Year: 2022

Today, China Tech Threat released the third installment in its continuing policy recommendation series intended to help leaders at the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) to prevent adversaries from acquiring and weaponizing sensitive U.S.-made technologies.

Semiconductors are critical to power virtually all forms of modern technology, from everyday devices like smartphones and tables to sophisticated defense systems. Yet, in the wrong hands or wrong applications, U.S.-born semiconductor and semiconductor manufacturing equipment (SME) technology can present a national security risk.

While the United States enjoys a competitive advantage over China in chip design and manufacturing, the People’s Republic of China (PRC) has made self-sufficiency a pillar of its national strategy to dominate the global market. The Chinese government’s success will depend largely on access to American-made chips and SME.

Despite the Biden Administration’s hardline position, including expansion of Entity List designations, China’s semiconductor production increased 33% last year, more than double the growth rate from a year earlier. This owes largely to what the Semiconductor Industry Association (SIA) recently called “a whole-of-nation effort to advance China’s chip sector, including government subsidies, procurement preference and other preferential policies.”

Chinese chipmakers Yangtze Memory Technologies Company (YMTC), ChangXin Memory Technologies (CXMT) and Semiconductor Manufacturing International Corporation (SMIC)—which have been called China’s “national champions”—have largely evaded U.S. export restrictions and continue to steal U.S. technology, despite SMIC being added to the Entity List.

SME is one of the few chokepoints that U.S. policymakers can use to prevent the PRC from surpassing the United States in chip design and production. In fact, the White House’s 100-day supply chain review recommended that the Administration “target and implement export controls on critical semiconductor equipment” to “protect U.S. national security interests by limiting advanced semiconductor capabilities in countries of concern.”

As much as 80% of sophisticated chipmaking and design processes is owned by U.S. companies, Nikkei Asia reported this month. And some critical tools are only made by U.S. companies.   

Yet, American SME makers continue to generate significant profits from sales to China. In November 2020, CNBC’s Jim Cramer predicted that “business is going to very good” for U.S. SME manufacturers Lam Research, KLA Corporation, and Applied Materials. “The China opportunity could be enormous,” he added, referring to these companies’ continued access to Chinese buyers.

Mr. Cramer’s prediction has been a windfall to stockholders. U.S. SME makers far outpaced the S&P 500 index over the past two years (up 33%), with KLA stock increasing 136%, Applied Materials up 126%, and Lam Research up 89%.

These growth trends indicate that U.S. export controls on SME remain largely insufficient to prevent the flow of sensitive technology to Chinese-controlled companies. As U.S. Representative Michael McCaul (R-TX10) cautioned last November: “[U.S. SME makers’] short-term corporate profits are sacrificing long-term American strategic interests. The Administration must use export controls to stop the PRC from further building out its semiconductor supply chain.”

To curb the PRC’s ambitions to dominate the semiconductor industry, China Tech Threat encourages BIS leaders to:

• Add YMTC and CXMT to the Entity List. Designating bad actors to the Entity List is a powerful way to stop China’s state-owned entities from acquiring sensitive information. Yet, inconsistent application has allowed major Chinese semiconductor manufacturers, like YMTC and CXMT, to operate freely, while restricting others, like SMIC.

Not only does U.S. export control law compel BIS to restrict SME to military end users, putting YMTC and CXMT on the Entity List represents an effective exercise to choke China’s military ambitions and protect Americans.

• Target “Organizing Forces” with Trade Restrictions. As Martijn Rasser, a Senior Fellow and Director of the Technology and National Security Program at the Center for a New American Security, explained last year: “The Chinese have been very good at creating cutout companies and intermediaries [to circumvent U.S. export controls],” which creates a “game of whack-a-mole” that expends U.S. resources.

BIS should target organizing forces with trade controls, as the Biden Administration did by adding the Chinese Academy of Military Medical Sciences to the Entity List. Doing so will reach beyond individual state-controlled entities and “behind the curtain” to stop the Chinese government and military from stealing U.S.-made technologies.

• Prioritize Unilateral Controls on U.S. SME. SME provides the PRC and its proxies with the tools to advance the country’s chip design and manufacturing. Yet, creating SME is a highly complex, patented, and expensive process that requires significant human capital and expertise. That provides leverage for U.S. makers to exert monopoly control and prevent other countries from backfilling demand.

While multilateral cooperation is necessary, U.S. policymakers must prioritize a “control-now-cooperate-later” approach with respect to SME. This should not be an “either-or” decision, but instead, a “both-and” approach.

The PRC is not waiting and watching for U.S. policy to be written. It is actively working to advance the country’s indigenous semiconductor capabilities, with the clear goal of disrupting the United States’ leadership in these key sectors. As such, BIS leaders should be laser focused on protecting the United States’ competitive advantage. That must start by prioritizing semiconductors and SME with trade restrictions, strengthening the export control regime and eliminating holes in the framework, and implementing unilateral controls in tandem with broader multilateral efforts.

To read the full recommendation, click here.

As the Biden Administration begins a push on Capitol Hill to bolster U.S. competitiveness against China, Axios reports that a recent dispute among senior advisors may signal disagreement in the White House over trade policy.

With support from Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi, the White House recently urged members of Congress to support legislation that would allocate $250 billion to strengthen U.S. supply chains in key industries, including semiconductors.     

In a speech on January 21, President Biden urged Congress to pass funding to incentivize U.S. chipmakers. “To be able to say, made in Ohio, made in America—what we used to always be able to say 25, 30 years ago—that’s what this is about,” the President said. “At the end of the day, this is about national security, economic security and it’s about jobs.”

The Axios article this week notes that tensions over the White House’s China policy came to a head at a NSC meeting last September, during which U.S. Trade Representative Katherine Tai accused National Security Advisor Jake Sullivan of leaking comments to the media to undermine her agency’s position of whether to investigate Chinese industrial subsidies.  

“The rare window” into personal clashes within the White House “illuminates the tension between the president’s trade and national security advisers about how and when to execute aspects of their China strategy,” the article states.

Despite President Biden’s firm position that China represents the greatest long-term challenge to the U.S., “the Administration’s plan for competing in the region consists of a single 51-word paragraph,” Politico reported on Monday.

The President’s advisors are divided into “three camps,” the article adds. “The result: inaction. Policy options are debated, teed up for release, and then pulled back — a kind of vaporware China economic policy.”

President Biden has largely maintained his predecessor’s hardline approach—including adding more than 50 Chinese companies with ties to the Chinese Communist Party and People’s Liberation Army to the Entity List.

Yet, it is unclear whether the White House has a concerted plan to protect the United States’ competitive advantage in key industries, particularly semiconductor design and manufacturing.

During a China Tech Threat roundtable forum last week, Nazak Nikakhtar, former Assistant Secretary for Industry and Analysis at the U.S. International Trade Administration, said the Administration should be “more aggressive” in applying export controls on sensitive technology.

“Multilateral sounds good. But in practice, it’s not actually effective because of our allies’ different levels of risk tolerance,” Ms. Nikakhtar said. “We should be mindful and respectful of that, and then move forward with what we believe we need to control.”

As it relates to moving forward, it’s also important for key positions within the Administration to be filled. For example, top leaders for the Department of Commerce’s Bureau of Industry and Security (BIS) have not yet been confirmed and will have important voices and roles as it relates to export controls and protecting America’s strategic technologies. We’re following BIS extensively and producing policy recommendations for the incoming leadership. Visit: futureofbis.com for more.

Today, China Tech Threat released the second in a series of policy recommendations meant to help leaders at the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) prevent adversaries from acquiring and weaponizing sensitive U.S.-made technologies.

BIS Agenda Recommendation 2: Within 90 days of starting, the new BIS Director should publish Congress’ required lists of emerging and foundational technologies.

The globalized world enables a relative free movement of goods and services, but this also allows the proliferation of weapons and items to be used for hostile purposes. Countries adopt export controls to manage the distribution of sensitive items to help ensure that people live in a secure environment.

The Bureau of Industry and Security (BIS) at the U.S. Department of Commerce regulates U.S. exports of “dual use” technologies, which have commercial and military applications, and ensures that innovative products and services are not weaponized by adversaries against Americans.

This second installment in the series explores a key policy issue for BIS: the process and efficacy to control new and innovative dual use technologies. Major Congressional reforms adopted in 2018 require BIS to take leadership in an interagency process to identify and report on emerging and foundational technologies in foreign countries to assess what effect export controls imposed on these technologies may have on their development in the United States, and to judge the effectiveness of export controls on limiting the proliferation of emerging and foundational technologies to foreign countries.

BIS’ performance of these tasks has become a matter of controversy and debate, even prompting some observers to suggest that BIS should be moved out of Commerce because it either can’t or won’t fulfill the tasks. Others have argued that the task is difficult because BIS lacks a workable definition of national security and the view that the relevant technologies are already widely available. The Acting BIS Director states that the relevant technologies are already controlled and that it’s impractical to publish such lists.

Ultimately, this paper’s examination leads to the second recommendation for BIS: Within 90 days of assuming office, the new BIS Director should publish Congress’ required lists of restricted emerging and foundational technologies–which at the very least could include updates to their Export Control Classification Numbers (ECCN), if they are already controlled–and maintain publication thereafter to Congress’ required schedule.

The second policy recommendation from China Tech Threat to help leaders at the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) prevent adversaries from acquiring and weaponizing sensitive U.S.-made technologies, will be launched next week.

This recommendation explores a key policy issue for BIS: the process and efficacy to control new and innovative dual use technologies. Major Congressional reforms adopted in 2018 require BIS to take leadership in an interagency process to identify and report on emerging and foundational technologies in foreign countries, to assess what effect export controls imposed on these technologies may have on their development in the United States, and to judge the effectiveness of export controls on limiting the proliferation of emerging and foundational technologies to foreign countries.

BIS’ performance of these tasks has become a matter of controversy and debate, even prompting some observers to suggest that BIS should be moved out of Commerce because it either can’t or won’t fulfill the tasks. Alan Estevez himself noted, during his prepared remarks at his nomination hearing, that “if confirmed, I will lead the dedicated professional staff at BIS to ensure that our export controls prevent the transfer of sensitive U.S. technologies. To do that, I will work to ensure that we are appropriately using all the authorities provided under ECRA. As part of that process, I will ensure that we execute our due diligence in identifying and imposing appropriate controls on those emerging and foundational technologies that need protection.” However, the Acting Director of BIS states that the relevant technologies are already controlled and that it’s impractical to publish such lists.

Keep an eye out for this recommendation and more to come as we move further into 2022.