Heritage Report Address China’s Aspirations of Tech Dominance, Part 1 of 2: Export Controls and Tariffs

A landmark report out this week from the Heritage Foundation points the way forward on countering the most consequential strategic threat facing the U.S. in the 21st century: the Chinese Communist Party.

The ultra-comprehensive report addresses the dangers emanating from the CCP across multiple domains, including national security, economic, and homeland security arenas. Helpfully, the report also offers prescriptions for fighting back against China’s hopes of dominating technological arenas.

Today we release our summary – Part 1 of 2 – of some of the report’s major recommendations, beginning with export controls and tariffs to ensure U.S. leadership in semiconductors. 

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Part 1 – The Crucial Importance of Semiconductors.

“Semiconductors, also known as microchips, are omnipresent, critical to the function of every electronic device from smartphones to fighter jets. As a result, semiconductors are vital to U.S. national security and economic prosperity.”  (p 47)

Expand Export Controls (p. 73-75)

The report states a problem succinctly: “America should not be exporting technology to China that makes the PLA more capable; threatens the security of the U.S. or its allies and interests abroad; or contributes to the CCP’s human rights abuses.”  It also recognizes that the Commerce Department’s Bureau of Industry and Security, which “has a history of prioritizing export revenue over national security,” must do more to implement laws on the books. It also laments the fact that “BIS approves almost all transactions with malign PRC entities even when controls are in place.”

This critique is almost perfectly backed up in data showing BIS approving or returning with no comment 205 out of 206 applications in 2020 and 2021 from American companies proposing to sell their technologies to Chinese military-linked semiconductor company SMIC. Those licenses are worth a combined $41 billion dollars.

As China Tech Threat is preparing to detail in a forthcoming paper, BIS must get serious about closing these loopholes as China prepares to overwhelm the legacy chip market. As former Deputy National Security Adviser Matt Pottinger has described,  a Chinese-dominated legacy chip market “would give Beijing coercive leverage over every country and industry – military or civilian.” The coming CTT report not only explains the real danger, but provides several policy solutions for protecting legacy chips and the national security they deliver. 

The Heritage Foundation echoes one of CTT’s forthcoming recommendations for new export controls by writing, “Expanding export controls, combined with new U.S. investments in defense capabilities, promoting domestic economic growth, and cooperating more with allies could dramatically reverse the relative gains that China has made in the past decade and further tip the balance of military and economic power in America’s favor.” (75)

Make Limited Use of Tariffs and Non-Tariff Barriers (p. 80-83)

The U.S. government needs to expand its consideration of which policy tools will be useful to counteract Beijing’s intended dominance of the global semiconductor market. The Heritage report states, “The use of punitive tariffs to combat unfair trade practices and protect U.S. national security is consistent with U.S. obligations as a member of the WTO and the principles of the international trading system routinely violated by Beijing.”   

Other voices, such as Tom Cotton, have also called for the targeted use of tariffs to impose costs on Beijing’s bad behavior.

With China heavily subsidizing its semiconductor industry and thus distorting the global market, tariffs could be a viable, legal solution to prevent China from exporting its chips to the U.S. market, where they have found their ways into U.S. defense systems, as former National Security Advisor Robert O’Brien has noted. CTT agrees with Heritage’s conclusion that “The U.S. government should be less risk-averse in implementing and enforcing tariffs to punish Chinese predatory behaviors…” Stay tuned for Part 2 of our blog series on this important report, which will address state purchases of dangerous Chinese technology.