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In spite of a number of serious and ongoing geopolitical events,
the summer of 2022 saw significant change in the United States,
with the passing of two key pieces of legislation by
Congress. Irene Lynch Fannon discusses what is referred to in
media reports as ‘the CHIPS and Science Act‘, and
the Inflation Reduction Act…
Geopolitical developments often change the environment in which
our clients develop their business strategies for the short- and
medium-term. In 2022, a range of geopolitical events
including the conflict in Ukraine, climate change causing drought
and floods, and the effects of Brexit are all competing for our
attention, causing some to speculate about where the opportunities
may be and others to react defensively. Success sometimes
lies in the ability to identify, adapt to and capture new
opportunities. In that context, significant change has
happened over the summer months in the United States with the
passing of two key pieces of legislation by Congress. The
first is referred to in media reports as ‘the CHIPS and Science
Act’ and the second, the Inflation Reduction Act.
The CHIPS and Science Act
The first, which has a number of different titles or sections
and is primarily an appropriations act, has received a lot of
attention because it has allocated significant federal funding to
support the manufacturing of particular products, in addition to
providing focused funding for particular technological and
scientific initiatives and research. The abbreviated title is
actually an acronym for Creating Helpful Incentives to Produce
Semi-Conductors in America. The majority of the legislative
provisions contained in it are driven by policy concerns around
ensuring leadership of the US in the manufacturing of high-level
technologies.
In addition, there are concerns around supply chain
vulnerabilities through over-reliance on the overseas manufacturing
of crucial components such as semi-conductors and
micro-chips. There is also a broader, longstanding concern
around repatriating certain kinds of manufacturing to the US.
A further concern, shared by other countries, is the growing
capacity for such ‘high-end’ manufacturing in
China.
The Act, which became law in August, allocates $52.7 billion in
subsidies for US chip manufacturers who establish or expand
operations in the US, and $200 billion for investment in research
into technologies such as artificial intelligence, robotics and
quantum computing. The Act received cross-party support with
a significant majority vote in the Senate, and approval in the
House, following further tax and spend agreements with some
‘hold out’ Democrats. President Biden said, as he
signed the Act into law, that the new initiatives will mean lower
prices for the US consumer for everything “from cars to
dishwashers”. Clearly the initiative represents
opportunities for those particular sectors.
However, another feature of the legislation is what is described
as the ‘guardrails’ approach, preventing investment by US
companies in Chinese companies and entities engaged in similar
cutting-edge industries. This part of the legislation is
designed to protect intellectual property and, indeed, US
jobs. At the same time this particular aspect highlights what
is really compelling about this new legal framework. It
represents a level of governmental engagement with specific
industrial policy which is unusual in the US. The legislation
has been described as a significant shift in approach to shaping
industrial policy and as the most important planned US investment
in industrial development in over 50 years (Peterson Institute for
International Economics). That said, while this is different
in terms of recent American approaches, such investment and
planning is not unusual in the EU or, indeed, in other major
economies, such as Japan.
On a side note, once the Act was signed several initiatives from
major US manufacturers of semi- conductors got underway.
However, recent reports have indicated that further instability in
this sector developed later in the summer, with large manufacturers
now reporting a glut of inventory in the US, due to unpredictable
supply chains coupled with a decline in consumer demand for a range
of goods.
The Inflation Reduction Act
The second key piece of legislation which was passed during the
summer – the Inflation Reduction Act, which was originally called
the Build Back Better Bill. However, increasing concerns
around inflation and the need to address challenging economic
developments led to a change in title. Three aspects of this
legislation stand out. First; the significant allocation of
funds for clean energy initiatives. Second; the clarification
of a tax strategy for large corporates and, third; changes to
federal spending on prescription drugs provided under the Medicare
system.
Included in the clean energy initiatives are an allocation of
$30 billion to support the building of infrastructure-supporting
alternative fuel initiatives, including support for solar panels,
wind turbines, battery manufacturing and geothermal plants. A
further $30 billion has been allocated for grants and loans
supporting the transition of utilities to clean energy.
From a tax perspective, the Act includes provisions designed to
prevent the largest corporations from exploiting tax loopholes that
allow them to pay little or no federal income tax, by imposing a
15% alternative minimum tax on corporations with average annual
adjusted financial statement income that exceeds $1 billion over
any consecutive three taxable year period. This tax is predicted to
generate approximately $300 billion in revenue from an estimated
150 companies. The legislation also includes other tax
reforms intended to make the tax code fairer and also provides
approximately $80 billion of additional funding over the next 9
years for IRS enforcement, operations, systems modernisation and
customer service, with the Congressional Budget Office estimating
that enforcement-related funding will raise $204 billion in
additional revenue, through 2031.
Finally, the legislation will allow the federal government to
negotiate and cap the prices it will pay for nominated prescription
drugs provided to millions of Americans under the Medicare
system. Medicare supports access to healthcare and
prescription drugs for Americans over the age of 65 and other
categories of vulnerable individuals, and represents a significant
market of over 55 million people. This initiative builds on
an already intricate classification system for medication and
pharmaceuticals paid for by the federal government under
Medicare. It strengthens the ability of the government agency
operating the system to negotiate prices and to penalise companies
for particular pricing strategies. The plan is that this will
lead to budgetary savings of $200 billion which can be used
elsewhere.
These two pieces of legislation seem to be politically popular
in the US and their success represents a potential shift towards
continued support for the Biden administration, which would not
have been expected earlier in 2022.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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