China’s expansion of semiconductor production threatens to make societies dependent on the communist regime for computer chips essential to a host of products used daily around the world, U.S. and European officials fear.
“Based on China’s own reporting, about 60% of all new ‘legacy’ chips coming to the market in the next handful of years will be produced by China,” Commerce Secretary Gina Raimondo told reporters Friday. “And we know there is a massive subsidization of that industry on behalf of the Chinese government, which could lead to huge market distortion, and so that’s why we’re focused on it.”
That percentage evokes the degree to which medical mask production was concentrated in China at the outbreak of the coronavirus pandemic, when Beijing exposed the danger of overreliance on supply chains that run through China. Raimondo met with European officials to discuss trade and technology issues, while another U.S. Cabinet official broached the broader problem during a trip to China.
“Overcapacity isn’t a new problem, but it has intensified, and we’re seeing emerging risks in new sectors,” Treasury Secretary Janet Yellen said Friday during a U.S. Chamber of Commerce event in Guangzhou, China. “Specifically, direct and indirect government support is currently leading to production capacity that significantly exceeds China’s domestic demand, as well as what the global market can bear. … And it can lead to overconcentration of supply chains, posing a risk to global economic resilience.”
President Joe Biden’s team has moved to restrict Beijing’s access to very high-end Western microchips, and U.S. officials feel a growing unease about the communist regime’s dominance in the wider semiconductor market.
“There’s a widespread sense in the U.S. government that there are real economic security concerns if our manufacturing base becomes more dependent on chips that are made in China,” Chris Miller, an American Enterprise Institute nonresident senior fellow and the author of Chip War: The Fight for the World’s Most Critical Technology, told the Washington Examiner. “The administration has been debating what exactly to do about this.”
Raimondo offered a glimpse of that misgiving in Brussels, where she joined Secretary of State Antony Blinken for a Trade and Technology Council meeting with European Union officials.
“We know China is extremely focused on these more mature chips,” Raimondo said. “They’re like the workhorse semiconductor chips. They’re in cars, this microphone, all of your household appliances, medical devices, every pacemaker — everything. That’s the quote-unquote legacy chip.”
Chinese Communist Party authorities have used a flood of subsidies to orchestrate a surge in production of those chips for the stated purpose of gaining independence from foreign chip suppliers.
“With strong manufacturing capabilities and a vast domestic market, the country’s chip supply is poised for a significant growth, which plays an important role in enhancing the nation’s technology security,” Information Consumption Alliance Director-General Xiang Ligang told the Global Times, a Chinese state media outlet, last month.
With the backing of government subsidies, China may be able to sell those legacy chips abroad at a lower price than producers in the United States or allied countries.
“I understand these policies may be driven by domestic development objectives. But overcapacity can lead to large volumes of exports at depressed prices,” Yellen said, without a direct reference to semiconductors. “This can undercut the business of American firms and workers, as well as of firms around the world, including in India and Mexico.”
That might sound like the kind of problem that policymakers would seek to address through tariffs or even bans on imports of those chips, but the structure of manufacturing supply chains resists such simple measures.
“For example, it is not difficult to envision the complexities that would arise if the United States were to implement a tariff on inbound items containing Chinese chips — for example, affecting a Korean vehicle with chips produced in partner countries and also in China,” a Center for Strategic and International Studies research team wrote in a new analysis. “Furthermore, a significant U.S. tariff increase could push Chinese legacy chips into other foreign markets, including allied economies, undercutting their own attempts to bolster domestic chip supplies.”
U.S. and European officials have launched a pair of industry “surveys” in a bid to develop a coherent and effective policy.
“We will compare notes in order to take measures forward to make our supply chains resilient,” EU Executive Vice President Margrethe Vestager told reporters alongside Raimondo. “And we have been coordinating from the very first day on how to avoid a subsidy race, make the best possible use of the incentives available for both the U.S. and Europe to increase our global footprint when it comes to semiconductors.”
The European survey is “voluntary,” Vestager noted, but U.S. officials have used Defense Production Act authorities to require U.S. businesses to answer the survey.
“It’s compulsory,” Raimondo emphasized. “We’re trying to collect data in the market to find evidence of any kind of market distortion. And the Europeans have also launched their own version of a similar survey, and we plan to share that data — we talked about that this morning — and act together.”
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Miller, the semiconductor expert, characterized those remarks as “signaling” to Western companies that they should be wary of investing in Chinese-supplied semiconductor chips.
“It’s also partly a shot across the bow manufacturers saying, ‘Hey, watch out. We’ve got our eyes on this issue, and we’re going to track really carefully whether you’re buying more Chinese chips because we think it’s a problem,’” Miller said. “If you’re a manufacturing company, what you really don’t want is to buy some Chinese chips now and then have to rip and replace them in a couple years when Congress does something differently.”