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.
Challenge and Opportunity
The intelligent and autonomous functioning of physical machinery is one of the key societal developments of the 21st century, changing and assisting in the way we live our lives. In this context, semiconductors, once a niche good, now form the physical backbone of automated and intelligent systems. The supply chain disruptions of 2020 laid bare the vulnerability of the global economy in the face of a chip shortage, which created scarcity and inflation in everything from smartphones to automobiles. In an even more extreme case, a lack of chips could impact critical infrastructure, such as squeezing the supply of medical devices necessary for many modern procedures.
The deployment of partially- or fully-automated warfighting further means that the deployment of Artificial Intelligence (AI) systems now has direct and inescapable impacts on national security. With great power conflict opening on the horizon, threats toward and emanating from the semiconductor supply chain have become even more evident.
In this context, the crucial role of the People’s Republic of China (PRC) in chip production represents a clear and present danger to global security. Although the PRC currently trails in the production of cutting-edge sub-16 nm chips used for the development of AI models, the country’s market dominance in the field of so-called “trailing edge chips” of 28 nm or above has a much wider impact due to their ubiquity in all traditional use cases outside of AI.
The most important harm of this is clear: by leveraging its control of a keystone international industry, the Chinese Communist Party will be able to exert greater coercive pressure on other nations. In a hypothetical invasion of Taiwan, this could mean credibly threatening the U.S. and other democratic countries not to intervene under the threat of a semiconductor embargo. Even more dramatically, given the reliance of modern military manufacture on digital equipment, in the case of a full-scale war between the People’s Republic of China and the United States, China could produce enormous amounts of materiel while severely capping the ability of the rest of the world to meet their challenge.
A secondary, but significant risk involves the ability of China to build defects or vulnerabilities into its manufactured hardware. Control over the physical components that underlie critical infrastructure, or even military hardware, could allow targeted action to paralyze U.S. society or government in the face of a crisis. While defense and critical infrastructure supply chains represent only a small fraction of all semiconductor-reliant industrial products, mitigation of this harm represents a baseline test of the ability of the United States to screen imports relevant to national security.
Beyond Subsidies: A Blueprint for Global Manufacturing
Wresting back control of the traditional semiconductor supply chain away from China is widely recognized as a prime policy goal for the United States and allied democratic countries. The U.S. has already begun with the passage of the CHIPS and Science Act in 2022, providing subsidies and tax incentives to encourage the creation of new fabrication plants (fabs) in the United States. But a strategic industry cannot survive on subsidies alone. Preferential tax treatment and government consumption may stand up to some degree of semiconductor manufacture. But it cannot rival the size of China’s if the PRC is able to establish itself as the primary chip supplier in both its domestic market and the rest of the world.
Nascent American foundries and the multinational companies that operate them must be able to survive in a competitive international environment without relying on unpredictable future support. They must do this while fighting against PRC-backed chip manufacturers operating with both a strong domestic market and massively developed economies of scale. Given the sheer size of both the Chinese manufacturing base and its domestic market, the U.S. cannot hope to accomplish this goal alone. Only a united coalition of developed and developing countries can hope to compete.
The good news is that the United States and its partners in Europe and the Indo-Pacific have all the necessary ingredients to realize this vision. Developing countries in South and Southeast Asia and the Pacific have a vast and expanding industrial base, augmented by Special Economic Zones and technical universities. America and its developed partners bring the capital investment and intellectual property necessary to kickstart semiconductor production abroad.
The goal of a rest-of-world semiconductor alliance will be twofold: to drive down the cost of chips made in the U.S. and its allies while simultaneously pushing up the cost of purchasing legacy semiconductors produced in China to meet it. Only when these two intersect will the balance of global trade begin to tip back toward the democratic world. The first two slates of policy recommendations will focus on decreasing the cost of non-China production and increasing the cost of Chinese imports, respectively.
Finally, even in the case in which non-Chinese-influenced semiconductors become competitive with those made in the PRC, it will likely be impossible to fully exclude Chinese hardware from American and allied markets. Therefore, the final raft of policy recommendations will focus on mitigating the threat of Chinese chips in American and allied markets, including possible risks of inbuilt cyber vulnerability.
The creation of an autonomous and secure supply chain entirely outside of China is possible. The challenge will be to achieve semiconductor independence in time to prevent China from successively weaponizing chip dominance in a future war. With clashes escalating in the South China Sea and threats across the Taiwan Strait growing ever more ominous, the clock is ticking. But America’s Indo-Pacific partners are also increasingly convinced of the urgency of cooperation. The policies presented aim to make maximum use of this critical time to build strategic independence and ensure peace.
Plan of Action
Recommendation 1. Boosting non-China Manufacturing
The first and most crucial step toward semiconductor sovereignty is to build and strengthen a semiconductor supply chain outside of China. No matter the ability to protect domestic markets from Chinese competition, U.S. industrial productivity relies on cheap and reliable access to chips. Without this, it is impossible to ramp up industrial production in key industries from defense contracting to consumer electronics.
According to a report released by the CSIS Wadhwani Center for AI and Advanced Technologies, the global semiconductor value chain broadly involves three components. At the top is design, which involves creating Electronic Design Automation (EDA) software, generating IP, and producing manufacturing equipment. Next is fabrication, which entails printing and manufacturing the wafers that are the key ingredient for finished semiconductors. The final stage is assembly test, and packaging, which entails packaging wafers into fully-functioning units that are fit for sale and verifying they work as expected.
Of these three, the United States possesses the greatest competitive advantage in the field of design, where American intellectual property and research prowess drive many of the innovations of the modern semiconductor industry. Electronic Design Automation software, the software that allows engineers to design chips, is dominated by three major firms, of which two, Cadence and Synopsys are American companies. The third, Mentor Graphics, is a U.S.-based subsidiary of the German industrial company Siemens. U.S. Semiconductor Manufacturing Equipment (SME) is also an important input in the design stage, with U.S.-based companies currently comprising over 40 percent of the global market share. The United States and Japan alone account for more than two-thirds.
Meanwhile, the PRC has aggressively ramped up wafer production, aiming to make China an integral part of the global supply chain, often stealing foreign intellectual property along the way to ease its production. Recent reported efforts by the PRC to illicitly acquire U.S. SMEs underscore that China recognizes the strategic importance of both IP and SME as primary inputs to the chip making process. By stealing the products of American research, China further creates an unfair business environment in which law-abiding third countries are unable to keep up with Chinese capacity.
Semiconductor Lend-Lease: A Plan for the 21st Century
The only way to the international community is to level this playing field. In order to do so, we propose that the United States encourage and incentivize its companies to license their IP and SME to third countries looking to build wafer capacity.
Before the United States officially entered into the Second World War, the administration of President Franklin Delano Roosevelt undertook the “Lend-Lease” policy, agreeing to continue to supply allied countries including Great Britain with weapons and materials, without immediate expectation of repayment. Recently, Lend-Lease has been resurrected in the modern context of the defense of Ukraine, with the United States and European powers supplying Ukraine with armaments and munitions Ukrainian industry could not produce itself.
The crucial point of Lend-Lease is that it takes the form of immediate donations of critical outputs, rather than simple monetary donations, which require time and investment to convert into the desired goods. World War II-era Lend-Lease was not based on a long-term economic or development strategy, but rather on the short-term assessment that without American support, the United Kingdom would fall to Nazi occupation. Given the status of semiconductors as a key strategic good, the parallels with a slow-rolling crisis in the South China Sea and the Taiwan Strait become clear. While in the long term, South, East, and Southeast Asia will likely be able to level up with China in the field of semiconductors, the imminent threats of both Chinese wafer dominance and a potential invasion of Taiwan mean that this development must be accelerated. Rather than industrial and munitions production, as in 1941, the crucial ingredients the United States brought to this process were intellectual property, design tools, and SMEs. These are thus the tools that should be leased to U.S. partners and allies, particularly in the Indo-Pacific. By allowing dedicated foreign partners to take advantage of the gains of American research, we will allow them to level up with China and truly compete in the international market.
Although the economics of such a plan are complex, we present a sketch here of how one iteration might look. The United States federal government could negotiate with the “Big Three” EDA firms to purchase transferable licenses for their EDA software. The U.S. could then “Lend-Lease” licenses to major semiconductor producers in partner countries such as Singapore, Malaysia, Vietnam, the Philippines, or even in Latin America. The U.S. could license this software on the condition that products produced by such companies will be made available at discounted prices to the American market, and that companies should disavow further investment from or cooperation with Chinese entities. Partner companies in the Indo-Pacific could further agree to share any further research results produced using American IP, making further advancements available to American companies in the global market.
When growing companies attain a predetermined level of market value they can offer compensation to the United States in the form of fees or stock options, which will be collected by the United States under the terms of the treaty and awarded to the EDA firms. Similar approaches can be taken toward licensing American IP, or even physically lending SME to countries in need.
Licensing American research to designated partner countries comes with some risks and challenges. For one, it creates a greater attack surface for Chinese companies hoping to steal software and design processes created in the United States. Preventing such theft is already highly difficult, but the U.S. should extend cooperation in standardizing industrial security practices for strategic industries.
A recent surge in fab construction in countries such as Singapore and India means that the expansion of the global semiconductor industry is already in motion. The United States can leverage its expertise and research prowess to speed up the growth of wafer production in third countries, while simultaneously countering China’s foreign influence on global supply chains.
A Semiconductor Reserve?
The comparison of semiconductors to oil is frequently made and has a key strategic justification: for more than a century, oil was a key input to virtually all industrial processes, from transportation to defense production. Semiconductors now play a similar role, serving as a key ingredient in virtually all manufacturing processes.
A further ambitious policy to mitigate the harm of Chinese chips is to create a centralized reservoir of semiconductors, akin to the Strategic Petroleum Reserve. Such a reserve would be operated by the Commerce Department and maintain centralized holdings of both leading- and trailing-edge chips, obtained from free dealings on the open market. By taking advantage of bulk pricing and guaranteed, recurring contracts, the government could acquire a large number of semiconductors at reasonable prices, sourced exclusively from American and partner nation foundries.
In the event of a chip shortage, the United States could sell chips back into the market, allowing key industries to continue to function with a trusted source of secure chips. In the absolute worst case of a geopolitical crisis involving China, a strategic stockpile would create a bulwark for the American defense industry to continue producing armaments during a period of disrupted chip supply. This buffer of time would be intended for domestic and allied production to ramp up and continue to supply security functions.
However, allowing the U.S. to participate in the chip industry has a further impact on economic development. By making the U.S. a first-order purchaser of semiconductors at an industrial scale, the United States could create a reliable source of demand for fledgling businesses. The United States could serve as a transitory consumer buying up excess capacity when demand is weak, ensuring that new foundries are both capable of operation and shielded from attempts from China to smother demand. The direct participation of the U.S. in the global semiconductor market would help to kickstart industry in partner countries while providing a further incentive to build collaboration with the United States.
Recommendation 2. Fencing in Chinese Semiconductor Exports
A second step toward semiconductor independence will be in containing Chinese exports, with the goal of reducing China’s access to global markets and starving their industrial machine.
The most direct approach to reducing demand for Chinese semiconductors is the imposition of tariffs. The U.S. consumer market is a potent economic force. By squeezing Chinese manufacturers seeking to compete in the U.S. market, the United States can avoid feeding additional production capacity that might be weaponized in a future conflict. These tariffs can take a variety of forms and justifications, from increased probes into Chinese labor standards and human rights practices to dumping investigations pursued at the WTO. The deep challenges of effective tariffs is how to enforce these tariffs once they come into play and how to coordinate tariffs with international partners.
Broad Tariffs, Deep Impact
No rule works without an enforcement mechanism, and in the worst case, a strong public stance against Chinese semiconductors that is not effectively implemented may actually weaken U.S. credibility and embolden the Chinese government. Therefore, it is imperative to have unambiguous rules on trade restrictions, with a strong enforcement mechanism to match.
These measures should not just apply to chips that are bought directly from China but rather include those that are assembled and packaged in third countries to circumvent U.S. tariffs. The maximal interpretation of the tariffs mandate would further include a calculated tariff on products that make use of Chinese semiconductors as an intermediate input.
In the case of semiconductors made in China but assembled, packaged, or tested in other countries, we suggest an expansion of the Biden Administration’s 50% tariff on Chinese semiconductors to include all chips, consumer, or industrial products that include a wafer manufactured in the People’s Republic of China, based on their international market rate. That is, if an Indonesian car manufacturer purchases a wafer manufactured in China with a market value of $3,000, and uses it to manufacture a $35,000 car, importing this vehicle to the United States would be subject to an additional tax of $1,500.
While fears abound of the inflationary effects of additional tariffs, they are necessary for the creation of an incentive structure that properly contains Chinese manufacturing. In the absence of proportional tariffs on chips and products assembled outside China, Chinese fabs will be able to circumvent U.S. trade restrictions by boosting wafer production that then takes advantage of Assembly, Testing, and Packaging (ATP) in third countries. Further, it is imperative for the United States to not only restrict Chinese chip growth but to encourage the development of domestic and foreign non-China chip manufacturers. Imposing tariffs on Chinese chips as an intermediate ingredient is necessary to create a proper competitive environment. Ultimately, the goal is to ensure a diversification of fab locations beyond China that will create lower prices for consumers overall.
How would tariffs on final goods containing Chinese chips be enforced? The policy issue of sanctioning and restricting an intermediate product is, unfortunately, not new. It is well known that Chinese precursor chemicals, often imported into Mexico, form much of the raw inputs for deadly fentanyl that is driving the United States opioid epidemic. Taking a cue from this example, we further suggest the creation of an internationally maintained database of products manufactured using Chinese semiconductors. As inspiration, the National Institutes of Health / NCATS maintains the Global Substance Registration System, a database that categorizes chemical substances, along with their commonly used names, regulatory classification, and relationships with other related chemicals. Such a database could be administered by the Commerce Department’s Bureau of Industry and Security, allowing the personnel who enforce the tariffs to also collect all relevant information in one place.
Companies importing products into the U.S. would be required to register the make and model of all Chinese chips used in each of their products so that the United States and participating countries could impose corresponding sanctions. Products imported to the U.S. would be subject to random checks involving disassembly in Commerce Department workshops, with failure to report a sanctioned semiconductor component making a company subject to additional tariffs and fines. Manual disassembly is painstaking and difficult, but regular, randomized inspections of imported products are the only way to truly verify their content.
The maintenance of such a database would bring follow-on national security benefits, in that the disclosure of any future vulnerability in a Chinese electronic component would allow quick diagnosis of what systems, including critical infrastructure, might be immediately vulnerable. We believe that creating an enforcement infrastructure that coordinates information between the U.S. and partner countries is a necessary first step to ensuring that tariffs are effective.
Zone Defense: International Cooperation in the Semiconductor Tariffs
At first glance, tariff action by the United States on Chinese-produced goods would appear to be a difficult coordination problem. By voluntarily declining an influx of cheaply-priced goods, American consumers exacerbate an existing trade glut in world semiconductor markets, allowing and incentivizing other nations to purchase these chips in greater volume and at a lower price.
However, rather than dissuading further sanctions in world markets, tariffs may actually spur further coordination in blocking Chinese imports. The Biden Administration’s imposition of tariffs on Chinese electric vehicles coincided with parallel sanctions imposed by the European Union, India, and Brazil. As Chinese overcapacity in EVs is rejected by U.S. markets, other countries face intensified concerns about the potential for below-price “dumping” of products that could harm domestic industry.
However, this ad-hoc international cooperation is still in a fragile and tentative stage and must be encouraged in order to create an “everywhere but China” semiconductor supply chain. Further, while countries impose tariffs to protect existing automotive and steel industries, global semiconductor manufacturing is currently concentrated in the Indo-Pacific. Thus, coordinating against China calls on countries to not just impose tariffs to protect existing industries, but to impose “nursery” tariffs that will protect nascent semiconductor development, even in places where an existing industry does not yet exist.
A commonsense first step to building an atmosphere of trust is to take actions protecting partner countries from retaliation in the form of Chinese trade restrictions. In response to EU tariffs on Chinese EVs, Beijing has already threatened retaliatory restrictions on chicken feet, pork, and brandy. For a bloc as large as the European Union, these restrictive sanctions can irritate an important political constituency. For a smaller or less economically powerful country, these measures might be decisive in sending the message that semiconductor tariffs are not worth the risk.
The United States should negotiate bilateral treaties with partner nations to erect tariffs against Chinese manufacturing, with the agreement that, in the case of Chinese retaliation against predetermined fundamental national industries, the United States government will buy up excess capacity at slightly discounted prices and release it to the American market. This preemptive protection of allied trade will blunt China’s ability to harm U.S. partners and allies. Raising tariffs on imported goods also imposes costs on the Chinese consumer, meaning that in the best case, the decreased effectiveness of these tools will deter the PRC from attempting such measures in the first place.
Recommendation 3. Mitigating the Threat of Existing Chips
No matter the success of the previous measures mentioned, it will be impossible to keep Chinese products entirely outside the U.S. market. Therefore, a strategy is required for managing the operational risks posed by Chinese chips that have and will exist inside the U.S. domestic sphere.
Precisely defining the scope of the threat is very important. A narrow definition of threats might allow threats to pass through, while an overly wide definition may expend time and resources over nothing. A recent British effort to exclude Chinese-made cap badges presents a cautionary tale. By choosing a British supplier over an existing Chinese one after the acquisition process was already underway, the UK incurred an additional delay in its military pipeline, not to mention the additional confusion caused by such an administrative pivot. Implanting GPS-tracking or listening devices within small pieces of metal by one company within the Chinese supply chain seems both impractical and far-fetched– though the PRC surely enjoys the chaos and expense such a panic can cause.
We consider it analogously unlikely that China is currently aiming to insert intentional defects into its semiconductor manufacturing. First, individual wafers are optimized for their extremely low cost of production, meaning that inserting a carefully designed (and hidden) flaw would introduce additional costs that could compromise the goal of low-cost manufacturing. Any kind of remotely activated “kill switch” would require some kind of wireless receiver–and a receiver of any reasonable strength could not be effectively hidden on a large scale. Second, such a vulnerability would have to be inserted only into wafers that are eventually purchased by the U.S. and its allies. If not, then any attempt to activate a remote exploit could risk compromising uninvolved countries or even the Chinese domestic market, either by accidentally triggering unintended chips or by providing a hardware vulnerability that could be re-used by Western cyber operations. Deliberately planting such vulnerabilities would thus require not just extreme technical precision, but a careful accounting of where vulnerable chips arrive in the supply chain.
Nonetheless, the existence of Chinese chips in the American market can accomplish much without explicitly-designed defects or “kill switches”. Here, a simple lack of transparency may be enough. China currently requires that all software vulnerabilities be reported to the Ministry of Industry and Information Technology, but does not have any corresponding public reporting requirement. This raises the fear that the Chinese government may be ‘stockpiling’ vulnerabilities in Chinese-produced products, which may be used in future cyber operations. Here, China does not need to explicitly build backdoors into its own hardware but may simply decline to publicly disclose vulnerabilities in software in order to attack the rest of the world.
Shining a Light on Untrusted Hardware
The likelihood of cooperation between Chinese industry and the CCP exposes a potentially important risk. Chinese software is often deployed atop or alongside Chinese semiconductors and is particularly dangerous in the form of hardware drivers, the “glue code” that ties together software with the low-level hardware components. These drivers by default operate with high privileges and are typically closed-source and thus difficult to examine. We believe that vulnerable drivers may be a key vector of Chinese espionage or cyber threats. In 2019, Microsoft disclosed the existence of a privilege escalation vulnerability found in a Huawei driver. Although Huawei cooperated with Microsoft, it is unclear under the current legal regime whether the discovery of similar vulnerabilities by Huawei would be reported and patched, or if it would be kept as an asset by the Chinese government. The promulgation of Chinese drivers packaged with cheap hardware thus means that the Chinese Communist Party will have access to a broad, and potentially pre-mapped, attack surface with which to exploit U.S. government services.
The first policy step here is obvious: banning the use of Chinese chips in U.S. federal government acquisitions. This has already been proposed as a Defense Department regulation set to take effect in 2027. If possible, this date should be moved up to 2026 or earlier. In order to enforce this ban, continuous research should be undertaken to map supply chains that produce U.S. government semiconductors. How to accelerate and enforce this ban is an ongoing policy question that is beyond the scope of this paper.
However, a deeper question is how to protect the myriad components of critical infrastructure, both formal and informal. The Cybersecurity and Infrastructure Security Agency (CISA) has defined 16 sectors of critical infrastructure whose failure could materially disrupt or endanger the lives of American citizens. The recent discovery of the Volt Typhoon threat group revealed the willingness of the Chinese government to penetrate U.S. critical infrastructure using vulnerable components.
While some of the 16 CISA sectors, such as Government Services and the Defense Industrial Base are within the purview of the federal government, many others, such as Healthcare, Food and Agriculture, and Information Technology, are run via complex partnerships between State, Local, Tribal, and Territorial (SLTT) governments and private industry. Although the best effort should be made to insulate these sectors from over-reliance on China, fully quarantining them from Chinese chips is simply unrealistic. Therefore we should explore proactive efforts at mitigation in the case of disruption.
A first step would be to establish a team at CISA to decompile or reverse-engineer the drivers for Chinese hardware that is known to operate within U.S. critical infrastructure. Like manual disassembly, this is an expensive and arduous process, but it has the advantage of reducing an unknown or otherwise intractable problem to an issue of engineering. In this case, special care should be taken to catalog and prioritize pieces of Chinese hardware that impact the most critical infrastructure systems, such as Programmable Logic Controllers (PLCs) in energy infrastructure and processors in hospital databases. This approach can be coordinated with the threat database described in the previous section to disassemble and profile the drivers of the highest-impact semiconductor products first. If any vulnerabilities are found, warnings can be issued to critical infrastructure providers, and patches issued to the relevant parties.
Brace for Impact: Building Infrastructure Resiliency
Even in the case that neither the reduction of Chinese hardware nor the proactive search for driver vulnerabilities is able to prevent a Chinese attack, the United States should be prepared to mitigate the harms of a cyber crisis.
A further step toward this goal would be the institution of resiliency protocols and drills for designated critical infrastructure providers. The 2017 WannaCry ransomware attack substantially incapacitated the UK National Health Service by locking providers out of Electronic Medical Record (EMR) systems. Mandating routine paper backups of digital medical records is one example of a resiliency strategy that could be deployed to ensure emergency functioning even in the case of a major service disruption.
A further step to protect pieces of critical infrastructure is to mandate regular cyber training for critical infrastructure providers. CISA could work in cooperation with State, Local, Tribal, and Territorial regulatory bodies to identify critical pieces of infrastructure. CISA could develop hypothetical scenarios involving outages of critical Information Technology services, and work with local infrastructure providers, such as hospitals, municipal water services, transit providers, and the like, to create plans for how to continue to operate in the event of a crisis. CISA could also prepare baseline strategies, such as having non-internet connected control systems or offline backups of critical information. Such strategies could be adapted by individual infrastructure providers to best protect their services in the event of an attack. These plans could then be carried out in mock ‘cyber drills’ to exercise preparedness in the event of an incident.
Ultimately, plans of this kind only prepare for service disruptions and do not address the longer-reaching impacts of breaches of confidentiality or the targeted manipulation of sensitive data. However, as we believe that the likelihood of targeted or sophisticated vulnerabilities in Chinese chips is relatively low, these kinds of brute force attacks are the most likely threat models. Preparing for the most basic and unsophisticated service disruptions is a good first step toward mitigating the harm of any potential cyber attack, including those not directly facilitated by Chinese hardware. This cyber-resiliency planning is therefore a strong general recommendation for protecting Americans from future threats.
Conclusion
We have presented 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. We have proposed three slates of policies corresponding to each challenge with some guidance on how to proceed, divided into three complementary categories:
Boosting non-China semiconductor production
- Institute a “Lend-Lease” policy for semiconductor IP, design software, and Semiconductor Manufacturing Equipment (SME) in allied and partner nations
- Create a strategic reserve of semiconductors held by the U.S. government, in order to insulate against chip shortages and shore up demand in fledgling markets
Containing Chinese exports
- Institute tariffs on all imported products making use of Chinese semiconductors and components, with a product database to catalog products containing Chinese chips and ensure enforcement
- Negotiate bilateral treaties to protect partner countries from Chinese trade retaliation by buying up excess trade capacity in the event of Chinese tariffs
Mitigating the threat of chips in the U.S. market
- Disassemble and reverse-engineer drivers in imported Chinese hardware to identify vulnerabilities
- Build resiliency strategies and institute training drills for critical infrastructure to function without computer infrastructure
We hope that this contribution will advance future discussions on the semiconductor trade and make a measurable impact on bolstering U.S. national security.
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.
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”.
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?
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.
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.
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.
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.
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: Washington’s Toolkit).
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.
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.
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.”
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.
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.
‘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.
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%).
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.
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.
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 could agree together 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.
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.
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.
To tackle AI risks in grant spending, grant-making agencies should adopt trustworthy AI practices in their grant competitions and start enforcing them against reckless grantees.