BIS, Allies Must Coordinate on Export Controls to Keep Advanced Tech from Renegade Actors

Stephen Ezell is the Vice President for Global Innovation Policy at the Information Technology and Innovation Foundation (ITIF), and he is a leading observer of international semiconductor policy. His new report, Moore’s Law Under Attack: The Impact of China’s Policies on Global Semiconductor Innovation, describes how China’s state-directed strategy to vault into a leadership position in the semiconductor industry distorts the global market with massive subsidization, IP theft, state-financed foreign firm acquisitions, and other mercantilist practices. China’s inferior innovators thus have a leg up—and the global semiconductor innovation curve is bending downward. Ezell estimates there would be 5,100 more U.S. patents in the industry annually if not for China’s innovation mercantilist policies. To address the challenge Chinese innovation mercantilism poses to the semiconductor industry, the United States needs to work with like-minded nations while enhancing its own innovation capacity in the sector.

One function of export controls is to prevent a sensitive or dual-use technology to be acquired by an unauthorized user or for an unauthorized use, for example using advanced American semiconductors in Chinese fighter jets. However, unless nations coordinate export controls, renegade actors will acquire the technology from another source. As such, export control regulations by the Commerce Department’s Bureau of Industry and Security (BIS) need to be coordinated with allies and specifically the leading producers of advanced semiconductor manufacturing equipment.

The following excerpt explaining the importance of international coordination from Ezell’s ITIF report is printed with permission.

Allied Nations Should Collaborate on Semiconductor Export Controls

China represents both an important market and an important location of production for companies competing in the semiconductor industry (let alone all other advanced-technology sectors). As part of receiving the benefits conferred on it by electing to join the WTO, China has committed to make access to its market available to enterprises from other nations according to the foundational principles of non-discrimination, national treatment, and non-transparency. China has also agreed not to distort trade and international markets through excessive industrial subsidization. If it continues to compete along these trajectories, it poses an existential threat to firms that are playing according to market-based rules. Recognition of this dynamic led the Trump administration to impose, or threaten to impose, export controls on Chinese firms, including the August 2020 decision by the Department of Commerce to require a license for the sale to Huawei of any microchips that are designed or produced through the use of U.S. equipment or software. At the end of September 2020, the administration expanded these controls by requiring companies to obtain a license from the Department of Commerce before a range of technologies or inputs could be sold to SMIC (the administration expanded its logic for export controls in this instance by contending that SMIC is a major supplier of semiconductors to the Chinese military, and so U.S. national security concerns were implicated by the sale of U.S. technologies that could benefit the Chinese military).

In the face of unbridled Chinese innovation mercantilism—not to mention the nation’s growing geopolitical aspirations—export controls on the core technologies underpinning China’s economic and military rise are certainly a tool which will be closely considered by policymakers. However, as ITIF wrote in “An Allied Approach to Semiconductor Leadership,” it’s important that to the greatest extent possible the United States collaborate with like-minded nations to coordinate in introducing such export controls, “for export control regimes are most successful when they are coordinated internationally.”  As Section 4811(5) of the Export Control Reform Act notes, “Export controls should be coordinated with the multilateral export control regimes. Export controls that are multilateral are most effective, and should be tailored to focus on those core technologies and other items that are capable of being used to pose a serious national security threat to the United States and its allies.”

Specifically, a new approach is needed that represents a middle ground between the United States’ recent efforts to introduce unilateral export controls that increasingly seek to accomplish economic or trade policy objectives and the traditional Wassenaar approach for both semiconductors (including semiconductor manufacturing equipment) specifically and advanced technologies more generally. As such, the United States should eschew the application of unilateral export controls and seek to develop a more-ambitious and effective plurilateral approach to promulgate export controls among like-minded nations that have indigenous semiconductor production capacity, such as Germany, Japan, South Korea, Taiwan, the Netherlands, and the United Kingdom. These nations should work together to establish a common understanding of both what threats are posed to the global semiconductor industry by enterprises from non-market economies not fundamentally competing on market-based terms, as well as the pace and evolution of semiconductor technology. Then, among themselves, these nations should establish working groups, outside the Wassenaar structure, to develop descriptions of both the semiconductor technologies and related items that warrant controls (beyond what already exists), as well as establish common licensing policies.

Ezell notes SMIC, which is a major supplier of semiconductors to the Chinese military and is now subject to restrictions related to the Department of Commerce’s designation as a Military End User. Earlier in the paper, he brings attention to other Chinese semiconductor enterprises that are subject to considerable state influence. China Tech Threat has written about two of those companies, YMTC and CXMT, and believes BIS should make Entity List designations for them.

To learn more about BIS – what it does, the issues facing it, who’s rumored to lead it, and more – follow China Tech Threat’s #FutureOfBIS series on Twitter