The CHIPS Act is 'intertwined with the president's larger fiscal agenda': Expert

Daniel Clifton, head of Washington research at Strategas, joins Yahoo Finance Live to discuss the ongoing chip shortage and how U.S. lawmakers are trying to address it through the CHIPS Act.

Video Transcript

RACHELLE AKUFFO: Well, joining us now for more on this is Daniel Clifton, head of Washington Research at Strategas, a Baird Company. Thank you for joining us. So as we heard there, trying to get an idea of what is at stake if this does not pass in the next few weeks.

DANIEL CLIFTON: That's right. So Congress has been debating a much larger piece of legislation that touches on trade policy, semiconductors, and National Science Foundation research. And the House and Senate just could not reconcile their differences. Given the urgent need that the Secretary just outlined, the goal right now is to strip out the funding for semiconductors-- it's about $50 billion-- and to be able to pass that as a standalone measure. That process started today, actually, when the House of Representatives passed legislation that ends tariffs on baby formula.

And you could say, what does baby formula have to do with semiconductors? Well, it created the revenue vehicle so that the Senate could start to move on the semiconductor legislation next week with two very important provisions. The first is the money for the semiconductors, which is a subsidy, but also a second provision called the Fabs Act, which provides a 25% tax credit to the semiconductor industry for any type of construction, manufacturing, or equipment related to that factory, which will then further increase the opportunity for more investment here in the United States.

The administration's message is a little bit complicated in terms of the stakes. They're saying if this bill does not pass, China wins. But at the same time, you're seeing these factories go into US allies. So I don't think it's as clear cut as the political messaging that we're hearing. But clearly, there is a move for supply chain resiliency in America, where they don't-- the US policymakers do not want to be subject to foreign supply chains, especially after COVID and the war in Ukraine.

And they want those critical semiconductors here in the United States protected and willing to change the US economic model, one based more on industrial policy to be able to get there. So I'm not sure if the bill is going to pass on Tuesday. I actually don't think that it will have 60 votes in the Senate. But directionally, we're on a path to get this bill passed. It may take a little bit longer than the Secretary of Commerce had suggested.

SEANA SMITH: Well, Daniel, a two-part question here. One, what do you think that timeline, then, more realistically looks like? And you mentioned the fact that you don't think it's as clear cut as the US loses and China wins If we don't see something pass. I guess, how big of a setback, though, has this been for the US, more broadly speaking, when it comes to the chip industry?

DANIEL CLIFTON: Absolutely. Those are great questions. And if you think about it, the future of chips, people call it the new oil. So you want to be able to have that here in the United States, given that there is a deglobalization pattern that's going on around the world. And so the way that we think about it is that you're going to want to harbor your very critical technologies, such as chips and everything that goes associated with that, and have them here and produced in the United States. Even if it goes to Germany, it's not a win for China, but it still defeats the purpose because you want that here.

And so that message is coming across. This bill got 80 votes in the United States Senate when it was first passed on. And we think that we're going to reach some sort of deal. But it's very complicated right now because it's intertwined with the president's larger fiscal agenda, where the Democrats are considering passing a legislation with Democratic-only votes on what's called budget reconciliation for taxes and renewable energy and healthcare. And the Republicans said we're not going to help on any legislation until you forgo that larger fiscal package. So it's complicated and compounded by that.

And I got to tell you, it's not just the Republicans in the Senate. There are some folks in the House of Representatives who are not sold on this smaller bill yet. So it's going to take some work to work that out. Do I think that this bill could pass in September? Absolutely, I think it will. And if it doesn't pass in September, then it will likely pass in the November-- pass the November election, but before the new Congress comes into office.

DAVE BRIGGS: Daniel, we got to frame it whenever it does. This is a textbook definition of congressional dysfunction. Both parties agree on this. It originally passed the Senate 13 months ago. It is incredible. We are still talking about it. Sorry for the twofer here. How important is it for national security? Because the Secretary of Defense today weighed in on the Chips Act. And what does it mean for the US automobile industry?

DANIEL CLIFTON: Absolutely. So both of them are critical. And the reason why that this is important for national security, if you look at what China is trying to do, they're trying to secure the race on chips. They're a little bit behind us. But they're also trying to secure the race on oil. You control oil and chips, you start to control the production of just about anything that's going to happen in the economy. And we could see that that's where the long-term trend is.

So, from a national security perspective, I think that's why you're getting a lot of Republicans who are, frankly, uncomfortable with subsidizing private industry. There's such chip demand, as the Secretary of Commerce laid out, that you shouldn't need government funding to do this. But it's because the national security is now tied to that economic security.

I would also agree with your point that this is a classic case of congressional dysfunction, but again, you've got to think about it. It was very bogged down over trade policy in the house, which is a very, very different and unrelated issue to where we are today. We're finally getting to that resolution. So just because I've been in politics for a while, this is the process. Whether it's one month or two months, I'm not really sure it's going to make a difference.

The companies see we're on the path to this. I do think that Intel and GlobalFoundries will move forward. The car companies are very critical in getting this bill through, largely because they're going to need these chips, as well as just the general technology companies. So you have a broad coalition looking for it.

The way investors are looking at this is absolutely critical. We just had a chip shortage catalyst. That chip shortage is now beginning to wane. Investors now see this as the next catalyst for semi equipment spending. And that's why as soon as this vote was announced yesterday, you saw a big uptick in the semiconductor stocks. So it is a catalyst that is being very closely watched in financial markets today.

DAVE BRIGGS: Yeah, we saw a nice pop today as well. Get 'er done, Congress. Daniel Clifton, good to see you. Have a good weekend. Thanks.