USCC Report Underscores Risks from China’s Legacy Chip Sector

Each year the U.S.-China Economic and Security Review Commission issues its annual report to Congress. This year’s offering grasps that legacy chips should be considered as part of the U.S.-China national and economic security equation. 

Earlier this year, CTT’s Every Chip Matters report articulated how China is subsidizing state champion chipmakers like SMIC in order to eventually control the global legacy chip market. Similarly, the bipartisan USCC’s commissioners write in their report, “[China] is evidently betting that massive, state-directed investments and continued access to foreign technology can help it to achieve the breakthroughs it needs to boost productivity and maintain growth.”  

The Chinese government’s subsidies and reliance on Western tech appears to already be bearing fruit. The appearance of a 7-nm SMIC chip inside Huawei’s Mate 60 Pro phone earlier this year stoked speculation that Chinese companies like SMIC have figured out how to use equipment intended for the production of legacy chips to create advanced chips. More recently, news broke that Applied Materials, an American semiconductor equipment maker, is being criminally investigated for evading export restrictions to help SMIC. More export controls on semiconductor manufacturing equipment destined for China are clearly necessary. But export controls have limits and aren’t the only tool in the toolbox. 

The USCC understands this: “U.S. export controls toward China have expanded substantially, though they now face significant obstacles to enforcement. Military-civil fusion presents a unique challenge to export controls, requiring a renewed focus on dual-use technologies…” Because China’s military-civil fusion policy gives all Chinese entities carte blanche to sidestep U.S. restrictions, CTT advisor Steve Coonen has written extensively why a policy of denial for all microelectronics equipment bound for China is the only effective solution to the problem.  

Moreover, the USCC helpfully recommends that Congress “establish a risk matrix framework to evaluate the national security threat posed by electronic products imported from the People’s Republic of China.” Indeed, U.S. defense systems are almost certainly loaded with Chinese chips. The intelligence firm Govini found in 2020 that with regard to semiconductors specifically, the number of China-based companies participating in the Pentagon’s supply chain increased 364% (65 companies) from 2010-2019. The idea of ceding legacy chip production to China will exacerbate the already known risks of sabotage, malfunction, and cyberattacks. These same vulnerabilities also exist for U.S. critical infrastructure.  

A dependence on Chinese legacy chips means U.S. businesses could face more COVID-style supply crunches, whether because of another pandemic or Chinese coercive trade policies. China is currently implementing such policies with gallium and germanium—essential for semiconductor production—and graphite—essential for electric vehicle batteries. Just imagine how an export ban of the world’s most essential chips will punish ordinary Americans.  

Finally, the USCC writes, “To eliminate or mitigate risks identified in the threat matrix evaluation, Congress should consider the use of all trade tools, including tariffs.” CTT has advocated in Every Chip Matters for the use of Section 301 tariffs to respond to China’s predatory practices and defend American national security. Certainly, a national reliance on the Chinese legacy chip sector is problematic to both U.S. national security and economic interests. The ball is in Congress’ court to take action, preferably through some combination of tariffs, new export controls, and a proper direction of CHIPS Act funding to domestic legacy-node producers.