UCSD admits into the University first, then into your major. If you do not get into Engineering, then you will probably be placed into Chemistry. Since Engineering is a capped major (impacted), they recommend to pick a non-capped major as your alternate choice which makes Chemistry the best option. And No, selecting an alternate major will not make you less competitive.
Also an additional note, if you are an OOS applicant, the UC’s no longer offer financial aid, so you can expect to pay $55K+/year to attend. If this will be a hardship, you may want to reconsider keeping this school on the list.
Good Luck.