The goal is to make the United States less dependent on foreign semiconductor production, particularly in regions like East Asia where geopolitical tensions with China and natural disasters pose supply chain risks as observed during the COVID-19 pandemic.

During the previous three decades, all major semiconductor companies remained reluctant to construct new fabs inside the United States due to the high regional price differential and preferred building their fabs elsewhere. Restoring manufacturing in the US requires enormous capital that may not be cost-efficient under normal capital market conditions. So, in the year 2022, the US federal government stepped in to bridge the gap.

Considering that it takes approximately USD $15 billion+ to build a semiconductor fab,and the fact that Asian countries have been subsidizing semiconductor manufacturing for the past several decades, the US’s share of global fabrication capacity naturally declined from 37% in 1990 to 10% in 2022.

Source: Exyte

CHIPS Act Funding Allocation Breakdown

The major allocations under this Act are as follows.

1. $39 billion (including $19 billion in FY2022 and $5 billion each year from FY2023 through FY2026) to incentivise semiconductor fabrication.
2. 11 billion for FY2023 through FY2026 for R&D and workforce development programs.
3. Up to 2% of the funds provided to implement the above two allocations may be used for salaries and expenses, administration, and oversight.
4. The CHIPS for America Defense Fund provides $2 billion for the Department of Defense ($400 million per year for FY2023-FY2027)
5. The CHIPS for America International Technology Security and Innovation Fund allocates $500 million to the Department of State (over FY2023-FY2027) to collaborate with foreign partners on ICT security and semiconductor supply chain stability.
6. The CHIPS for America Workforce and Education Fund provides $200 million for the FY2023-FY2027 period to the National Science Foundation to promote growth of the semiconductor workforce.

Source: Bloomberg

CHIPS Act Awards Till Now

Thus far, the US Department of Commerce has finalized an award for $31.5 Billion under the CHIPS Act 2022. There had been concern that most of the taxpayer money has been awarded to non-US companies. Data shows that Intel has been the largest beneficiary of the Act followed by Taiwanese company TSMC. Nearly 60% of total funding has gone to domestic US companies.

There have been delays in the money disbursal due to stringent environmental reviews and provisions for workforce inclusion. In the last months of the Biden administration, these conditions were relaxed to speed up the award process.

The CHIPS Act has led to 23 mega projects in 15 states. These projects include 16 new semiconductor manufacturing facilities and are expected to create over 115,000 manufacturing and construction jobs across the United States.

Source: US Department of Commerce

Comparing Policy Approaches: Federal Funding vs. Tariffs

The CHIPS Act emphasizes federal subsidies to incentivize domestic semiconductor production. This strategy focuses on direct financial support to lower manufacturing costs and encourage chipmakers to build facilities within the U.S.

President Trump has proposed an alternative approach that relies on tariffs to boost U.S. semiconductor manufacturing. Under this strategy, imported semiconductor products would face higher taxes, moving the IC supply chain to the U.S., thus making domestic production more cost-competitive. The goal is to discourage foreign imports, thereby shifting demand toward U.S.-produced chips and encouraging manufacturers to invest in domestic facilities without relying on subsidies.

However, many experts believe that the complete onshoring of advanced chip manufacturing is nearly impossible. The semiconductor supply chain is highly complex and relies on a distributed global manufacturing process.

Source: Donald Trump TruthSocial Account

Strengths and Weaknesses

• Federal Funding Approach:
  • Pros: Provides immediate financial support for expansion projects, research, and workforce development, accelerating investment decisions and project timelines. A SIA report notes that the Act has spurred over $450 billion in private investment.
  • Cons: Heavy reliance on government funds and taxpayer support, posing risks if spending priorities shift or funding dries up. Secondly, the CHIPS Act comes with several strings attached.
• Tariff-Based Approach:
  • Pros: Encourages long-term domestic growth without direct government spending, promoting a sustainable industry.
  • Cons: Potentially raises costs for downstream industries relying on imported chips, increasing prices for end-users. Additionally, tariffs alone may not be able to shift the entire semiconductor ecosystem which is highly dependent on R&D and globally distributed manufacturing components.

Both strategies target the same ultimate goal—a robust U.S. semiconductor supply chain—but take contrasting approaches with different economic implications.

The TSMC $100 Billion Plan: Where Does It Fit In?

TSMC’s ambitious $100 billion investment to build five new fabs in the U.S. aligns closely with the CHIPS Act’s goals. These fabs are intended to enhance domestic chip supply and strengthen the U.S. position in the global semiconductor industry. Here, we consider both of the scenarios:

• If the CHIPS Act Remains:
  • TSMC could receive substantial direct subsidies and tax credits to complete these fabs, reducing capital expenditure risks and accelerating construction timelines.
  • Federal funding would also support workforce development and R&D efforts, both critical elements for ensuring TSMC’s long-term success in the U.S. market.
• If the CHIPS Act is Repealed:
  • TSMC’s investment strategy currently relies on incentives like grants, tax credits, and direct funding to mitigate these costs. The repeal would likely mean TSMC must independently absorb these expenses, increasing its financial risk.
  • It can avoid strict federal environmental and DEI regulations and focus on merit-based hiring only.
  • Repeal can limit TSMC’s ability to recruit, train, and retain local semiconductor engineers and technicians, potentially delaying production ramp-up. They may have to bring in professionals from Taiwan in greater numbers.

TSMC appears to be well-prepared for every scenario. Recently, C.C. Wei credited TSMC’s increased investment to heightened demand from major American clients like Apple, Nvidia, AMD, Qualcomm, and Broadcom. These companies sought to mitigate supply chain risks by having their chips manufactured domestically.

Wei also emphasized that TSMC is “not afraid” of potential subsidy cuts under the CHIPS Act, noting that the company’s decision to invest in the U.S. was primarily driven by customer demand.

How Can the Proposed CHIPS Act Repeal And Tariffs Affect Semiconductor Sub-industries?

Fabs and IDMs

America and China are both aggressively pursuing onshoring and domestication of semiconductor chips, especially for their defence industries. Irrespective of the CHIPS Act’s future, local pureplay fabs and IDMs are positioned to benefit from this protectionism. Key players like Intel, Global Foundries, and Texas Instruments in the USA, as well as SMIC in China, are expected to gain local market shares.

However, TSMC and Samsung are in a complicated situation. Tariffs coupled with high US-based demand are forcing them to shift their production capabilities inside the United States. This comes with its own set of complications.

A possible 25%-35% duty on Taiwan’s $150 billion annual chip exports to the U.S. would add $52.5 billion yearly to domestic prices, impacting industries from automotive to aerospace.

Apart from direct subsidies, tax credits offered under the Act have helped with the mobilization of private investments. The CHIPs Act repeal can have serious negative effects on the timeline of major construction projects leading to cost overruns or project halts.

To keep things balanced, TSMC has also started building a €10billion chip plant in Dresden, Germany — its first in Europe. The German government will provide half of the funding with €5billion in state aid, under the EU’s Chips Act.

Fabless Companies

Nvidia’s chips are primarily manufactured in Taiwan; however, certain advanced systems and complete computer units that incorporate these chips are produced in other regions, such as Mexico and the United States. All these products may be impacted by the 25% import duties on goods from Mexico and Canada.

Last month, President Trump also suggested the possibility of a “25% or higher” tariff on all semiconductor chips imported into the United States. Since Nvidia generates around 47% of its sales from the U.S., the impact on its margins will be more constrained. TSMC’s decision to manufacture advanced chips on U.S. soil positions major U.S.-based fabless companies to benefit significantly.

However, they would prefer to have supply chain diversification in the future. The CHIPS Act plays a pivotal role so that some day Intel, GF and TI can supply them with advanced chips just like TSMC is doing right now.

Chinese fabless companies like HiSilicon, a part of Huawei, are focussing primarily on the huge Chinese market. Huawei laptops will be using HiSilicon designed chips. Tariffs or no tariffs, their future looks bright as the Chinese government continues to directly pump public money into this critical sector.

European fabless firms will continue to benefit from the EU CHIPS Act.

OSATs

Most of the OSATs are located in East Asian countries where labor costs are low. Profit margins are tight with high capex costs and fast technology cycles. Proximity to Taiwan and South Korea is crucial.

They get bulk of their orders from fabless companies who outsource their chip packaging and testing. IDMs prefer to keep these tasks in-house for greater control. Relocating to America won’t be easy.

OSATs would face higher costs when exporting assembled and tested semiconductors to the US market, potentially further reducing their profit margins. Additional costs would likely be passed on to customers, including US tech companies. Amkor is the only OSAT that has received CHIPS Act funding. In the coming days, dealing with non-U.S. companies will be comparatively straightforward.

EDA

Major EDA companies like Synopsys, Cadence Design Systems, and Mentor Graphics (now Siemens EDA) are primarily US-based, so they will face less direct impact from tariffs on Asian countries. They do have significant R&D operations in countries like India and China that could be affected if tariffs extend to software services or intellectual property.

EDA firms may face pricing pressure as their customers (chip designers) deal with higher manufacturing costs and seek to reduce expenses elsewhere. Currently, stock market sentiments for major EDA tool providers are negative mainly due to uncertainty in the whole semiconductor ecosystem.

Test Equipment Manufacturers

Test equipment manufacturers themselves rely on global supply chains for components, which would be disrupted by tariffs, potentially increasing their own production costs. Companies like Teradyne (US-based) and Advantest (Japan-based) would need to recalibrate their manufacturing and distribution strategies to minimize tariff exposure.

Test equipment manufacturers might accelerate efforts to diversify their customer base, reducing dependence on any single region or semiconductor market segment.

Product Engineering Services

The CHIPS Act indirectly increased demand for product engineering services offered by companies like Tessolve, SiTime, Wipro, Infosys and Tata Consultancy Services, who provide software design and testing support. With the repeal of the CHIPS Act, there may be a slowdown in U.S.-based semiconductor expansion, reducing the demand for such services. However, direct tariffs are hard to apply on digital products and services.

Semiconductor companies would place greater emphasis on engineering services that reduce manufacturing costs and improve yield to offset tariff impacts.

Conclusion

Source: Semiconductor Industries Association

Despite intentions to repeal the CHIPS Act, reformation of its policies may be more likely as the Act has bipartisan support as well as national security implications and possible employment impacts in states such as Arizona and Ohio.

From automobiles to consumer electronics and advanced fighter jets like the F-35s depend on a global supply chain that is exponentially growing in complexity. While chips are getting smaller beyond Moore’s Law, they are also becoming more and more compartmentalized, with a supply chain that may source components from one part of the world and assemble in another.

The CHIPS Act has substantial R&D and workforce development provisions. How the current administration plans to fulfill these goals in a reformation could impact the entire Semiconductor industry.

List of References:

1. Building Fabs in the U.S. vs Taiwan: Twice as Long, Twice as Much
2. The CHIPS Act brought Intel to Ohio. Trump wants it gone. Will Ohio’s congressional representatives defend it?
3. Want to bring microchip fabs back to the US? Exempt them from environmental review
4. SIA: The CHIPS Act Has Sparked $200 Billion in Investments in the U.S. Semiconductor Ecosystem
5. What Changes to the CHIPS Act Could Mean for AI Growth and Consumers
6. Fear and resignation after ‘world’s most powerful company’ pays Trump a $100 billion ‘protection fee’
7. SIA: American semiconductor innovation and competitiveness under the Trump administration & the 119th congress