How Uncertainty Could Kill US Industrial Policy

The private sector needs credible, stable signals

Both the Trump and Biden administrations have expanded the industrial policy toolkit. Government intervention in the private sector has grown, as evidenced by the recent use of supply side incentives, equity investments, price floors, lending to establish a commercial critical mineral stockpile, and offtake guarantees. These strategies, while controversial, are the kinds of serious, long-horizon commitments that can help build resilient supply chains.

But these deals are built on weak foundations: The MP Materials rare earths deal rests on an expansive interpretation of Defense Production Act authority that the company itself flagged as a material risk in its SEC filing.¹ CHIPS was subjected to an appropriations schedule that created annual cliffs and forced the program office into complex financial engineering to manage risk across budget cycles.

Industrial policy is here to stay, but how we fund it needs to change. A bipartisan consensus has emerged that the US government must intervene in private markets and influence private sector activity to fulfill critical economic and national security needs. Whether those efforts succeed depends on whether companies can trust that the government’s funding decisions will be sustained through year three, year seven, year ten. But when legal authority is improvised, or funding is contingent on annual appropriations fights, companies price in uncertainty — particularly in today’s volatile political environment. In the short term, this means that a political risk premium is embedded in every government-backed industrial deal, making projects more expensive, timelines shorter, and investment more hesitant. In the long-term, the ability of the government to sustain a multi-decade strategy as a consistent player in industrial intervention is at stake.

CHIPS exposes the fragility of the appropriations cycle

The appropriations process typically operates on short time horizons. Most programs and agencies are funded on a yearly basis and have strict expenditure requirements, with funding expiring if not spent — the U.S. code even requires that appropriations acts are titled as “An Act making appropriations (here insert the object) for the year ending September 30 (here insert the calendar year)” (emphasis added). Congress has maintained its constitutional power over the purse through annual appropriations for years.

The CHIPS appropriations did not follow this default: over $50 billion was appropriated in a single act, covering five years of appropriations across the CHIPS manufacturing and research programs. These funds were what’s called “no-year money” — they never expired. Congress seemed to understand that for an urgent national and economic security concern, longer-term appropriations and flexibility in spending is paramount.

However, Congress still constrained these funds, making it harder for both the government and industry to rely on long-term funding. The $39 billion manufacturing incentives appropriation included a provision for an alternative “allocation authority” — essentially a backdoor process by which Congress could undo allocations made by the President. The CHIPS and Science Act required that the President submit “detailed account, program, and project allocations” for the program, but then allowed Congress to make alternative allocations in the yearly appropriations bill, which would override the allocation made by the President. Determining the right allocations, conducting due diligence, and negotiating awards was a complex effort; Congress could exercise the allocation authority and unwind it all. While Congress gave the CHIPS team, and the executive branch by extension, the charge to make long-term investments and the requisite funding to execute, in practice the program still had yearly cliff-edges. This influenced deal structures, requiring legal and financial engineering to manage appropriations risk, and still left private companies partly exposed.

The Secure Enclave program is emblematic of the fragility of CHIPS’s investment decisions. Secure Enclave is a $3.5 billion defense procurement program designed to “ensure a secure supply of microelectronics for defense requirements.”² Public reporting suggests that the executive branch intended for Secure Enclave to be co-funded, with CHIPS providing roughly $1bn for the program, and DoD promising to cover the remaining ~$2.5 billion. Devoting even just $1 billion of a $39 billion commercially oriented appropriation to a defense program with limited commercial spillover was a hard call, but this allocation was deemed necessary under the President’s authority.

But Congress unwound the executive allocation plan by compelling Commerce to fund the full $3.5 billion out of CHIPS -- and in so doing upended the CHIPS program’s portfolio planning. The consequences were immediate and disruptive. CHIPS had structured agreements based on portfolio-level math (as described by Todd Fisher here), and the finite pool of funding was precisely allocated to achieve the statute’s goals. In a blink, nearly 10% of that funding pool was directed to Secure Enclave, and the office had to renegotiate agreements with companies to account for the smaller available funding pool. Recipients understandably viewed this as a breach of faith — commitments were being revised not because of any failing on the companies’ part, nor because of a reassessment of the program’s goals, but because Congress redirected funding away from the prioritizations made by the executive branch.

Even with these challenges, the CHIPS and Science Act might be the high water mark of appropriations flexibility. But it’s still totally insufficient for the scale of the problem, and rather than fix this, oversight concerns have pushed Congress and appropriators toward additional constraints.

The MP Materials deal: ambitious but fragile

Rare earth minerals are a chokepoint in geopolitical competition, prompting government intervention. China dominates their production, processing over 90% of rare earths globally. Those rare earths are critical to advanced technology ranging from smartphones to laser-guided missiles. While the US has produced rare earths at the Mountain Pass mine since the 1950s, we’ve largely shipped them to China for processing. China’s recent retaliatory restrictions on imports and exports of rare earths led the Trump administration to negotiate an agreement with MP Materials (the company that owns Mountain Pass) to shore up this vulnerability.

The deal is an escalation in ambition. Unlike previous support for MP Materials, which came in the form of limited grants for specific technological innovations, the Trump administration’s deal attempts to address the supply chain problem by employing a broader array of tools, combining supply-side assistance, such as loans and equity investment, with demand-side guarantees in the form of a price floor and guaranteed purchases. Previous support was ineffective in part because it failed to establish a viable US customer base, prompting MP to continue exporting much of its output to China for processing. The new package aims to change that.

However, the deal has fiscal exposure. The Department of Defense committed to a ten-year price floor for neodymium-praseodymium (“NdPr”) oxide, a rare earth alloy produced at Mountain Pass, compensating for any shortfall if market prices decline. The size of the contingent liability is uncertain because the price floor is indexed to the Asian Metal Market price, largely driven by the Chinese market. Should China increase supply to depress the price (particularly if the goal is to deter Western capacity buildouts rather than maximize near-term revenue), US price-floor payments would increase. Our fiscal exposure is linked inversely to Chinese strategic actions.

By any reasonable standard, MP Materials is the most comprehensive industrial policy package the US government has assembled for a single company in decades. DoD also agreed to purchase all output from MP’s new magnet manufacturing facility at production cost plus a guaranteed profit margin, adjusted for inflation — that means MP Materials, which previously focused primarily on minerals, is now poised to be a vertically-integrated national champion of rare earth magnet production.

But the deal assumes sustained funding. The price floor payments, guaranteed offtake, profit guarantee, and the $350 million in preferred stock all depend on ongoing congressional appropriations and Department of Defense budget allocations.

Moreover, the deal relies on an unconventional interpretation of the Defense Production Act. Title III of the DPA, which governs financial incentives, has historically been used for targeted investments in specific industrial capabilities, backing purchase commitments, cost-sharing agreements, or grants tied to discrete production goals. The MP Materials package expands the toolkit to encompass a ten-year price floor, a production-cost-plus offtake guarantee, preferred equity, and warrants convertible to a 15% ownership stake in the company. No prior Title III transaction has combined this range of instruments on this scale or over this horizon — MP’s own lawyers flagged the “unconventional use” language in the firm’s SEC 8-K filing:

“given the unconventional use of DPA Title III authority, the need for the Department of Defense to secure additional funds in the future in order to meet its obligations in these Transaction Documents, as well as the heightened sensitivity and complexity of contracting with a government entity, particularly in a high profile industry implicating national security, there can be no assurances that the authorization of and continued support for the Transactions will not be modified, challenged or impaired in the future, which could have a material adverse effect on our business, prospects, financial condition and results of operations.”

The filing goes on to note that the uncertainty may be compounded by variable interpretation of statute, “future changes in the federal administration,” and the unpredictability of appropriations.

Because of the lack of long-term appropriations, a substantial portion of the package remains unfunded and without binding contractual obligation and legal improvisation creates risk.

The political risk to MP Materials is not confined to the deal itself. Because the authority underlying the package is contested, any other high-profile controversy over the DPA can splash onto it. The clearest recent example: the Trump administration reportedly considered using the Defense Production Act to “force [Anthropic] to tailor its model to the military’s needs,” which would have been an unprecedented intervention in a private company. The compulsion never came to pass, but its mere possibility stoked concern around the DPA at exactly the moment the law is working its way through reauthorization. A defensible deal like MP Materials could get swept up in congressional backlash triggered by an unfulfilled threat simply because both rest on the same legal foundation.

Toward a more durable industrial policy framework

Addressing these vulnerabilities to industrial policy requires changes to legal authority, appropriations, and where possible, institutional structure. These reforms fall into two tiers: changes Congress can make in the current session by amending existing authorities and appropriations practices, and the establishment of a standing institution that would create durable infrastructure for industrial policy across administrations.

1. Define the policy toolkit in statute

   To correct for the need to creatively interpret statute, Congress must explicitly authorize agencies conducting industrial policies with the full toolkit to succeed. Purchase guarantees, advance market commitments, price stabilizing mechanisms, options, futures, and yes, even equity investments, should be made available to government agencies. Bipartisan, bicameral bills, such as the SECURE Minerals Act and the Industrial Finance Corporation Act, have been introduced with robust, enumerated toolkits. These bills, or their core provisions, should move as standalone legislation or as riders on the next NDAA (the path of least resistance for defense-adjacent industrial authorities), or as part of the reauthorizations of the Export Import Bank or DPA.

   While Other Transaction Authority (OTA) can provide sufficient flexibility for many contractual arrangements and fulfill these same needs, it fails to address the underlying problem. Relying on a single, undefined authority invites political risk, provides no clear guidance to agencies, and ensures that every transaction carries legal risk factored into private sector pricing from inception. OTA should be normalized as a problem-solving tool for cases requiring creative structuring, rather than a substitute for explicit authority.

2. Make appropriations available for the long term

   Beyond enumerating the tools available to agencies, Congress must also make appropriations available for long-term commitments. One approach is to make industrial policy appropriations no-year and available without limitation like the alternative allocations in the CHIPS and Science Act. Concretely, this means a single lump-sum appropriation. Congress can require the executing office to establish milestones to drive performance and outcomes; if a recipient fails to deliver, clawback provisions could protect the appropriated funds from being wasted. While determining which violations should affect funding is complex, a transparent milestone system forces these decisions to be resolved in advance.

   Congress would have justifiable concerns with this level of latitude. Appropriations are a primary oversight mechanism and broad spending discretion raises risks that funds will be spent in misguided or corrupt ways. Yet successful industrial policy requires flexibility, judgment, and continuous resources to increase private sector investment at the scale we need — that might include extraordinary interventions like MP Materials. While the MP Materials deal has its flaws, industrial policy practitioners need comparable latitude to execute such deals when strategic conditions require them. And when a deal is made, the recipient should be able to count on its investment being backed by available funding.

   One way to reconcile this tension is to pair discretion with structural safeguards. First, deals like MP Materials should be transparent and competitive. One-off deals raise concerns about who benefits and why particular companies are singled out. Congress could require notification of such deals that includes an agency justification of necessity. This would create a procedural hurdle, but also a public record that enables oversight by Congress, inspectors general, and the press. Second, the default execution for some tools should be at the market level rather than for individual companies. Price floors, for example, could be available to all qualifying domestically produced NdPr oxide, up to a certain volume. One model is the Federal Reserve’s emergency lending facilities under 13(3), which Congress amended after 2008 to require “broad-based eligibility,” precisely to prevent single-firm bailouts. Agencies should approach industrial policy with the presumption that tools are designed to move a market, rather than subsidize a single company. Congress can preserve agency discretion to waive that presumption when justified, but agencies should bear the burden of justifying departure from the default.

3. Establish an independent body

   Over a longer horizon, the most ambitious reform would be to take another cue from the Federal Reserve, establishing institutional independence with bounded discretion. The Fed’s significant discretion is constrained by statute, authorized tools, and established norms; Congressional oversight is maintained through staggered term appointments, enabling periodic board renewal, and semiannual hearings that hold the Fed chair publicly accountable.
   
   A comparable institution for industrial policy, comprising an entity with enumerated authorities, dedicated funding, and regular reporting obligations to Congress, could mitigate executive-branch volatility and appropriations uncertainty. Recent Supreme Court decisions, notably Seila Law v. CFPB (2020), Collins v. Yellen (2021), and the ongoing uncertainty after SEC v. Jarkesy (2024), have complicated the establishment and maintenance of independent agencies, limiting Congress’s capacity to shield executive functions from presidential control. The legal terrain for independent agencies has narrowed, and any such entity would need to be designed within those constraints and with enumerated authorities tightly drawn to industrial policy functions. In the current political climate, norms alone are insufficient — the operational framework must be legislated.

Uncertainty compromises industrial policy

The United States has achieved bipartisan agreement on the need for industrial policy far more quickly than it has developed the institutional capacity to implement it. Uncertain appropriations and ad-hoc deals under tentative legal authorities leave our industrial policy efforts likely to fail. It is time to pass statutes to give practitioners the tools necessary to achieve their strategic objectives. Without those assurances, every government-backed deal will carry a political risk premium that competitors in other economies do not face, and we will simply not be able to generate the investment necessary to ensure our economic and national security.

1. The Defense Production Act is a Korean War-era law that authorizes the President with a broad set of authorities to influence domestic industry in the interest of national defense. Title III of the Act governs financial incentives, which have typically been in the form of grants or cost-sharing agreements. The MP Materials deal included novel uses of the authority, such as implementing a price floor for produced NdPr oxides and a guaranteed profit, amongst others.

2. Secure Enclave’s design was controversial. Some in the intelligence and defense community viewed it as a necessary countermeasure against a long-standing vulnerability in microchips that could allow hackers to infiltrate defense systems. Others disagreed: a congressionally required DoD review conducted in 2023 suggested an alternative approach focused on standards at commercial facilities. Using CHIPS funding for defense initiatives was part of the debate as well — Rep. Zoe Lofgren stated that, “any secure program that might be necessary should be funded by the Department of Defense … not from CHIPS funding that should be focused on revitalizing our domestic chip capacity.” Whatever the merits of the program, this commentary is focused on the appropriations process surrounding it.