Every Chip Matters

Why the U.S. Must Fight Back Against a Looming Chinese Monopoly in the Legacy Semiconductor Sector

The Problem

Since 2020, the U.S. government has actively protected “advanced chips” (set at an arbitrary level of 14 nanometers or smaller for export control purposes), but has ignored legacy semiconductors – those that are critical to defense systems, critical infrastructure, automobiles, medical devices, consumer electronics, and other products.

With the U.S. government exclusively targeting China’s advanced chip manufacturing sector, the People’s Republic of China (PRC) – led by SMIC, its national champion working with the Chinese military – is exploiting the U.S. government’s tunnel vision and spending billions to dominate legacy chip manufacturing.

National Security: The national security and economic consequences of a Chinese-dominated legacy chip space would be profound:

The U.S. military would potentially be dependent on China for chips essential to various warfighting technologies and critical infrastructure.

The world would be re-exposed to supply chain vulnerabilities associated with China-centric chip production.

The Chinese Communist Party would have more new conduits for spying on, hacking, and stealing from targets in the West.

The CHIPS Act, designed to boost American chipmaking competitiveness and strengthen semiconductor supply chains, would be rendered irrelevant.

Other dangerous Chinese tech companies such as Huawei would benefit from a stable source of chips (and American companies may very well not).

Solutions

In October of 2022, the U.S. government imposed restrictions targeting state-backed chipmaker YMTC, justifying them on the grounds of YMTC “posing a significant risk of becoming involved in activities contrary to the national security or foreign policy interests of the United States.” SMIC has already met that criteria because of its involvement with the Chinese military. BIS must tighten restrictions on SMIC by applying the presumption of denial standard for all exports destined for the company and other Chinese legacy chipmakers.

In 2022, Congress amended Section 5949 of the NDAA to stop the U.S. government from procuring or using any parts, products, or services that include semiconductors manufactured by specific Chinese companies that represent security risks. But, as former National Security O’Brien has also argued, the FY 2023 NDAA should include an expansion of Section 5949 to completely bar federal contractors from using Chinese chips in their equipment. Congress should also amend Section 5949 to prohibit chips made by PRC owned and operated companies from U.S. critical infrastructure.

The U.S. Trade Representative should impose tariffs to address China’s predatory practices and defend America’s national security. The U.S. China Economic and Security Commission notes that Section 301 of Trade Act of 1974 “provides USTR with a great deal of flexibility and can allow for novel remedies.” The Commission further notes that Section 301 investigations are “more open-ended”… “leaving a wide range of actions available to the administration.” USTR should target PRC chips in products coming into the United States. Senator Tom Cotton of Arkansas has likewise called for a precise application of tariffs.

Pandemic-related chip shortages caused many policymakers to realize that the U.S. was overly dependent on China-based supply chains. Additionally, the prospect of a Chinese invasion of Taiwan, the main locus of the world’s advanced chip manufacturing, has caused both parties to act to protect chip supplies. On August 9, 2022, President Biden signed the CHIPS Act to bolster U.S. competitiveness, innovation, and national security. The CHIPS Act devotes $39 billion for domestic chip manufacturing. The distribution of these funds should not unduly favor advanced chip production over legacy chip production.