Lawfare Daily: Mike Schmidt Talks CHIPS and U.S. Industrial Policy

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[MUSIC] The core objective of industrial policy shouldn't be making money.

“And I think that, you know, sometimes a profit objective will run counter to the”

national security objective. It's the law fair podcast. I'm contributing editor and host of the Security Economics podcast, Peter Harold. For today's episode as part of our new security economic series, I sat down with Mike Schmidt, distinguished visitor at Princeton University's

Griswald Center for Economic Policy Studies, a non-resident senior fellow at the Institute for Progress, and for today's purposes, the former director of the Chips Program office at the Department of Commerce.

Basically, the person who turned the 2022 chip sack into a program that actually

secured hundreds of billions of dollars of planned semi-conductor factories for the United States. China's manufacturing is a total powerhouse. If our strategy is to focus only on what we're building here, it's going to be very, very difficult for us to compete. The Security Economics podcast explores the intersection of economics and national security.

How countries manage their economies to support national security and how they deploy economic tools and support of geopolitical objectives. Today, Mike and I discuss how the Chips Program worked in practice, what kinds of industrial policy tools a government needs, and how we should be thinking about industrial policy as a nation.

I want to begin with a question just to jump in about where the semi-conductor industry is today. When you were setting up the Chips Office back in 2022, 2023, a lot of the industry was in the doldrums. People were worried, for example, about the future of Intel.

“Memory semi-conductors were going through a cyclical bust, and there was, I think, a very”

strong impression, both in Congress and in industry that, "Oh, if we didn't have the Chips Program, there's no way these companies would be able to afford to build here in the United States." Today, of course, for a very different situation, we've seen Intel stock, which, of course, the US is now a 9% owner of, I think, more than triple over the last couple of years.

The memory companies have all joined the trillion dollar club. They're all making money hand over fist. When you look back from where we are today, to where we were a couple of years ago, do you think we actually needed the Chips Act to build semi-conductors in the US, or could these companies all actually be paying for it out of pocket?

Yeah, you know, when I think back to the dynamics in the industry, when we started, I think the other characteristic that I would flag and reflect on is the fact that when Chips passed mobile, particularly in the leading edge, mobile was still the huge driver. They ruled the roofs in terms of demand, with Apple being the big gorilla in the room. And of course, companies like Nvidia and AMD were big drivers of demand.

But the whole shift towards AI being the driving force of the industry hadn't happened yet. Chips passed in August of 2022, and it was that fall that Chatch E.P.T. had its viral moment. So, while we were implementing the Chips Act, the industry was rapidly shifting and adapting

to what was going to be, you know, now clearly is years and years of a structural change where AI really, really driving the demand.

“I think that there's no question that there would be huge demand for Chips and Chips”

production driven by AI, and that these companies like TSMC and Micron, and Samsung and Intel, and even others would benefit from that. The question for Chips was, you know, where is that going to happen?

And, you know, I think that there were some kind of incentives in the system towards geographic

diversification.

“So, you could imagine some measure of on-choring or supply chain diversification.”

But I don't think we get anywhere close to where we are without the incentives of the Chips Act, and without Chips implementation, because now the United States really is a premier destination for semiconductor manufacturing, particularly on the leading edge, where the only economy in the world that has all five leading edge producers, building projects here, really large projects, there's no other economy with more than two.

And so my assessment is that the shape of global supply has really been impacted by the Chips Act. And it's actually what you're saying is that the United States captured a larger share of this buildout, this AI-driven buildout that we are seeing because of the act that got the companies thinking about the United States as opposed to South Korea, Singapore or wherever.

That's right. That's right. And then the other thing I would say is that when I left the Chips Office in early 2025, we felt like we had put the industry or put the country in a really strong position with micron and TSMC and Intel and Samsung and this can't hide next.

But there were a lot of risks kind of still embedded in many of those projects, and strong demand has a way of making risks disappear, or at least be mitigated.

“And so I think when you look at the strength of Intel, or you look at the strength of”

Samsung, and there are found your business when you look at just the overwhelming demand for T-Ran that's driving micronship reduction and therefore how important their project in New York and their project in Iowa at Oregon to be. I think that there's no question that kind of once we've, once the Chips Act kind of set the industry up in the United States as we did, that the demand has been really helpful

and kind of solidifying that trajectory. That makes a ton of sense. Let me step back a little bit with you, Mike, because I think that for many of my listeners when they think about the Chips Program, they are thinking about the grant program, which was kind of the signature piece of it, or certainly the piece that generated most of the

attention, but obviously the Chips Act had a couple of different pieces to it. There were grants, tax credits, R&D. Maybe if you could just step back and walk through how you thought about the structure of the Chips Program and how the different pieces of the Chips Program tool kit fit together.

“So I think the tax credit was foundational, and I think to your point, gets a little bit less”

intention, but the tax credit was a 25 percent ITC, and it was a direct pay, basically

fully refundable. So regardless of tax liability, that's 25 percent that's as good as cash if you make that investment. So we always thought of that as the baseline incentive. Then our job at Commerce Department with grants and loans, we can get to the loans, but

really we were mostly focused on the grants, our job was to say, how can we use these grants to get companies over the edge in terms of making investments in the United States? And we want to give them just enough subsidy with the grants and the tax credit combined so that makes sense for them to invest here as opposed to in Taiwan, or Korea, or Singapore, or Japan, or elsewhere.

So that was the, and we built a whole operation, a whole process, a whole team that we felt was positioned to engage with companies in that way, to do the bottom up analysis of project economics and financials, and determine what the subsidy level was, that was an asserting to secure the investment in the United States. We also had loan authority, which we tried to deploy as a kind of another tool in the

toolkit.

It ended up being substantially less powerful than the grants for obviously reasons you have

to pay loans back, and also fundamentally, you know, the Chips Act, the problem was trying to solve was that it's more expensive to build chips here than the United States. These are companies that really need access to financing, so we were able, in the margin, to do some loan negotiations that were helpful, but that wasn't, you know, that wasn't really the major driver of the program.

Can I just ask you a question on loans real quick, Mike, just to jump in, because it's interesting, when I look at other recent pieces of U.S. government and industrial policy,

So for example, if I look at the work that the Department of Energy loan program office did, obviously loans with under the previous administration, but there was a, you know, really a lot of lending into clean energy and clean energy materials projects, or if I look at

the Trump administration's kind of current focus on critical minerals and, you know, various

other kinds of Trump administration and industrial policy, equity, which we can come through in a minute, and I'd be interested in your views, but you really see a lot of loans to a bunch of these mining companies, and I'm interesting, like, when you think the government should be thinking about a loan versus a grant, or, you know, how the different kind of tools fit together.

“I think you need to start by asking the question, what is the problem here that the market itself”

is not solving? And so, in the case of chip manufacturing, the problem was never that TSMC and Samsung and Micron couldn't issue bonds, couldn't access capital. These are the some of the most

gorgeous, most creditworthy companies in the world. The problem is that their shareholder driven

enterprises that want to make investments that are most profitable, and logically enough, more, logically enough, and it is more expensive to do it here than to do it elsewhere. And so, incentives have the function, directive-scented grants, have the index credits, have the function of offsetting that delta to make it economic for them to do it here. There are a lot of businesses where that's not the primary problem, where actually accessing capital or accessing capital on terms that

“are going to allow the project to bear out commercially is much more difficult. And there I think that”

the toolkit, the credit toolkit, could be very valuable as one. I do want to ask about equity authority. Obviously, one of the things we've seen the Trump administration do both with the chipsac and also with other authorities is convert what I think previous administration used more as grant authorities into authorities that they view as allowing them to take equity stakes, provide capital, via via taking an equity stake. And I'm interested in your views on, I don't know you've written

about this too, but I'm interested in your views on, you know, when it would be useful or helpful to have an equity toolkit for industrial policy and when you think the government should generally be relying on these other kinds of assistance. Well, I'm going to answer that in a couple of ways.

“One is that I think as part of the toolkit, I'm pretty supportive of having it, having access to it,”

which is separate from saying when should you deploy it? So they should begin the toolkit, make sense. My first view is the toolkit should be very broad, and that we should have figuring out what the right intervention is for the right company, for particular industry, is going to change from industry to industry company to company and a broad toolkit is valuable and that we need to be empowering the state with a measure of discretion to advance our industry

will policy objectives in in different ways. That is a separate question from the kind of a set of disciplines or norms or a broader state craft around deploying those tools and when it makes sense to deploy certain tools in certain contexts. Equity, I think it goes back to the question I asked earlier, what is the problem that the markets are insulting, right? So if you showed

me a early stage company with a technology that was going to be critical to industrial based in

some way or critical to national security in some way and they were struggling to raise capital from traditional venture, but it was a really important technology. I would say, that's a case where government equity could make a lot of sense. In the case of more mature companies that can raise equity on their own, I sort of see it in the same way and equity introduces a whole range of complications, policy downsides, et cetera, that then have to be considered. I think

there can be a bit of sense sometimes of like, let's take equity because it's costly, because the government's going to make a profit. I mean, Trump keeps talking about how much money we've made. And to me, I mean a couple of things. One is like, I just don't, I think we have other ways to make money as a government. I don't view industrial policy as being the core objective of industrial policy shouldn't be making money. I think that sometimes a profit objective will run

then probably the market could do it anyways. And so what do we kind of doing in there? And then then all industrial inventions will come with costs. And some of those costs are fiscal costs. You know, tax credits and grants, they cost taxpayer money, but some of the costs might be

“measured in policy drawbacks or downsides. And I think that in the case of equity, that's,”

you know, your bearings from those costs as well. Let me ask you about a different part of the tool kit, which is the, the demand side part of the tool kit. And you, you have talked in the past and written in the past about how there wasn't that much of a demand side part of the tool kit for chips. My sense is you and Secretary General Romando could, you know, call up companies that are buying chips, you know, computer companies, what and say, could you please buy American chips?

But you, you didn't really have a good tool to create a demand side incentive for the fabs that are, uh, are being built here in the US. I'm interested in kind of looking back what your views are about where demand side tools should fit and how you would fit, you know, would would have fit demand side tools into the chips act, uh, if you would have. So chips, chips was a supply side program.

“They was grants and tax credits to make investment happen here. I think supply side incentives”

are hugely powerful and they are by their nature limited depending on the set of problems are

trying to solve. So what you describe is exactly right. We spent obviously most of our time negotiating with the major semiconductor manufacturers like TSMC and Samsung and Intel and Micron to try to secure their investment here in negotiating our incentive deals with them. But we also spent a lot of time with their customers and this is Apple, Nvidia, AMD, Qualcomm, etc. And we did that for two reasons. One was it helped us understand a full picture of the industry

so that we were more knowledgeable counterparties in negotiating with the semiconductor manufacturers. But two was because we really wanted to encourage them to provide strong demand side signals for American made chips. And those, you know, that could be, you know, we want you to demonstrate a willingness to pay a premium for American made chips. That could be, we really want you to begin to

diversify your supply. Obviously, TSMC was and continues to be an incredible dominant player in

leading as manufacturing. It was really important to us to try to also drop demand to Intel and Samsung because we wanted a diverse competitive ecosystem for leading edge chips, not just for United States, but for the world. But our tools for doing so were kind of inherently limited. I mean, I say to me, ask you a quick question on that. So you wanted a diverse, you know, multiple suppliers. Was that for supply chain resilience purposes? Now, we kind of market competition

purposes. Like, why, what did you see is the benefit to having multiple leading edge suppliers

“rather than kind of a, we'll bet heavy on TSMC and make sure it succeeds kind of approach?”

A couple of things. One is, I think resilience and competition both those things. A world in which one company is producing every advanced logic chip is, you know, a world that has a lot of drop from a, from a competition perspective, from a resilience perspective, a security perspective, etc. You know, the other thing I would say is each of the companies in the leading edge ecosystem has the ability to bring different types of advantages to the country or willing this to bring

different types of advantages to the country. So with TSMC, for example, we were very successful in getting them to increase their ambitions to do leading edge manufacturing here. And that was a huge success by January 24. They were doing leading edge. They were actually producing leading edge chips in the United States. They had committed to three fabs. They then updated it at the committed to six fabs. So huge massive success in terms of what they're willing to build out.

We also spent a lot of time talking to them about where their core process technology

R&D was happening. That is still happening in in Taiwan. With Intel, they have an incredible R&D

ecosystem in Oregon. And with Samsung as part of our deal, they actually committed to do some R&D in the United States for the first time out out of Korea. So when you think about a resilient and competitive ecosystem having multiple players as advantages, but also each of those players can bring different things. And if you're able to negotiate with different companies to bring different things like that, that's an advantage too. And then the

And you don't know where risk is going to come from and having, you know, seeding

“several investments when the futures on certain was the prudent way to do it.”

One last toolkit conversation, or part of the discussion before we move on to other topics, you have said in the past, you've described in the past a moment when you realized one of the chip companies you were negotiating with had a matter of pending with the Bureau of Industry and Security at the Commerce Department, which presumably was something to do with export controls. And you said that linking the two would have made getting what you wanted on the chip's act easier.

But that, you know, the lawyers thought that was a bad idea and generally disweighted you from that. I have thought in the past on a kind of similar track that, you know, you can envision places where export controls could be part of industrial policy in the sense of if we have some technology that we've invented here, but we don't want it manufactured in China. For example, OLED screen technology, you know, which is now mostly manufactured in China.

We could have restricted the export of the technology to China and kept the manufacturing somewhere else. I'm not saying that would have been a good idea. I'm saying that conceptually, you can think about how export controls would be a piece of the industrial policy toolkit. Curious, how do you saw that? Like, I obviously can't give details about specific cases, but kind of saw the pros and cons of mixing export controls and industrial policy.

“It's a great question. I think there are a few, a few threads to pull out there.”

One is, I think on the export control side, when we were in government, I was an involved in export controls, but I think the Biden administration was pretty careful and consistent in saying that export controls aren't a tool that industrial policy. They're a tool of kind of other national security concerns. And I think that deserve scrutiny and should be revisited because in the fact pattern you just provided or others, I could imagine wanting to have an integrated strategy.

And even if, you know, I will say, even if the intent of the Biden here export controls

was not related to industrial policy, the effect was, like arguably the most important structural

shaper of the global semiconductor industry right now is the fact that China does not have access to UV technology. Right. You have leading edge chips being made in China today if they had access to UV technology. And so what does, you know, Samsung and Intel, what are their prospects look like if Huawei is churning out, you know, really good five-bedometer chips using UV machines from SML or if, you know, TSMC and Intel are competing for SMLs of UV machines with Huawei or whatnot.

“Right. I think that's hugely important. I think the anecdote you're getting at, oh,”

or you mentioned, you get that another question too, which is whether it's through export controls or through other authorities of the government, how comfortable are we using the power of the state coercively to get what we want when it comes to industrial policy. And there I think that certainly when we were in, we were pretty careful. I think the current administration is much more comfortable using more coercive forms of intervention. The way I look at them is like they have

objectives they want to achieve. There's sort of substantive objectives. And they'll kind of pull whatever leverage they can figure out to pull to achieve those objectives. And, you know, that may have long-term downsides. I personally think there are many ways in which it might. But, you know, they're less worried about that. They're kind of how do we, what leverage we have to achieve this objective over the next 12, 18, 24 months? Exactly. And on the one hand, I have

simply in the sense of like, you know, these are big powerful companies. It's not like I feel bad

for them. You know? Yeah, that's fair. That's fair. On the other hand, I do think that there are some basic norms about how our system works over the long-term where, you know, that that are worth protective. And there could be trade-offs between, in the short-term, using coercive power to get what you want in the long-term, the type of institutions, investment environment, and country we have. So let me step back a little bit moving beyond just the chipsac,

research that you are doing now. You've talked in the past about how the chipsac is a non-repeatable

one-off and that now that you're at Princeton and at the IFB, thinking about how the government can get industrial policy right, right long-term. I'm interested in how you think the government

“should structure itself to do industrial policy across, you know, what I think we would all agree”

is going to be a number of important strategic sectors that the US government will want to invest in. So just to clarify, I don't know that I would say that my view as chips was a non-repeatable one-off, but what I would say is that it was very hard to do. There are a bunch of hurdles to

jump through to get through anything done in government and it took a pretty extraordinary team

working really, really hard to make it happen and so I think from a policy standpoint, we need to think about state capacity and kind of reducing the constraints on the government as part of this, the question of what we need to make industrial policy succeed. I think that relates to the broader question of what is the right institutional design for industrial policy going forward. One place I start with here is the role of Congress and the reason I say that is that there are

a lot of proposals out there for kind of flexible pools of strategic capital and my personal experience running the chips operation was there's just huge amount of value in having Congress set the objectives.

Rather than sort of a flexible, rather than a flexible, $40 billion, you figure out what's important.

It's like the bill passes and you're like, we know that if we succeed in bringing leading edge production here, we will have kept faith with the purposes of this legislation. We will have kept faith with the bipartisan coalition that that enacted it and from day one, you are mobilizing around that objective and you are attracting talent that is geared towards that objective, right? People who have experience relevant experience who want to be a part of the effort

and not withstanding a bit of a bumpy road after the transition, like there has been actually fair amount of bipartisan continuity in terms of advancing the objectives of the chips

“acts, which I think would be much harder to maintain if you had a flexible pool of capital when”

people had different ideas of what to do with it. So I think that my optimal institutional design personally, I think starts with Congress saying here are the five or ten industries that we care about and here are the resources that we're going to put against those objectives. We know high level, not getting into the weeds of your supposed to do this with the money or that with the money, a lot of discretion when it comes to process, the right mix of tools,

you know, baseline, non-discretionary incentive, discretionary incentives. But you know, fundamentally, Congress is kind of creating the broad framework and then the executive is mobilizing to implement it. Then the question becomes how should the executive structure itself

“in that effort? I think that the institution building is really important. I think we need to”

rationalize the various offices in that are doing this. I could imagine a big bureau, maybe in the Congress Department, that kind of does all of it, a big bureau of industrial investment or economic security or something like that. I could imagine saying we're going to have one of commerce, one at energy, because energy is its own kind of unique beast in the of the labs, and that's, you know, all that, and one at DOD. Some kind of rationalization in terms of how it all

works together, and then a set of, you know, special authorities around special hiring authorities, contracting, lots of admin funding, you know, what it takes to really build an institution to do this. [Music]

It is interesting to me to hear you say you think it makes sense for Congress to set the direction, because as you say, there have been a number of proposals or, as a couple of years, it would give a more flexible tool to the executive branch, and I can kind of intuitively

“or sort of on first glance, I do see the appeal of that, like what will Congress doesn't necessarily?”

No, what we're going to need and all the rest, but it's interesting to hear you talk about, you're right, wouldn't, if you have a flexible approach, you will have implementation that might chase too many objectives, you might have political support that doesn't endure across administrations. It's just an interesting to me to hear here, you actually liking that strong congressional mandate. You know, I am not like one of these people who's like, oh, we need to do what China does,

when it comes to industrial policy, I think we need an American model of industrial policy, and I think we're kind of developing that. But one thing I think they do really well is set one term objectives and stick to them, right? And in the American system, the way we do that, the way we create actual policy stability, is through bipartisan legislation in Congress. And so I think that that takes a work, maybe politically, it's too hard, I don't know,

“but from an optimal institutional design standpoint, that's how I would think about it.”

Well, that maybe brings me to the next topic I wanted to talk with you about, which I know you've been thinking about at Princeton and beginning to do some writing on, which is, well, maybe I'd phrase it this way. If you were going to go up into a hill briefing for Congress on what sectors they should pass legislation to drive US industrial policy towards, I mean, interested both in the sectors, but also how you think about

what those sectors should be. I'll be very frank here. I worked when I was with the Biden campaign and then very early in the Biden administration, I worked on the President's supply chain EO, 14/0/17, where they laid out, you know, here's some sectors where we're going to work on supply chain,

and we had chips and we had key EV batteries and pharmaceuticals and critical minerals. And being

frank, the way we came up with those was kind of, well, it's sort of obvious that these are four, we need to work on. There wasn't a ton of scientific process, you might say, you've obviously got been thinking about this quite a bit and lived through chips. How should we be

“thinking in a more structured way about what sectors is appropriate to do industrial policy on?”

Yeah, there's a bit of kind of, I know when I see it. Yeah, exactly. I mean, that was, you know, that was for EO, 14/0/17. That was kind of, well, this bipartisan support for this. We kind of know these are important, you know, there'd be political support, let's do it. Which by the way, like, there's going to be art and science here, right? At some point, it's going to be you're going to apply judgments, but I think we need more stronger theoretical frameworks.

I would say, so the first question is deciding that an industry is critical, that matters

in some deep sense for economic and national security. And there, I think there are a few categories that jump off the page to me. One is obviously defense technologies. Two is dual-use technology, so technologies that are really important for defense, but where you can't really sustain them commercially, unless you also have thriving commercial markets supporting that production. And then three is broad-based intermediate goods, right? broad-based

intermediate inputs into the system. So, you know, think rare earths being a great example of this. Obviously, energy is an example of this where both for the national security applications, but to broader economic implications of disruption or course of efforts are such that having vulnerability in those industries kind of threatens our political autonomy, right? Our ability to

sustain certain policy trajectories. And then the last I would add is areas that are critical

to health and human life, right? And so when you think about pharma and medicines and all that, like, it might not be that it's a huge supply chain disruption, but it's a really, really big deal if we can't get access to those things because people's lives are about stake. So, that's kind of

theory around international dependence with dependence on China being the key question,

but obviously in the case of chips, Taiwan is part of that for certain industries you might have,

“you know, Russia or other countries. But I think that that needs to be a crucial part of the”

analysis. I think capital intensity is very important. I think the case for an intervention goes up when things are really expensive to build and when it takes a really long time to build them, right? So, if you think about masks during the pandemic, you know, you might say, well, it's really bad within a mask, but you might also say, well, it took like a couple of months and then suddenly we did at masks, right? And, you know, for next time, you know, maybe just having

a bigger stockpile of masks is what we need so that we can bridge to, you know, when we're able

to ramp production, etc. So, I think capital intensity is really important. And then I think you need some framework around not just kind of addressing the world as it is, but the world where it's going, right? And so, you know, robotics might be a good example of this today, right? We don't have major robotics industry will evolve dramatically in the next 10 years and if we don't act, might we, you know, accumulate a set of dependencies that we don't want and so we should act now,

“that kind of thing. So, I would say those are some categories I think about all within, you know,”

some theory, the case of allies and partners and, you know, not not trying to do everything here, right? It has to be part of a broader, broader effort. You know, it's interesting, you mentioned masks. I've been doing some, for some research I've been doing on industrial policy, I've been looking at the US government's experience trying to build up mask capacity in 2020 and 2021.

And I think you are, you are on to something with the lesson there. We basically were able to

search capacity, but also what ended up happening in 2021 is demand plummeted a bunch of the new entrance we searched capacity to went bankrupt because, you know, the demand for the US made product basically evaporated. And I think there is maybe a lesson that for that kind of a product thinking about better stockpiling with some sort of flexible search capacity is going to be more economically efficient and more policy-efficient than trying to have some long-term mask

industry here in the US. Right. If, yeah, it's like regardless, the right answer isn't xanty to say we need to invest billions of dollars in masks, mask factories because it's a problem we're probably going to be able to solve when the contingency arises. Right. So, on that topic

“of kind of resilience and the important dependencies you've written about this concept you're”

developing of vertical resilience versus horizontal resilience. And I'm interested in how you how you think about that. The concept of vertical resilience is saying, okay, within a supply chain, within a chip supply chain, semiconductor supply chain, you have equipment that goes into chip manufacturing, like EV machines, you have the chip manufacturing itself and then you have the packaging of those chips. All of those are necessary to get a semiconductor to market.

And the intuition there is that you can have a goal. We're going to onshore chip manufacturing, but if there continue to be kind of durable dependencies in other parts of that vertical supply chain, you're probably not having the impact you want to have in terms of overall resilience. Right. And so, to make a concrete and chip simple mutation, we were really really focused on chip manufacturing, which was, you know, for advanced laws of chips was highly concentrated in Taiwan,

but we also thought, man, if all these chips just end up getting packaged in Taiwan anyways, we're probably not flowing from the US to Taiwan for packaging. Yeah. We're probably not going to be having the impact you want to have. So, we pounded the table like we went hard to try to get more packaging in the United States. And we went direct to market to companies that do packaging. And we also applied a lot of pressure on the chip makers themselves saying, like, hey, if you want

federal funds, like one thing we need to understand is where these chips are going to be packaged. Right. And so, in some insist, those efforts led to new projects being announced in the United States, like we had a company called Amcore, announced a major advanced packaging project in Arizona, not far from where the TSMC, where the TSMC plant is being built. But in some cases, we also had

build, as part of this deal, we commit that within five years, we will have another packaging

facility outside of China and Taiwan in a different more resilient place. So, that's the concept

“of vertical resilience. And there, I think the big lesson or intuition is, policy makers really”

should be looking at the full vertical supply chain to say, where are they going to be sticky areas of dependence, right? If there are areas of dependence that maybe can be addressed in a few months, you know, like the master equivalent, maybe you don't need to solution to everything, but if there are something like an advanced packaging facility, which takes a couple years to build and is expensive, et cetera, then yeah, I think you want to make sure you have a comprehensive policy framework.

Okay, so for us, our resilience is saying, okay, like let's say there are five or 10 major industrial dependencies on China, right? Do we have to address all of those in order to shift the strategic dynamic in our favor? And I think the intuition there is, obviously it's great to address all of them,

“but also there can be a lot of value in addressing the most acute dependencies and that”

the returns to those investments for strategic standpoint can be substantial, even if, a set of other dependencies might remain. Let me ask you quickly, actually, to follow on on that, for the dependencies, we have whether the vertical or horizontal, how do you think about what we need to onshore versus Frenshore? You know, I think, for example, you've said, you know, we weren't going to manage to onshore EUV machines, which were mostly made in the Netherlands, or I guess entirely

made in the Netherlands by ASML. Like how did you think about what parts of this, we need here in the US versus, you know, Frenshore and Rubrik that the previous administration talked about more than the current one? Well, so a big picture, I think that China's manufacturing is a total powerhouse and that if our strategy is to focus only on what we're building here, it's going to be very, very difficult for us to compete, but if our strategy is to work in concert with allies and partners,

“then I think we're in a very, very strong position. So I think, big picture, I think that's essential.”

I think with, I think Lequan, you said that, you know, China has a billion people, America as its

best has six billion or seven billion people, something like that, and I think that's, I think that's kind of like how I would, you know, a hopeful optimistic take on American policy and working, oh, maybe, but I think that that should be our mindset. Let me just reflect on kind of how this played out in, in, in, in ships, because there were some big strategic questions about which parts of the industry, we were going to attract here and which we were going to really kind

of focus on and prioritize. So in the case of EV machines and, you know, ASML,

we were kind of looking at limited resources, we had 39 billion dollars, which is a lot of money,

but actually not a ton of money when it comes to the scale of the industry and it was really about how are we going to most efficiently allocate our capital and we had discussions as to, should we make a real run at ASML? You know, we decided that we were comfortable having production in an allied country like the Netherlands and that we focus our, our capital elsewhere and focus on other, other dependencies. Within, making itself, it was interesting because what you ended up seeing happen was

that kind of within the context of governments intervening and competing for investment, the market also was making a set of kind of pretty sensible decisions about where manufacturing would happen, what types of manufacturing would happen, right? So we, we had great ambitions or discussions about ambitions, I should say, to onshore, not only leading edge manufacturing, but current and mature technologies and we had some real success that we had global

foundries, we had Texas instruments, but if you look, for example, at what TSMC decided to do, TSMC said, we're going to do leading edge manufacturing in the United States and we're going to build our current mature facilities in Germany and in Japan and if you look at each of those countries, it makes a lot of sense. United States is home to Apple and in India and AMD, the major leading

customers. If you look at Japan and Europe, obviously they're really important industrial ecosystems there and building lagging edge technologies in partnership with those customers

“makes a lot of sense. So I think that the, at least the experience that we had was”

that in the context of these single nation efforts to onshore particular parts of, you know, of an industry that certain kind of logic of the markets still played out in terms of where investment around the world ended up happening. Let me ask you one more chips question. So you wrote an era in the essay of yours recently where you talked some about a couple of lessons from World War II or comparisons to World War II and I think one thing that really comes

to that essay is we managed to build the factories very quickly in the late 1930s, early 1940s and you know, there's a lot of talk today about the way in which environmental regulations, various other various bureaucratic structures slow us down. What were the barriers or the challenges to moving quickly that most surprised you? Like if you'd asked me, I would say the efforts are going to be environmental issues. So I'm not surprised there all I think you've said,

you spent a quarter of your time on nepo, which is maybe higher than what I've expected. That was not for the whole program. That was like that. Yeah, but yeah. What's slow us down? Like what were the things

“that surprised you that slowed us down? I think what's really important to understand about this”

is that it's about the cumulative effect of a bunch of constraints. And any single constraint, you might look at and say like, you know what that makes a lot of sense. I understand why that's

there. And most of them do, not all of them, but most of them do. They're not totally random, basically.

There's a reason for each other. When you add them all up, you're sitting there thinking like, man, this is just too hard. And you're doing it in the context of, I think one of the things that made it most kind of acute for me in my experience was we're literally sitting across the table from private industry. Right. So it's like you have this, the kind of counterfactual is very visible and you're trying to be dynamic and keep up with and compete with industry in a sense, right?

Because you're negotiating. Right. So I would say just to just to like walk through some of them, the first one I felt like in my first few days of work is procurement, like government contract.

So like, you know, you come in, we had special hiring authorities, which were absolutely essential

with that special hiring authority. We would not have been successful in including the chipset, but we didn't have any exemptions from procurement rules. And so you start, you start work. The first thing you want to do is build a team. It takes a long time to build a team. We needed quickly

“some semiconductor expertise in house. You have to go to a consultant to do that. But if you have”

to go through a normal government procurement process, it's very, very difficult to do that. I mean, I remember story where we were sitting across the table from one of the big executives at one of the companies we were negotiating with who kind of gave a whole speech about how our incentives weren't sufficient. And, you know, he had a fiduciary obligation to potentially invest abroad and all this kind of stuff. And he presented his, you know, independent analysis from a major investment bank explained why

our incentives were insufficient. And we also had a plan to have an investment bank who would be able to produce similar such analyses, but ours were still in procurement. Right. So it was like this very, it was like this very kind of like clear distinction. But anyways, procurement, I mean, the

paperwork reduction act, which basically says, you need to like go through a process with OMB in a

public posting with comments every time you want to solicit information from the public, you know, including major semiconductor companies, hundreds of hours work on the paperwork reduction act. So it's not reducing paper or is what I hear you say? It's, it's just producing paperwork. We had, you know, in the, in the nitty-gritty implementation of something called the Davis Bacon Act, which is a statute that requires some equal prevailing wage for construction workers,

we ran into some meaningful challenges. Neepa was very difficult. Of course, we ended up getting a correct congressional exemption from Neepa, but, you know, it's not, you know, when I think about environmental, Neepa is part of it that requires an environmental analysis or assessment of your projects, but also the underlying substantive permits. Clean air act, clean water act, endangered species act. You know, each of those, depending on the nature or project,

they're advancing meaningful, kind of substantive goals, sometimes it's kind of at heart to see,

kind of how they're laddering up into like a sensible overall, perming policy. And then, and then we had, I would say, like, among the most surprising to me, what's I really didn't anticipate, maybe I should have, but like, we had this period where we had to go from our term sheets, we announced a bunch of term sheets, a great fanfare. And then we had to go from our term sheets to our final awards. And, you know, I kind of felt personally felt at the time,

I was like, oh, man, we're at, like, the 10-yard line. We're almost there, right? And then getting into the weeds of finalizing these awards and the legal relationship between the government

and the companies proved to be very, very challenging in terms of things like, you know,

“what are the circumstances where we're going to be able to stop funds or clawback funds?”

What are the termination rights of each party? What is the dispute resolution mechanism? What are the covenants, the affirmative covenants, the negative covenants? Oh, this is sort of, this is a big contract, since you're going to have a line contract, right, and contract, and warranty, and events of default. And, you know, indemnities, you know, like, if the government gets sued for something that happens at the project site,

is the company and indemnifying the government, right? And those are these big open-ended liabilities, so companies and their boards of directors really worry about them. And then, so we're trying to negotiate it with it, but it turns out there's DOJ guidance on how indemnities can be used. And so our lawyers are actually negotiating with DOJ, well, we're negotiating with the companies. And, you know, it was, you know, I took a trip to TSMC in Taiwan, and we just spent a full week

“in the conference room going through these details. And I think that there was a big picture on”

all these constraints. There, there for a reason, most of them are there to protect taxpayers in some ways, but they come at the cost of adding friction, and we need to, you know, that, like, like, I remember, you know, I asked the counterpart TSMC, I said, you know, how does our contract compare with your PAN's contract? And he looked at me kind of puzzled, he said, what do you mean? I said, you know, your deal with your PAN, tell me, give it to me straight, what's it like? He goes,

"Oh, we don't have a contract with your PAN." Wow, you know, he said, we just, we just, we have nothing in the incentives, and obviously we submit our invoices, and we get the incentives, and and then, you know, there are other challenges with that. There's a lot of exposed auditing, and, you know, so it's not that airy, but it is, there was a lot of fresh in there. If I remember correctly, you went on odd lots in 2023, and you've said that coming out of that

interview where you talked about the chip sacked, you managed to hire a couple of folks who had kind of decided to apply after hearing you. And I'm curious, what advice you might offer people who are out there right now who might be interested in working for the government on industrial policy. Like, advice on like offices, they should be thinking of applying to, or skills, they should be thinking of building or just, you know, any advice you might have for listeners who

were maybe in college or grad school, or think tanks right now, but, you know, what to do this

on the inside, and what advice would you give them? The first, I guess, first advice would be to encourage

“it. I think it's hugely important for the country. I think it's will continue to be a really”

important part of the US policy, and it's awesome, fascinating, awesome, fascinating work. I think that there are a few angles into it. One is to develop really deep industry-specific expertise, right? So we had people on our chips team who, we built a team of about 180 people, among that group were people who knew the industry really well, and they were of extraordinary value. Some of them came from the industry themselves, some of them came from within the US government,

the intelligence community, the DOD, etc. So there are a lot of different places there, you can accumulate that kind of knowledge, but, you know, that would be really valuable. But then there are set of skills that were valuable, even if you didn't have the industry-specific context. So like core commercial skills, you know, the ability to underwrite negotiations and do financial models and understand businesses and the types of things you'll accumulate in the

financial sector or in consulting, etc. Those were hugely valuable. But we also had an awesome workforce team. We had an independent risk team, so I think they're different kind of entry points,

these things where like, there's no substitute for actually doing it. And so, for people who are

“in doing it, finding parts of the government now or in the future that are working on issues that”

feel meaningful and where your skills could contribute, just kind of go for it. You know,

see if there's a way to get on the door. And once you start doing it, then the opportunities can

kind of emerge from there. Well, that's a great place to leave it. Mike Schmidt, thank you so much for joining. All right, thanks Peter.

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