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Letting China Dominate Legacy Chip Production Would Be a Catastrophic Mistake

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Letting China Dominate Legacy Chip Production Would Be a Catastrophic Mistake

May 24, 2023

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Legacy chips are everywhere—and that’s not an exaggeration. As the world enters the 5G era, and the Internet of Things comes to life, legacy chips are increasingly likely in your fridge, in your car, and, most importantly, in U.S. military systems and critical infrastructure. Unfortunately, as a new paper from China Tech Threat illustrates, Washington is dramatically overlooking the risks of a world beholden to China for its legacy chip needs.

In October of last year, the Commerce Department’s Bureau of Industry and Security (BIS) imposed export controls aimed at restricting “the People’s Republic of China’s (PRC’s) ability to both purchase and manufacture certain high-end chips used in military applications.” Earlier this year, strategic allies Japan and the Netherlands joined in the effort. The multilateral action to target advanced chips is crucial for preventing China from becoming the world’s leader in advanced chip manufacturing.

But the U.S. government has suffered from tunnel vision in neglecting to develop policies to address the threat of China pivoting to dominate the legacy chip market. In February, BIS Under Secretary Alan Estevez told the House Committee on Foreign Affairs, “Chips are a ubiquitous commodity at the legacy level.” The implication in his statement is that the U.S. government is not eager to interfere with China’s production of legacy chips.

That negligent approach is a mistake. While the U.S. is myopically focused on denying China the tools for manufacturing advanced chips, Chinese manufacturers such as Semiconductor Manufacturing International Corporation (SMIC) are ramping up production with the goal of dominating the legacy chip industry. Reuters reports, “With U.S. export controls making it impossible to produce advanced chips, SMIC is doubling down on mature technology chips and has announced four new facilities, or fabs, since 2020. When those come online, it would more than triple the company’s output.” SMIC’s expansion is likely also fueled by billions of dollars in Chinese state subsidies.

Look hard, and you’ll see that China appears to be running the same playbook that has proved successful in dominating solar panel sales and getting Huawei products into the world’s telecommunications markets. Here’s how it works. Beijing subsidizes Chinese companies’ products. Chinese companies undercut competitors on price. Buyers flock to the lower-priced products. Competitors fail. Chinese companies own the market. It’s the Chinese government’s dream for this scenario to play out in the legacy chip space.

A Chinese monopoly over the world’s legacy chip supplies would be a disaster. For one thing, legacy chips are found throughout the components of military equipment. Secretary of Commerce Gina Raimondo recently testified to the U.S. Senate, “We have reports from Ukrainians that when they find Russian military equipment on the ground, it’s filled with semiconductors that they took out of dishwashers and refrigerators.” A Chinese-dominated legacy chip market would mean U.S. warfighters (and U.S. critical infrastructure) could become dependent on Chinese chips for their equipment. The world would once again be at the mercy of China-based semiconductor supply chains, whose unreliability bedeviled the world economy during the pandemic. And with Chinese-made chips in most every device, the Chinese Communist Party would have virtually unlimited new conduits for cyberattacking, stealing from, and spying on Western targets. “Made in China” has never sounded more dangerous.

Western chipmaking equipment firms and BIS should also know that SMIC is closely tied to the Chinese military, as James Mulvenon has definitively reported. And yet, as the China Tech Threat paper makes clear, BIS continues to approve licenses for virtually every American technology bound for the company:

According to BIS data released by the House Foreign Affairs Committee, between November 9 2020, and April 20, 2021, BIS approved 91.3% of license applications worth $41.89 billion from U.S. companies asking to sell technologies to SMIC. 8.3% were returned without action, and only 0.5% – a single license – were denied. Given SMIC’s ties to the Chinese military, it’s likely that SMIC is leveraging American technologies to make chips that will help the PRC equip its fighting forces.

Fortunately, there are steps policymakers can take to address this gathering storm. First, BIS must work to immediately impose meaningful export controls targeting SMIC and other PRC legacy chipmakers. Second, in the upcoming National Defense Authorization Act (NDAA) process, Congress must strengthen and expand Section 5949 of the FY2023 NDAA, to ensure that contractors servicing the federal government cannot use Chinese chips in their equipment. The U.S. government also has the power to impose tariffs under Section 301 of the Trade Act of 1974 when products put American national security at risk. It’s worth investigating whether Section 301 can be applied to make Chinese chips prohibitively expensive.

Finally, supply chain shortages such as those that plagued the automotive sector ravaged the American economy during the pandemic. Those kinks are a foretaste of the pain China could inflict on the U.S. if it dominates the legacy chip market. The Biden Administration can help prevent that scenario and give American companies an advantage over Chinese companies by ensuring that a healthy portion of the $39 billion appropriated for domestic chip production under the CHIPS Act supports legacy chip manufacturing.

The chips might be small, but the stakes couldn’t be bigger. The U.S. needs to get serious about tackling China's legacy chip industry.

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