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The Biden Administration Must Answer China’s Semiconductor Challenge

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The Biden Administration Must Answer China’s Semiconductor Challenge

January 26, 2021

President Biden’s nominee for Commerce Secretary testified to Congress today that the new administration will be firm in responding to China’s unfair trade practices. Rhode Island Governor Gina Raimondo told the Senate said the administration will “take aggressive trade enforcement actions to combat unfair trade practices from China and other nations that undercut American manufacturing.”

Over the past four years, a growing bipartisan consensus from the Obama and Trump administrations and across Capitol Hill has recognized that the United States addresses the People’s Republic of China’s semiconductor industrial policy. The responsibility for answering the China chip challenge now falls to President Biden and, if confirmed, Governor Raimondo.

In 2015, the PRC announced a decade-long campaign dubbed “Made in 2025,” designed to secure for itself global dominance in ten key economic and national security sectors, including the crucial semiconductor industry, committing to invest more than 150 billion to achieve independence in chip manufacturing and production. President Xi Jinping himself provided insight into the reasoning behind the PRC’s focus on developing its semiconductor manufacturing. In a 2016 speech, he noted that, “core technology is our biggest lifeline and the fact that core technology is controlled by others is our greatest hidden danger.”

The Obama Administration’s Warning

As President Obama was leaving office in 2017, the President’s Council of Advisors on Science and Technology (PCAST) issued a report warning that China’s semiconductor strategy “threatens the competitiveness of U.S. industry and the national and global benefits it brings.”

The Obama PCAST report detailed the PRC’s approach to semiconductor industrial policy and competition including both subdies (including the and zero-sum tactics. The latter include “forcing or encouraging domestic customers to buy only from Chinese semiconductor suppliers”, “forcing transfer of technology in exchange for access to the Chinese market”, “theft of intellectual property”, and “collusion.”

The Trump administration prioritized answering the China semiconductor challenge in concert with bipartisan leaders on Capitol HIll. I analyzed recent national policy actions in a recent Lincoln Network report “Answering the China Chip Challenge: Recommendations for U.S. Semiconductor Industrial Policy in 2021".

Recent U.S. Policy Actions

For starters, the Trump Administration and Congress strengthened federal laws regarding export controls and the review of foreign investment, passing the Foreign Investment Risk Review Modernization Act of 2018 and the Export Controls Reform Act of 2018.

The Trump Administration used these authorities to block foreign investment involving semiconductor companies that risked technology transfer. Three of the six transactions blocked by President Trump at the Committee on Foreign Investment in the US’s recommendation involved semiconductor companies.

In September, the Commerce Department initiated new controls on suppliers selling to Semiconductor Manufacturing International Corporation (SMIC), a leading Chinese semiconductor manufacturer, after determining that potential sales to the company “may pose an unacceptable risk of diversion to a military end use in the People’s Republic of China.”

Congress also reformed tax policy and recently authorized new research and development investments to strengthen and promote the competitiveness of the American semiconductor sector. The 2017 Tax Cuts and Jobs Act lowered corporate tax rates and maintained the R&D tax credit, which “significantly improve[d] the competitiveness of U.S. semiconductor research, design, and manufacturing,” according to the Semiconductor Industry Association.

In December, Congress passed the FY2021 National Defense Authorization Act which included provisions of the bipartisan Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act. The bill authorized federal incentives to support semiconductor manufacturing, research, and development. Funding these new incentives and supports will be on the Congressional agenda during the appropriations process.

Weighing Economic Efficiencies with National Security and Humanitarian Concerns

Some experts argue that concerns about the Chinese semiconductor sector are unfounded given the PRC’s inability to successfully challenge the U.S. for dominance, and that any government intervention is unnecessary, wasteful, and counterproductive. For example, experts at the libertarian Cato Institute have a long history of opposing a national semiconductor industrial policy, including in the current context with China.

While government subsidies and trade restrictions will introduce economic efficiencies, the value to U.S. national security justifies the intervention. Encouraging the development of additional domestic semiconductor manufacturing and protecting our existing technological advantage from potential theft justifies the intervention. The PRC’s drive to achieve technological independence and superiority poses a historic threat to global liberty, given its totalitarianism and plans to export their brand of digital authoritarianism.

The Democratic staff of the Senate Foreign Relations Committee released a report in July 2020 examining China and digital authoritarianism, which includes using technology to track citizens, limiting access to information and stifling dissent, and strengthening the Chinese Communist Party’s power.

“People’s Republic of China is successfully developing and implementing its malign governance model internally and, increasingly, making inroads with other countries to also embrace its new digital doctrine,” wrote Senator Robert Menendez, the Committee’s ranking member. “It further illustrates how the expansion of digital authoritarianism in China and abroad has drastic consequences for U.S. and allied security interests, the promotion of human rights, and the future stability of cyberspace.” Despite the economic costs, an aggressive U.S. industrial policy will maintain a key strategic, technology advantage for the United States and curb the PRC’s aims, including restraining its ability to export digital authoritarianism.

Gov. Raimondo Recognizes China’s Anti Competitive Actions and Human Rights Abuses

In her testimony before the Senate Commerce Committee, Governor Raimondo described China’s actions as “anticompetitive,” “hurtful to American workers and businesses,” and “coercive.” She added that China is “culpable for atrocious human rights abuses.” She committed to using the available tools at her disposal to counter China’ actions. “Whether it’s the entities list, tariffs, or countervailing duties, I intend to use all of those tools to the fullest extent possible to level the playing field for the American worker,” Governor Raimondo testified.

To honor that commitment once she is confirmed, Governor Raimondo should continue and extend the current national policy regarding China and national semiconductor industrial policy--including by using export controls to prevent potential technology transfer and to ask Congress to fund the newly authorized federal research and development incentives.

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