Actions Speak Louder than Words—So Where’s the Action from the Commerce Department?

“Actions speak louder than words” was the refrain from Commerce Secretary Gina Raimondo on CBS’ Face the Nation last Sunday. Raimondo is referring to what she hopes to see from the Chinese government following her meetings in Beijing last week—not just promises of change, but concrete steps. The world shouldn’t hold its breath waiting for them.

The Chinese Communist Party (CCP) can’t be trusted to uphold its promises—just ask the citizens of Hong Kong, who have seen their autonomy revoked in the last several years. Or maybe President Obama, to whom Xi Jinping made promises in 2015 that the CCP would stop militarizing the South China Sea. Or other nations in Asia, which are recently outraged after China released a map showing redrawn borders all over the continent.

Closer to home, as CTT special advisor Steve Coonen has detailed, the Chinese government has made a mockery of our export controls. Under the Chinese government’s policy of Military-Civil Fusion (MCF), any technology transferred to China’s civilian sector, including intellectual property derived from business deals with U.S. companies, can be co-opted by the Chinese military. No matter what a Chinese entity declares the stated end-use of an American technology to be, it is impossible to know the actual end-use purpose or end-user. MCF gives the Chinese government a domestic legal basis to violate U.S. export control rules. And it does.

Nor does the Chinese government have any scruples about spiking the football when it has successfully undermined U.S. controls. It is almost certainly not a coincidence that Huawei released a new 5G-enabled phone during Secretary Raimondo’s visit. That move showed off the technological breakthrough in semiconductors China has been able to make (fabricating its own advanced 7nm chip) even without relying on U.S. technologies.

Worse, the new phone is set to help revive the fortunes of Huawei, a spy agency masquerading as a telecommunications company which was banned from using U.S. components in 2019. The new phone also bolsters the operations of Semiconductor Manufacturing International Corporation (SMIC), a fellow Entity Listed company, which a teardown revealed is making chips for it. “It’ll be a big boost for SMIC and the whole semiconductor industry in China. Their share rally could continue because it beats market expectations,” said Steven Leung, a UOB Kay Hian Hong Kong executive director. “Most people didn’t foresee that China could catch up in this area so quickly.” Already, Bloomberg reported, SMIC added $5 billion in value by market cap.

The surge of cash into SMIC will likely have a dangerous ripple effect throughout the semiconductor ecosystem. It could be plowed into research, development, and production of legacy chips, an area in which SMIC is already a leader – certainly helped by the fact that current U.S. export controls made it easy for China to advance its position with legacy chips. Last month, China Tech Threat released a report detailing the dangers of a China-dominated legacy chip market: “An American dependence on Chinese legacy chips would be destructive to our national security and economic interests.”

Raimondo was less than convincing in her TV appearances assuring the American people that new dialogues with China could be a remedy for friction in multiple aspects of the U.S.-China relationship. With China looming as a hegemonic force in the legacy chip market, there is no time to waste by pretending that a series of talks will deter the Chinese government from its quest to dominate chip production. In fact, Reuters reported yesterday that China is set to launch a $40 billion state fund to boost its chip industry.

Actions speak louder than words, indeed. It’s time for the Biden administration and Congress to follow the Secretary’s maxim. What does that mean? The Bureau of Industry and Security (BIS) should impose a presumption of denial standard for all U.S. semiconductor manufacturing technology bound for China and additional U.S. government bodies need to act within their purview. An all-of-government approach is needed to confront China’s tech threat. 

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