The White House released a report on Tuesday that offers a solemn assessment of American companies prioritizing profits over national security and long-term sustainability. “A focus on maximizing short-term capital returns has led to the private sector’s underinvestment in long-term resilience,” the 250-page report states. The United States has a competitive advantage over China in the production of semiconductor manufacturing equipment (SME), which provides a chokepoint that can limit “advanced semiconductor capabilities in countries of concern.”
The report details the findings and recommendations of the Administration’s 100-day supply chain review required by President Biden’s executive order from February that directed the review of four key industries: semiconductors, large capacity batteries, critical minerals and pharmaceuticals. The report states that the Chinese government’s “massive subsidy campaign [as much as $200 billion over the past eight years] to develop its domestic semiconductor capability” has exploited “gray areas” in international trade rules and avoided World Trade Organization (WTO) oversight. The Chinese government has propped up key tech industries, including semiconductors manufacturing and SME production, through a “novel subsidy strategy” meant to avoid “transparency requirements of the WTO subsidy regime.” Essentially, government subsidies are booked as “investments” to avoid WTO disclosure rules.
This one of many “innovation mercantilist” tactics that Chinese state has practiced for years, according to a recent report and event by the Information Technology & Innovation Foundation which details China’s deleterious impact on competitive international ecosystems for semiconductors, telecommunications equipment, biopharmaceuticals, solar photovoltaics, and high-speed rail. Co-author Stephen Ezell estimates that the US loses out on some 5000 semiconductors patents annually because of this predation.
The Chinese Communist Party has made a concerted effort to dominate the semiconductor market. The Made in China 2025 plan aims to produce 70 percent of China’s chip demand indigenously and pledges as much as $1.4 trillion of investment into China’s semiconductor industries.
Memory chips are the “most mature” of these efforts. Yangtze Memory Technologies (YMTC), which has received $24 billion in state subsidies, has emerged as a “national champion memory chip producer.” A report by James Mulvenon this year identifies ties between YMTC and the People’s Liberation Army.
“It’s not just YMTC,” cautioned Emily de La Bruyère, senior fellow at the Foundation for the Defense of Democracies, during a China Tech Threat roundtable forum this week. “Changxin Memory Technologies [CXMT] is equally propped up and potentially equally connected to the [People’s Liberation Army].” The roundtable titled “Let the Chips Fall?” explored the theme of how the next Undersecretary for the Department of Commerce’s Bureau of Industry and Security (BIS) should address semiconductor policy.
The White House report appears to be a de facto roadmap for the next BIS chief and is notable for naming leading Chinese fabs with military connections which have yet to be designated as Military End Users or on the Entity List. In no uncertain words, the bipartisan United State China Commission issued a report earlier this month, Unfinished Business: Export Control and Foreign Investment Reforms which critiqued BIS for failing to issue the lists of foundational and emerging technologies as required by the 2018 Export Reform and Control Act. Such a publication would likely trigger action against the Chinese fabs.
“While the United States no longer leads the world in semiconductor manufacturing capabilities,” it has a competitive advantage over China in semiconductor manufacturing equipment (SME), the White House report adds. The United States supplies more than 41 percent of the world’s SME. Accordingly, “the Administration should target and implement export controls on critical semiconductor equipment and technologies to address certain supply chain vulnerabilities.”
The report calls for a multilateral export control approach with U.S. allies. “Together, such controls will protect U.S. national security interests by limiting advanced semiconductor capabilities… while enabling continued leadership of the U.S. semiconductor sector.”
Yet, despite tighter export controls in recent years, sales to Chinese companies have been a major driver of American SME makers’ profits. Approximately 90 percent of Applied Materials’ and Lam Research’s revenues came from non-U.S. sales last year, the White House report notes. The percentage of Lam Research’s revenues from China nearly doubled between 2018 and 2020.
But the Chinese government’s approach to semiconductors doesn’t simply revolve around subsidies, Emily de La Bruyère, a senior fellow with the Foundation for the Defense of Democracies, cautioned. “China is weaponizing industries,” de La Bruyère explains. “It explicitly encourages companies to go out and integrate into industry chains to achieve positions of power.”
Protecting the United States’ “incumbent advantages” will require more effective controls on upstream inputs, which should be implemented in coordination with the private sector and foreign allies, said Will Hunt, research analyst at the Center for Security and Emerging Technology, which also addressed the roundtable. “China understands how important dual use technologies are… If we can apply narrow controls on input, which may hurt U.S. companies a little bit in the short term, it will have lasting national security benefits — which benefit businesses in the long-term.” Hunt’s report China’s Progress in Semiconductor Manufacturing Equipment: Accelerants and Policy Implications likens China’s position today to Japan in the 1980s, a country with sustained effort that was able to meet if not exceed the US in certain industrial semiconductor metrics.
*This piece was originally published in Forbes