Winning the Next Phase of the Chip War
Last year the Federation of American Scientists (FAS), Jordan Schneider (of ChinaTalk), Chris Miller (author of Chip War) and Noah Smith (of Noahpinion) hosted a call for ideas to address the U.S. chip shortage and Chinese competition. A handful of ideas were selected based on the feasibility of the idea and its and bipartisan nature. This memo is one of them.
Summary
- Danger Ahead: Until now, the U.S. semiconductor policy agenda focused on getting an edge over China in the production of advanced semiconductors. But now a potentially even more substantial challenge looms. Possible Chinese dominance in so-called ‘legacy’ chips essential for modern economic life could grant it unacceptable leverage over the United States. This challenge will require tools far more disruptive than ever before considered by policymakers for the chip competition.
- The Foot on America’s Economic Neck: Collecting offensive economic leverage lies at the heart of Chinese leader Xi Jinping’s strategy. Chinese dominance in legacy chips could enable Beijing’s bullying of the United States it has thus far reserved for U.S. allies. China’s growing leverage over Washington may embolden Beijing to think it could attack Taiwan with relative impunity.
- Familiar Semiconductor Policy Tools Won’t Work Alone: China increasingly has access to the tech it needs for its legacy ambitions (via stockpiling and indigenization), damaging possible expanded export controls. And unfair Chinese trade practices could reduce the benefits of subsidies, as it has for solar and critical minerals.
- Learning to Love Trade Protection: Only when the U.S. market cannot access Chinese chips will they have sufficient incentive to manufacture chips in third countries. Washington could either turn to tariffs or outright bans on Chinese chips. Washington has several options to block China’s chips – AD/CVD, 337, ‘ICTS’, 5949, and 232. But the most powerful tool would be Section 301 of the Trade Act of 1974.
- The Keys to Success: Trade measures will have to target Chinese chips contained within other products, not just the chips themselves. The U.S. government’s clarity into global supply chains will have to grow dramatically. Allied participation and knowledge-sharing might be needed. The United States can ease enforcement of a chips trade war by incentivizing private industry to share the burden of detecting violations of U.S. law.
The Generational Leap in U.S. Chip Policy
For five years, U.S. concerns over China’s semiconductor sector focused on its cutting-edge chip production. The bipartisan instinct has been to mix restrictions on Chinese access to Western technology and to fund manufacturing of advanced chips at home. It began with the Trump administration’s sanctions against Chinese chip giants Fujian Jinhua, Huawei, and SMIC. The Biden administration’s October 2022 export controls on China’s advanced chipmakers and the CHIPS and Science Act crowned a new era of technology competition focused on the absolute bleeding edge.
Fast forward to July 2024: Washington entered the next phase of the chip war.
Biden administration concerns about legacy chips emerged subtly last summer from one-off statements from Commerce Secretary Gina Raimondo. Before long Team Biden began to formally investigate the issue in an industry survey. Then in May the administration doubled existing tariffs on Chinese-made chips from 25% to 50%.
Congress is equally concerned. The bipartisan China Committee endorsed tariffs on Chinese legacy chips in its December 2023 economic report and in a January 2024 letter to the administration. China’s growing position in the production of mature-node chips took center stage in a Committee hearing in June 2024, where Committee Chair John Moolenaar called for “a reliable domestic supply of semiconductors outside the reach of the CCP”.
This apparently sudden shift reflects the growth of the stakes in the U.S.-China chip competition over the past year:
- Legacy Chips Fuel Modern Life: Cars, aircraft, home appliances, consumer electronics, military systems, and medical devices rely on legacy chips. About 70% of chips produced globally are non-advanced.
- China’s Bid for Legacy Dominance: China already accounts for 30% of global logic chip capacity, a number that is projected to rise to 39% by 2027. And if Beijing makes good on its threats to annex Taiwan, the world’s other major manufacturer of legacy semiconductors, China could potentially control 60% of global production of chips in the range of 20 to 45 nanometers and 75% of overall legacy chip production by 2027.
Despite the scale of the challenge, Washington has not yet decided on its strategy to take on the problem. The best approach to the legacy challenge will be one that can prevent U.S. reliance on Chinese-made chips to ensure China cannot capture decisive leverage over the U.S. economy. Doing so will require using trade measures to reject Chinese chips from the U.S. altogether.
Dominance Means Leverage
China’s fast-rising position in the legacy chip industry threatens U.S. national security because it would grant Beijing extraordinary strategic leverage over the United States. That would encourage Chinese economic coercion and even a war over Taiwan.
2.1. Xi’s Plan for ‘Offensive Leverage’: Geoeconomics lies at the heart of Chinese leader Xi Jinping’s international strategy. The strategy is to exploit foreign dependence on Chinese critical supply chains to accomplish Beijing’s objectives abroad.
Xi himself laid the foundation of this vision in a pair of speeches in 2020 in which he called for economic “deterrence” over the rest of the world. He called for an economic “gravitational field” to “benefit the formation of new advantages for participating in international competition and cooperation”. China would achieve this by heightening “the dependent relationships of international industrial chains on our country, to form a powerful countermeasure and deterrence capability against external parties who artificially cut off supply”, according to Xi.
The Chinese Communist Party’s 2021 Five-Year Plan enshrined these principles in Party jargon, calling for a “powerful domestic market and strong-trading country” to “form a powerful gravitational field for global production factors and resources”. This is often called the “dual circulation” strategy by outside observers. It could more usefully be called “offensive leverage”.
2.2. Beijing’s Bullying Could Come for Washington: Since Xi Jinping rose to power in 2012, China has repeatedly demonstrated these geoeconomic principles by flashing its economic strength to accomplish strategic objectives.
The list of examples of Chinese economic coercion is long. In 2010, China limited Japanese purchases of rare-earth minerals over a Senkaku Islands dispute. Norwegian salmon rotted that same year on Chinese docks in retaliation for dissident Liu Xiaobo winning the Nobel Peace Prize. In 2012, Philippine bananas also rotted over the Scarborough Shoal dispute. In 2016, Beijing conveyed its displeasure toward Seoul for agreeing to host U.S. missile defense systems by squeezing South Korean auto sales in China and slashing Chinese tourism in the country.
This bullying has not slowed since Xi unveiled his economic thinking in 2020. That year, China embargoed Australian wine, barley, wheat, coal, fish, and other products after Canberra passed laws to reduce foreign influence and called for an investigation into the origins of Covid-19.In 2021, China blocked imports of Lithuanian goods over the state opening a “Taiwanese Representative Office”. In just the past month, Beijing has threatened French luxury brands, German car makers, and Spanish pork producers in retaliation for EU duties on Chinese electric vehicles.
Washington faces less blatant coercion compared to its allies. True, China has targeted U.S. firms such Micron over the past few years. But the scale and ambition of this bullying has never approached what China has applied to the likes of Australia and Lithuania. This may be because Beijing does not believe it yet maintains necessary leverage over Washington to brandish its economic blade as it does toward smaller economies.
China’s growing position in the legacy semiconductor market could change that. How would Beijing’s behavior change if sales of the Ford F-150 relied on Beijing’s willingness to sell its semiconductors?
2.3. Reliance Endangers Taiwan: Western European reliance on Russian energy was one factor (among many) that encouraged Vladimir Putin to believe he could invade Ukraine with relative impunity. Likewise, deepening U.S. dependence on China for strategic supply chains could make it far more difficult to challenge Beijing on sensitive geopolitical issues.
The United States already relies on China for other key inputs to its economy: generic pharmaceuticals, critical minerals, solar panels, and printed circuit boards, among others. U.S. reliance on Chinese-made legacy chips – the product at the heart of modern economic life – could be the crown jewel of Chinese geoeconomics. American economic reliance on China could embolden Xi Jinping to think he could attack Taiwan with tolerable penalty.
The Case for Blocking China’s Chips
Familiar semiconductor policy approaches – export controls and subsidies – are inadequate alone to prevent reliance on Chinese-made legacy chips. Washington and its allies will instead have to turn to the old-fashioned, disruptive tools of trade defense in the face of a challenge of this scale.
3.1. It’s Too Late for Export Controls: The crux of current U.S. semiconductor policy toward China is to contain the growth of Chinese advanced chip production by limiting its access to exquisite machine tools produced by the United States and its allies (often called the ‘restrict’ agenda). Without those tools, China will be unable to build the cutting-edge chips that enable AI and advanced weapons.
Why not do the same for legacy chips? Washington and its allies could grow its existing rules so that China could not purchase machines capable of manufacturing legacy chips from Western producers.
The issue is that China increasingly already has the tools it needs for its legacy chip production, in two ways:
- China Has Stockpiled Western Tech: Beginning in 2020, China became the world’s top buyer of semiconductor manufacturing equipment, a strong indicator of future capacity.Over the past year, China has risen to represent nearly half of all sales for Dutch giant ASML and U.S. firm Lam Research. China’s demand is ‘non-market’. As ASML’s CEO put it: “Our Chinese customers say: We are happy to take the machines that others don’t want”.
- Chinese Tools are Replacing Foreign Ones: Chinese semiconductor industrial policy has pivoted in the past two years to cultivate domestic alternatives to Western tech. Advanced Micro-fabrication Equipment, an etching firm competing with U.S. company Lam Research, can produce some kinds of etching equipment for chip production at 5 nanometers and 28 nanometers. Shanghai Microelectronics Equipment, China’s lithography champion, reportedly hopes to reveal soon a machine capable of servicing 28-nanometer manufacturing. Chinese semiconductor players may soon be able to produce legacy chips without Western tech.
Export controls may have worked for the legacy challenge five or ten years ago. It’s unlikely to work alone today.
3.2. Chinese Trade Practices Undermine Subsidies: The second pillar of Washington semiconductor strategy for the past couple of years has been what’s often called the ‘promote’ agenda. The United States is deploying $39 billion in subsidies through the 2022 CHIPS and Science Act to incentivize new chip factories at home. The strategy has helped galvanize $447 billion in private investment across 25 states, 37 new chip fabs, and expansions at 21 other fabs. The United States is now projected to make 30% of all advanced logic chips by 2032. But the CHIPS and Science Act focuses on advanced chips, not legacy ones. Only a quarter of CHIPS funding ($10 billion) is planned to be spent on legacy-chip production.
Why not pass a Chips Act for legacy chips? California Representative Ro Khanna has called for doing so: “a Chips Act 2.0 and 3.0 to better focus on legacy chips for our cars, refrigerators, and dryers”. Indeed, subsidies may be a key tool to spur additional domestic legacy chip production.
But subsidies alone are unlikely to rise to the challenge. China’s “brute force” economic strategy might render a legacy ‘promote’ agenda stillborn. Beijing’s approach is to eliminate foreign competitors with low prices by flooding international markets with state-sponsored artificially high supply. China could flood the market with cheap chips to deter private Western investment into new chip production despite generous subsidies. The result could be billions of taxpayer dollars spent with insufficient new chip capacity to show for it.
Two recent examples demonstrate how Chinese industrial policy practices can undermine Washington ‘promote’ policy:
- Solar Panels: Two years ago, the Biden administration placed a two-year waiver on tariffs on solar panels manufactured mostly in China but with minor processing in Southeast Asia (Cambodia, Malaysia, Thailand, Vietnam). The administration waived these tariffs (between 50% and 254%) to help meet Inflation Reduction Act (IRA) targets for solar installation. But in 2024 officials became worried that rock-bottom prices of imports (down 50% over the previous year) caused U.S. firms to abandon plans to build new U.S. factories, undermining the separate IRA goal of funding domestic solar manufacturing. Last month the administration let that waiver lapse.
- Critical Minerals: Low global prices are also disrupting administration goals to reshore critical mineral mining with domestic incentives. Lithium prices, for example, dropped by 75% in 2023. Mining investments globally grew at a lower rate last year than in 2022, despite Washington concern about reliance on Chinese minerals.
One Pentagon-funded Idaho mine, the only cobalt mine in the United States, was planned to open last year. It’s instead been mothballed since over low cobalt prices – down by almost two-thirds in two years.The owner of that mine, Australian firm Jervois, told investors in March it would lay off 30% of its senior corporate management over “adverse cobalt market conditions caused by Chinese overproduction and its impact on pricing”.
The warning signs in the legacy chip sector are already flashing. Chinese semiconductors were “20 to more than 30%” cheaper than their international counterparts in 2022 and 2023, according to the Silverado Policy Accelerator.This price advantage will likely only widen with time.
3.3. Don’t Compete with China on Price: The challenge facing U.S. policymakers is that Chinese industrial policy is designed to make it impossible for Western firms to offer prices competitive against Chinese players. The solution is to deny Chinese chips access to Western markets.
The logic is simple yet unfamiliar for some following semiconductor policy. Only if the U.S. market is denied to Chinese chips will those producing for the United States be forced to source chips outside of China, and only then will the construction of scaled chipmaking capacity in third countries become economic.
How It Would Work
Preventing U.S. reliance on Chinese chips would be more complicated than simply raising the tariff on Chinese-made chips imported into the U.S. market. For it to work, Washington would need to target goods that contain Chinese chips, not just the imports of the chips themselves. It also may need allied cooperation.
4.1. Target Chips as Components, not the Chips Themselves: Semiconductors are overwhelmingly an intermediate good, not a final product of the sort Washington typically tariffs or blocks at the border. U.S. policy will have to reflect that complexity.
The Biden administration in May doubled U.S. tariffs on imported Chinese chips from 25% to 50%, citing China’s “rapid capacity expansion that risks driving out investment by market-driven firms”. The original 25% tariff, imposed by the Trump administration in 2018, reduced direct imports of Chinese chips by around 72%, according to the U.S. International Trade Commission. But direct imports represent only a portion – likely a minority portion – of the Chinese-made chips that otherwise enter the United States as components within other devices.
The original 2018 tariffs had no effect on Chinese chips arriving as components of other goods – and neither will the new Biden tariffs, which double the rate of the 2018 tariffs without changing their design. Closing this loophole would require the administration to do just that.
One way of doing so would be to apply a “component tariff”, effectively increasing the import cost of the final good (whatever it is) because it contains a chip or chips made in China. The China Committee called for this in January 2024. Another way would be to deny outright products containing Chinese chips entry into the United States. Both options could work, assuming a component tariff is high enough to overcome any possible Chinese price advantage (e.g., 200% or higher).
Some experts have expressed doubt that it is even possible as a policy matter to target Chinese chips because they are intermediate goods. But this view is erroneous. In fact, various laws allow Washington to tariff or outright exclude from the U.S. market any product made with Chinese semiconductors. (See Section 5).
4.2. Bring the Allies Along: A strategy to prevent U.S. reliance on Chinese chips would have higher odds of success if U.S. allies join, most importantly Europe and Japan. The risk is that without allies, international chip players would continue to design their microelectronics with Chinese chips, leaving the United States out of the best the market has to offer. A more optimistic assessment would be that the U.S. consumer market is so large that unilateral Washington action would be enough to force leading market players to design their products without Chinese chips.
Either way, allied signals are positive. The EU said about legacy chips last April that it was “gathering information on this issue”, and that it would coordinate with the United States to “collect and share non-confidential information” about Chinese “non-market policies and practices”.The bloc’s new duties on Chinese automakers indicate it could be open to similar measures toward chips. Japan has taken fewer concrete steps than Europe, but Tokyo’s Minister for Economy, Trade and Industry Ken Saito told reporters that participants took “great interest” in legacy chips at the first Japan Korea-U.S. Commerce and Industry Ministerial Meeting on 28 June 2024.
Washington’s Toolkit
The United States has multiple policy tools that could be used to prevent U.S. reliance on Chinese made semiconductors. Th following summarizes these tools, in roughly ascending order of magnitude.
5.1. Countervailing Duties: This form of tax can be placed by the Commerce Department on foreign goods that it finds to be subsidised and that the U.S. International Trade Commission (ITC) finds materially injure a U.S. domestic industry. After an investigation prompted either by a petition from U.S. industry or initiated by Commerce itself, Commerce can impose “CVDs” on the goods in question.
Two challenges, however: First, it can sometimes be difficult to prove that Chinese state subsidies have boosted specific goods. Second, chips imported as components of other goods aren’t a natural fit for CVD investigations, so some policy creativity would likely be required.
5.2. Anti-Dumping Duties: This alternative tax is like its sister duty in how it comes about and who investigates it, but in this case it seeks to counter imports that have been “dumped” at artificially low prices in the U.S. market.
As with CVDs, however, some policy creativity may be required to use anti-dumping duties for chips imported as components of other goods. Further, it can be challenging to establish a baseline “fair” price against which to measure the price of any Chinese goods in the U.S. market. Former senior Commerce official Nazak Nikakhtar noted: “It is nearly impossible to find a surrogate country that has not been adversely affected by the PRC’s predatory pricing. . . . Virtually all benchmark prices in trade cases are now understated and inadequate for measuring [dumping] by the PRC.”
5.3. Section 337: This provision (from the Tariff Act of 1930) allows the U.S. ITC to investigate imported goods for alleged links to intellectual-property theft and a range of other unfair trade practices. Relief can take the form of exclusion orders, cease-and-desist orders, or sequestration of goods.
But the 337’s bureaucratic process might be too burdensome. The ITC is an independent agency not subject to direction by the White House. In 2018, the Commission on the Theft of American Intellectual Property, led by ex-ambassador and ex-governor Jon Huntsman, recommended speeding up the ITC’s 337 process.
5.4. Section 5949: With relatively little fanfare, Congress in late 2022 enacted a measure that will curb some Chinese legacy-chip sales in the U.S. market – but only some, and slowly. Via Section 5949 of the annual defence bill, Congress prohibited the U.S. federal government and its contractors from procuring semiconductors for “critical” uses from three Chinese firms (SMIC, YMTC, CXMT), beginning in four years. This provision could be expanded in multiple ways that would block Chinese chips from large swathes of the U.S. market. Policymakers could shorten the phase-in period, blacklist additional companies (beside SMIC, YMTC and CXMT), or force U.S. government contractors not to buy proscribed Chinese chips even for their own private use.
The federal government does not, however, have the authority to force state governments to adopt similar rules. This approach would also allow any company that does not contract with the federal government to purchase Chinese chips.
5.5. ‘ICTS’: The Commerce Department’s “Information and Communications Technology and Services” (ICTS) regime is probably capable of restricting the import of goods containing Chinese made chips. The regime, first outlined in the final days of the Trump administration and embraced by the Biden administration, has broad authorities to restrict transactions (from limits on cross-border data flows to import bans) across theoretically the entire digital economy: critical infrastructure, network infrastructure, data hosting, surveillance and monitoring tech, communications software, and emerging technology.The ICTS office’s current investigation on Chinese ‘Connected Vehicles’, will restrict Chinese-controlled critical components from being used in cars on U.S. roads. The president might similarly be able to use ICTS to restrict the import of products containing Chinese made semiconductors.
Taking on Chinese legacy chips, however, would not fit the ICTS Office neatly:
- ICTS’s policy emphasis thus far has been on technologies key for connectivity applications. In the ongoing ‘Connected Vehicles’ investigation, for example, the office cited its worries about Chinese electric vehicles as centering on software and hardware that enables the car’s connection back to China (e.g., cellular telecommunications systems).Legacy chips do enable connectivity, but the challenge is much broader than that. Mature-node chips enable the entire modern economy.
- It would be daunting task such a new Washington bureaucracy. The office only began fully staffing up in summer 2022, and its first action was taken against a single firm three years after the Biden administration first confirmed it would maintain the authority. ICTS is not likely ready to oversee a mission with such deep implications for the entire microelectronics industry and U.S. trade with China and the rest of the world.
5.6. Section 232: This instrument (from the Trade Expansion Act of 1962) allows any federal department to require a Commerce Department investigation of specified imports that may threaten national security (defined broadly). The President may then impose tariffs or quotas as a remedy. The Trump administration used Section 232 to tariff imports of steel and aluminum in 2018, and it could be a viable approach to legacy chips too.
232’s main drawback is that it does not allow import bans. An obvious workaround would be to apply a component tariff onto Chinese semiconductors so high that it works effectively as a ban (e.g., north of 200%).
5.7. Washington’s Most Powerful Tool – Section 301: The strongest tool for the legacy-chips challenge might be the Section 301 of the Trade Act of 1974, which gives the Office of the U.S. Trade Representative broad scope investigate “unreasonable”, “discriminatory”, or “unjustifiable” actions that burden U.S. commerce. After an investigation, USTR has sweeping powers to impose remedies as it sees fit, e.g. with tariffs, import bans, or other sanctions. It gives a president notably broad, flexible, and discretionary powers.
301 has become the bipartisan tool of choice to address unfair Chinese trade and industrial practices and to reshore supply chains:
- The Trump administration used 301 as its main instrument for adjusting trade with China. Trump launched a Section 301 investigation into Chinese intellectual-property theft and technology transfer in August 2017, then used its conclusions to apply tariffs in multiple tranches in 2018 and 2019. This is what came to be called the U.S.-China “trade war”. With 301, the Trump administration was able to apply tariffs on Chinese goods to a level unseen (and overwhelmingly unexpected) since before China’s accession to the World Trade Organization.
- The Biden administration has similarly embraced Section 301 to limit Chinese access to the U.S. market at will. In May, the Biden administration used Trump’s 301 investigation to increase tariffs on strategic goods: semiconductors, electric vehicles, batteries, certain critical minerals, solar cells, port cranes, and medical products (e.g., face masks and rubber gloves). The administration doubled U.S. tariffs on Chinese chips imported as such from 25% to 50%. Most Chinese chips enter the U.S. markets within other devices. This move is unlikely to solve the legacy-chip challenge.
- Biden administration officials had in April 2024 pointed to China’s “overcapacity” in critical sectors as justification. That same month, Biden also opened a 301 investigation into China’s activities in the shipbuilding sector.
A future 301 investigation could almost certainly find a way to prohibit goods with Chinese-made semiconductors from entering the U.S. market. The United States could open a 301 investigation into Beijing’s state-led subsidy strategy to do so, as the Biden administration considered doing in 2021.
Some may worry that 301’s required investigation before applying remedies would slow down a solution that would ideally begin as soon as possible. But a public investigation of China’s position in the semiconductor industry could have major benefits. It could provide the administration insight into the international microelectronics supply chain, needed to implement a legacy restriction policy.
And it would send industry a clear message that it should begin shifting its supply chains before the new U.S. policy began.
Some of History’s Lessons on Decoupling
One challenge facing this strategy is if it is practically possible to stop Chinese-made chips from entering the U.S. market, no matter U.S. law. Some have called banning Chinese chips tantamount to trying to “hold sand in your hands”. The U.S. government has limited visibility into global supply chains. How could Washington enforce the next phase of China chips containment?
Two examples of U.S. efforts to remove goods from international supply chains point to lessons about how the United States could go about doing so successfully today: implementation of the Uyghur Forced Labor Prevention Act (UFLPA), and the ‘Kimberley Process’ to prevent sourcing blood diamonds from Africa. They show that Washington will need three things to enforce this strategy: supply chain clarity, active participation from private industry to detect lawbreakers, and an allied coalition to ensure success in preventing U.S. reliance on Chinese-made chips.
6.1. Improving on the UFLPA Enforcement: Removing Chinese-made legacy chips from the U.S. market would not be the first time Washington moved to fundamentally change the U.S.-China trading relationship in pursuit of excising specific Chinese goods from the United States. The Uyghur Forced Labor Prevention Act, passed by Congress in late 2021, prohibited entirely any goods from Xinjiang – or those with supply chains stemming from there – from coming into the United States on grounds that they were tainted with forced labor. UFLPA Republican co-author Marco Rubio vowed in 2021 that it would “fundamentally change our relationship with Beijing”. Jim McGovern, the Democratic congressman who authored the House version of the bill, said “No more business as usual”.
Yet the law has had a less significant impact on U.S.-China trade flows than initially anticipated, most importantly in the solar industry. Some half of all global polysilicon, a base material for solar panels, comes from Xinjiang. Chinese firms have nonetheless increased their market share in the United States since the passage of the UFLPA.
There are three lessons to take from these challenges that policymakers can apply to the coming legacy chip trade war:
- Supply Chain Clarity Needed: The UFLPA granted the administration no additional funding for enforcement, likely forcing difficult decisions across the administration of how to fund the stiff demands for research into global forced labor supply chains. Enforcing legacy-chip protectionism would likely require a major expansion of supply chain analytical capabilities across the U.S. government, including in the Commerce Department and within Customs and Border Protection.
- Let Private Industry Help with Enforcement: UFLPA enforcement might have been more successful if detecting those who violated U.S. law was the responsibility of private industry, not that of the government. Is this even possible?
It appears so. The False Claims Act of 1863 allows private parties to initiate a lawsuit on behalf of the U.S. government against those who have defrauded the U.S. government. Whistleblowers receive some 15% to 30% of the government’s award if they win. This law, originally passed in the Civil War to crack down on fraud from military contractors, has increasingly been used against those who commit customs and tariffs fraud. The law triples damages and civil penalties for violators.
These cases (called “qui tam” cases) have been brought against those who transshipped Chinese goods through third countries to dodge 301 tariffs. In one case, manufacturing tools firm King Kong Tools paid $1.9 million in November 2023 to settle allegations that the firm dodged paying 301 tariffs by falsely claiming its goods were made in Germany. The case began when a competitor to King Kong brought a qui tam suit alleging that King Kong produced its products in China, shipped them to Germany, then sent them to the United States. The whistleblower received an award of $286,000.
Washington could similarly enlist the private sector to help detect violations of legacy-chip trade rules. At a minimum, the Justice Department could begin a public campaign to encourage whistleblowers to bring qui tam cases against violators. (Including technology research firms. TechInsights, the company known for teardowns of Chinese microelectronics to determine their quality, comes to mind here.) The U.S. government could also find ways to increase the incentive for private parties to bring cases against tariff dodgers. Congress could update the False Claims Act to boost the reward for whistleblowers, for example.
6.2. An Allied System for Legacy-Chip Trade Protection: The Kimberley Process is a UN-mandated certification scheme launched in 2003 to prevent diamonds that fund conflict from entering global markets. 85 member states, civil society groups, and industry agreed to commit to transparent practices and share data to certify that imported diamonds are not tainted by conflict.
Washington and its allies should agree to collectively work to restrict the import of Chinese made legacy chips. They could share best practices and supply chain intelligence. It could make it easier for Washington to know where Chinese semiconductors are moving throughout global supply chains. Doing so would help build an allied coalition collectively more resilient against Beijing’s economic coercion.
The United States has multiple policy tools that could be used to prevent U.S. reliance on Chinese made semiconductors.
We can address the issue of international semiconductor competition along three major axes: increasing production outside of China, containing an oversupply of Chinese semiconductors, and mitigating the risks of remaining Chinese chips in the U.S. market.
In an industry with such high fixed costs, the Chinese state’s subsidization gives such firms a great advantage and imperils U.S. competitiveness and national security. To curtail Chinese legacy chip dominance, the United States should weaponize its monopoly on electronic design automation software.
The technical advances fueled by leading-edge nodes are vital to our long-term competitiveness, but they too rely on legacy devices.