Late last month, Rep. Michael McCaul (R-TX) and 16 top Republicans sent a letter to Commerce Secretary Gina Raimondo, calling for the “strengthening of export controls on semiconductors.” China Tech Threat has written extensively on this topic and asked the Congressman to expand on some of the points raised in the letter. He graciously agreed.
3 Key Takeaways
- Congressman McCaul believes that Chinese companies SMIC, Honor, and YMTC require additional restrictions. For example, he notes, “YMTC’s reliance on U.S. and other foreign sources of equipment and software make export controls an effective option to mitigate the threats to national security, economic security, and foreign policy interests.”
- He points to Georgetown’s Center for Security and Emerging Technology and explains, “technologies [that] are available only from the United States and its allies. The semiconductor supply chain—from the initial research and development and intellectual property to the fabrication and packaging of the chip—is clearly critical to U.S. national security. Selling the PRC the tools and technology it needs to increase its coercive leverage over its trading partners damages America’s strategic interests.”
- With regard to American semiconductor equipment manufacturing companies (which include Lam Research, Applied Materials, and KLA), Congressman McCaul says, “U.S. and foreign companies … are advancing CCP economic, military, and political priorities. Put another way, 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.”
CTT’s questions and Congressman McCaul’s unabbreviated responses are below:
Q 1: Mr. McCaul, you cited at least three Chinese companies that require further restriction; please explain why.
Honor: Last fall U.S. sanctions on Huawei caused them to sell off their former smartphone brand. Almost two months ago, the Washington Post reported that the “Pentagon and Energy Department supported placing the company on the blacklist, while their counterparts at the Commerce Department and State Department opposed it.” Why do you want them on the Entity List?
A: In August 2021, 13 members of the China Task Force and I sent a letter to Commerce Secretary Raimondo asking that the End-User Review Committee designate Honor Device Co. Ltd. to the Department of Commerce Entity List. The Congressional Research Service and the Center for Strategic and International Studies indicate that the Chinese Communist party (CCP)—acting through state-backed investors—stepped in to prevent U.S. export controls from restricting Honor’s access to technology. The issue is straightforward: The same concerns about technology exports to Honor when it was part of Huawei should apply under its current state-backed ownership structure. The United States and other rule-of-law countries cannot let the CCP deliberately side-step our export control system to benefit components of a criminal enterprise.
SMIC: One year ago, SMIC was among the first semiconductor manufacturers to be censured. Now you recommend updating SMIC’s licensing policy and expanding its application to all PRC semiconductor foundries and fabs. Why is this important?
A: Senator Rubio and I sent a letter to Secretary Ross in December 2020 describing the SMIC licensing policy as “utterly ineffective.” As currently written, the SMIC licensing policy appears designed to give the company access to nearly all the semiconductor manufacturing equipment, technologies, and other goods it needs to make semiconductors. With BIS denying less than 1 percent of license applications for SMIC, our concerns appear to have been validated. BIS must immediately amend the SMIC rule to set the threshold at 16 nanometers and replace the phrase “uniquely required” with “capable of producing” as we suggested nearly a year ago.
YMTC: This is not the first time you have called out YMTC, which you said you said could destroy the market for memory chips. In fact, a May 2021 Nikkei story details an internal audit of YMTC’s reliance on U.S. companies. Given your concerns about YMTC, how should the Biden Administration employ Export Controls to curtail further strategic sales to our adversaries?
A: In July 2021, Senator Hagerty and I wrote a letter to Secretary Raimondo urging her to designate YMTC on the Entity List. Clear evidence suggests YMTC is linked to the CCP military, the Party-state, and a national semiconductor plan designed to deplete the U.S. defense industrial base. YMTC’s reliance on U.S. and other foreign sources of equipment and software make export controls an effective option to mitigate the threats to national security, economic security, and foreign policy interests. In addition to aggressive use of end-user controls, the Administration must implement broad-based technology controls—ideally in coordination with a small group of allies and partners—to ensure our adversaries are not able to build these strategic supply chains with our technology.
Q 2: In your recommendations, you called on Secretary Raimondo to restrict access to argon fluoride immersion photolithography, extreme ultraviolet photolithography, advanced materials, and software necessary for any advanced foundry or fab in the PRC. Why are these technologies important for defending America’s strategic interests? What are the implications for U.S. companies? You also asked the Commerce Secretary to restrict designs and photomasks for critical semiconductors that are developed using U.S. electric design automation software from being fabricated at PRC fabs. Again, please elaborate.
A: The Georgetown Center for Center for Security and Emerging Technology identified these items and technologies as “chokepoints” in the PRC’s semiconductor supply chain. According to the CSET report, these technologies are available only from the United States and its allies. The semiconductor supply chain—from the initial research and development and intellectual property to the fabrication and packaging of the chip—is clearly critical to U.S. national security. Selling the PRC the tools and technology it needs to increase its coercive leverage over its trading partners damages America’s strategic interests. In terms of the economic impact, CSET has also modeled the projected gross losses from various types of export controls on the PRC and found figures that would be easily made up for with the $52 billion in the CHIPS for America Act. Moreover, because of the overwhelming demand for semiconductors, any short-term loss from restricting this type of trade with the PRC would be balanced by demand to build fabrication plants in other countries.
Q 3: In November 2020, CNBC stock picker Jim Cramer recommended his viewers buy U.S. semiconductor equipment manufacturers KLA, Applied Materials, and Lam Research. In the weeks after President Biden’s election, Cramer cited increased demand from China and expected that potential Trump constraints would recede under Biden. Since Cramer’s prediction, Applied Materials has nearly doubled their stock price ($74 to $141), KLA has increased by about 60% ($241 to $380), and Lam Research is up 30% ($432 to $572). Are these companies making a profit by selling sensitive technologies to our adversaries and if so, should the Administration use export controls to stop them?
A: It’s important to take a step back and analyze the fundamentals of these sales. PRC industrial policies, including for semiconductors, are developed by the CCP, the PRC government, and the People’s Liberation Army. The goal is to achieve commanding market share and manufacturing scale by PRC national champions to control supply chains and support military modernization. The CCP leverages its control over financing and regulations to supplement these policies with massive subsidies and unfair state support. As a result, U.S. and foreign companies selling into these industrial policies are advancing CCP economic, military, and political priorities. Put another way, 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 while at the same time helping push the $52 billion in CHIPS appropriations and investment tax credit across the finish line. If the Administration can lead on both the protect (export controls) and promote (incentives) aspects of this competition and convince allies to do the same, U.S. national security and the long-term health of our industry will be enhanced.