CHIPS and Science Act is 'the closest we've had to industrial policy' in decades: Expert

PIMCO Managing Director Head of Public Policy Libby Cantrill joins Yahoo Finance Live to weigh in on the signage of the CHIPS and Science Act into law, Speaker Pelosi's trip to Taiwan, the Inflation Reduction Act, and more.

Video transcript

JOE BIDEN: Today is a day for builders. Today, America is delivering.

American manufacturing, the backbone of our economy, was hollowed out. We let semiconductor manufacturing go overseas. And as a result, today, we barely produce 10% of the semiconductors-- excuse me-- despite being the leader in chips design as well as research.

The future of the chip industry is going to be made in America.

SEANA SMITH: That was President Biden at the signing ceremony for the bipartisan CHIPS and Science Act. Now, this bill aims to bolster US competitiveness with China by authorizing billions of dollars to boost US production. Joining us now is Libby Cantrill, PIMCO Managing Director and Head of Public Policy. Libby, it's great to see you.

Let's start with the CHIPS Act. It is designed to make the US more competitive-- obviously, a huge win here for the Biden administration and for the Democratic Party. To what extent, though, does this act move the needle in terms of US competitiveness with China?

LIBBY CANTRILL: Yeah, I think that's the open question here. As a reminder, this bill authorizes about $280 billion to semiconductor manufacturing here in the United States, as you mentioned, but also to science and technological research. This really-- in many ways, this bill is sort of the closest that we've had to industrial policy here in the United States for decades, and really is an effort to counter China's rise technologically. But again, kind of open question whether this does move the needle.

I think lots of domestic semi manufacturers will say, yes, this does. At least this is a step forward-- probably not sort of the panacea. But for sure, better than nothing, and that's why you had Commerce Secretary Raimondo and lots of CEOs of different semi companies really lobbying for this in Washington. So I think, yes, incrementally, this for sure helps. But again, probably not the panacea that some lawmakers are characterizing it as.

RACHELLE AKUFFO: And, Libby, obviously, this is a long-term investment in the growth of the semiconductor chip industry in the US. But as we look at some of the big winners potentially, of course, Intel, as we're mentioning, but we're seeing the chip-makers still pulling back today. What are you watching in this space and why do you think we're seeing this pullback from them?

LIBBY CANTRILL: Yeah. I mean, that's-- I'm actually-- I'm not a semi analyst. Of course, my job is to really look at things through the policy and the political lens. I think, obviously, technology companies in the last few days have sold off for another reason, which is partly because of the other policies that are happening in Washington, the Inflation Reduction Act, which imposes, among other things, a 15% minimum book income tax.

Technology companies will disproportionately be impacted from that tax change. So again, sort of speculation here, but that could be one of the reasons why we're seeing a little bit of softening, even amidst the fact that this bill is being signed into law-- the CHIPS bill is being signed into law as we speak.

DAVE BRIGGS: So you mentioned the Inflation Reduction Act, which even the Congressional Budget Office says will have a negligible impact on inflation this year into next. So give me the one true winner of this bill not named private equity, although they kicked the can further down the road on carried interest-- never going to happen-- and one true loser of this bill.

LIBBY CANTRILL: Yeah, I mean, obviously, renewables, whether it's solar, wind, nuclear, geothermal, kind of all of the above, honestly, are big winners here-- some of the domestic EV manufacturers for sure are winners. And while many of that is sort of priced in already, the other kind of traditional sources of energy, traditional kind of fossil fuel companies are also winners here. Because in addition to this sort of massive amount of tax credits, about $400 billion of consumption and production renewable tax credits, there are also a lot of gifts to the fossil fuel industry, whether it's expanded permitting or what have you.

So really, the energy sector, kind of renewables and traditional, are the big winners. The losers, of course, are the pharmaceutical companies. They are the ones that are going to finally have to negotiate pharma prices with Medicare. Of course, they already have to do this with the VA and other parts of the US government.

And in some ways, this just makes parity for Medicare. But this is a big loss for pharmaceutical companies, for sure.

SEANA SMITH: Libby, what does all this mean for midterms? Because it looks like the Biden administration is going to have a huge victory here on the Inflation Reduction Act. Then we have the CHIPS Act that we were just talking about, a very strong labor market, gas prices, although they're very high historically, have been trending to the downside now for a couple of weeks. Does this put the Democrats in a better position or is it just too late?

LIBBY CANTRILL: Yeah, I mean, exactly as you said-- after seven really challenging months in 2022 for Democrats and the sort of death knell in terms of the Democratic control of Washington come November, they've had a string of really positive weeks, both legislatively and then also the Kansas election-- the ballot initiative there was also a big positive for them too, as they think it actually shows that Democratic voters are galvanized, particularly around the Roe v Wade decision of SCOTUS.

I think the bottom line is, really, it's probably too early to say with any high conviction here exactly what's going to happen. Conventional wisdom would argue, probably correctly, that Democrats will lose the House-- sort of past is prologue, the party in power never does really well in midterm elections-- on average, loses about 25 seats in the House. Of course, Democrats only have a five-seat cushion, five-seat majority.

So probably will lose the House, but the margins matter here. Whether they lose 10 seats or they lose 50 seats, it will make a big difference from both a policy perspective, but also in terms of 2024. The Senate, though, really, I think, is even odds the Democrats actually hold the Senate. That probably is a bit different from expectations just a few months ago. Some of the candidates Republicans are putting up are probably weaker than, certainly, Mitch McConnell would have liked.

So I think, again, even odds that they hold the Senate, probably lose the House, but maybe not by as many seats as was expected just a couple of months ago. But again, probably too early to say with any real high conviction exactly what's going to happen in November, because, as evidenced by the last few weeks, a lot can change in Washington.

RACHELLE AKUFFO: And speaking of the last few weeks, obviously, Speaker Pelosi being in Taiwan-- a lot of controversy there, even though we did see 26 Senate Republicans supporting her move there in Taiwan. But how much do you think that's actually going to move the needle, since this does tend to be a bipartisan issue, sort of countering China?

LIBBY CANTRILL: So I think that we shouldn't read too much into Speaker Pelosi's trip to Taiwan in terms of just sort of the broader impact here. This is a very sort of personal issue for Speaker Pelosi. She has been talking about concerns around China, particularly around their human rights track record, for decades.

What we expect is that this may be the last few months that she is Speaker. I think she's expected to likely step down if Democrats do lose the House in November. So in some ways, this is sort of the last window of time before those midterm elections that Pelosi could head over to Taiwan.

But I think the bigger thing for investors and market participants to take from this is that Congress is very hawkish on China. And so regardless of who's in the White House now or in 2024, I think our expectation is that there will continue to be US-China tensions. It will continue to be probably a risk premium in terms of investing in China for that reason. And even if we have a softer whomever is in the White House come 2025, if that's Biden or somebody else, again, we should rely on Congress that they will continue to be hawkish. I think Speaker Pelosi's trip to Taiwan is just sort of the latest evidence of that.

DAVE BRIGGS: Yeah, Ray Dalio spoke to the importance of this issue saying that it's far more impactful on the global economy than what we saw in Russia and Ukraine. So are we headed towards a confrontation there in the coming weeks? Or is this just a lot of China bluster, do you think?

LIBBY CANTRILL: Our expectation is this is not a question of confrontation in the next few weeks. Of course, there's the 20th Party Congress happening in China this fall. We think President Xi has every incentive to kind of retain some stability.

But this is certainly going to be a risk over the sort of secular horizon, to use a PIMCOism, over the three next three to five years. And this is something that we've been talking about for years, about the possibility of confrontation. I think that the view has sort of been that Russia's invasion of Ukraine may have made that a little bit less likely, at least in the near-term, because China did see, obviously, the world rally around Ukraine.

But for sure, this is a risk. I don't think we would put this risk, though as imminent, this 2022 risk, much more of a secular risk.

RACHELLE AKUFFO: All right, we do appreciate you joining us with your insights-- Libby Cantrill, thank you so much.