BIS Agenda Recommendation #3: Strengthen Semiconductor Manufacturing Equipment Restrictions to Stop China’s Self-Sufficiency

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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.