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.