Using CHIPS for Rare Earths
What it means and what it could mean
Monday, as much of the U.S. East Coast was shoveling snow, the administration announced a non-binding letter of intent (LOI) with USA Rare Earth. The $1.6 billion deal would give the Commerce Department 16.1 million shares and warrants for an additional 17.6 million shares of the company. This brings the total to nearly a dozen companies in which the administration has taken a stake. The novelty this time isn’t industrial policy. It’s the administration’s use of CHIPS authorities to justify equity-like exposure for a product is not tightly scoped to semiconductors.
The deal is $1.6 billion for up to 16 million shares of USA Rare Earth, with an additional warrant for 17.1 million shares. It uses a combination of financial tools, and there are several unknowns. Reports differ on whether the initial $277 million is direct funding or an equity purchase. The bulk of the proposal is $1.3 billion in secured, structured loans under the CHIPS and Science Act. The Commerce Department has not released a detailed memorandum of the deal, and the funding structure, valuation, and terms remain unknown.
The use of CHIPS is both novel and potentially problematic. CHIPS is intended to support the manufacture of semiconductors, semiconductor manufacturing equipment, and production of necessary critical minerals. USA Rare Earth is arguably part of that ecosystem, and onshoring mining, refinement, and magnet production supports this goal. However, magnets have much broader uses. Not clearly defining the propose of the magnets could lead to legal scrutiny and potential challenge.
The Purpose Statute requires agencies to spend appropriated funds on their intended purposes. For CHIPS, that means supporting semiconductor production and its supply chains. The “necessary expense” test turns on purpose, time, and amount, whether the expenditure is reasonably related to the appropriation’s objective, occurs within the proper time, and is not excessive in amount. In practice, that means the investment must be proportional to its intended purpose. If the magnets are general-purpose and not specific to semiconductor manufacture, the investment would need to be tightly tailored to the CHIPS nexus.
A secondary issue is the use of CHIPS to take equity. The Senate considered mandating equity stakes as a condition for receiving CHIPS funding. Senators Warren and Sanders argued this was necessary, but the proposal was ultimately defeated. That legislative history doesn’t prohibit equity-taking, but it undercuts any claim that equity stakes are clearly within CHIPS’s core design.
That said, it is unlikely that USA Rare Earth will sue; it agreed to the deal. A third-party challenge is also unlikely, as standing is difficult to establish. Appropriators and the GAO, however, do not face the same constraints or incentives. If the structure becomes too messy, it invites deeper scrutiny.
Some will argue that this kind of government intervention will create a crowding-out effect and reduce competition in the space. I am less sensitive to that theory, particularly because PRC subsidies and long-term investment in refinement capacity since the Deng era have already crowded out most global competition.
PRC dominance is also a strong argument for the move. The administration can claim urgency in breaking the PRC’s near-monopolistic hold on rare earth magnets as a reason to use novel funding tools. It could argue that these investments have broad applicability beyond semiconductors, and that the broader benefits are a greater good, even if secondary to the CHIPS intent.
PRC dominance, however, is a policy rationale, not a statutory authorization. Appropriations law is blunt: you can’t use “greater good” to route funds into adjacent priorities if Congress appropriated them for a narrower purpose. If the administration wants a broad magnet industrial policy, the cleaner move is to seek explicit appropriations, or use an existing tool clearly designed for that mission, rather than stretching CHIPS and hoping urgency substitutes for fit.
Urgency also does not resolve the ethical questions. The appearance of impropriety, even if none exists, is already emerging. The Commerce Secretary’s sons, and formerly the Commerce Secretary himself, lead Cantor Fitzgerald. According to the Financial Times, Cantor is raising additional capital for this deal. That will continue to raise questions about favoritism and impropriety. These concerns compound if Congress believes the administration is using CHIPS in ways that stretch its intent. As Tony Stark noted on a recent podcast, appropriators hate when people think they can use their money however they want.
A final risk is that critics of the administration will see CHIPS morphing into a blanket national industrial-policy slush fund. If magnets qualify, what about copper or machine tools? That kind of expansion risks undermining the work to onshore semiconductor manufacturing and future efforts to use capital to spur economic and infrastructure development.