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Washington Moves to Boost Legacy Chip Production Over Fear of Chinese Dumping

Washington Moves to Boost Legacy Chip Production Over Fear of Chinese Dumping

The Lede: The House Select Committee on the CCP sent a letter on Friday to the Biden administration’s top business and trade officials in which they recommend taking action against less-advanced legacy chips produced in China. It's another move aimed at breaking U.S. reliance on its Asian rival’s supply chains while also denying Beijing access to the latest generation of chips.

What We Know:

  • The letter was seen by the Wall Street Journal on Friday and published on the Select Committee’s website earlier this week. Republican Representative and committee chairman Mike Gallagher and Democratic Representative and ranking member of the party in the committee Raja Krishnamoorthi addressed U.S. Trade Representative Office Katherine Tai and Secretary of Commerce Gina Raimondo to set sights on shoring up supply chains for older chips. 
  • The Select Committee argued that Chinese manufacturers are in a position to flood the U.S. and global markets with ‘foundational semiconductors’ that are found in virtually all contemporary electronics in both consumer and defense industries. Most factories planned to begin operations in China are focused on producing these older-generation chips. 
  • Chinese foreign ministry spokesperson Mao Ning responded by calling U.S. semiconductor export controls discriminatory practices that violate the most-favored-nation principle (MFN). The Select Committee previously recommended the U.S. reset the MFN policy.
  • On Thursday, the Commerce Department announced that it plans to award $162 million in grants to the U.S. tech company Microchip Technology for the production of semiconductors and microcontroller units (MCUs) at factories in Colorado and Oregon for both consumer and defense industries.

The Background: Previous generation chips are used in a wide range of goods including automobiles, aircraft, home appliances, broadband, consumer electronics, factory automation systems, military systems, and medical devices. Citing the Rhodium Group, the Select Committee said that for chips 50 to 180 nanometers China could control around 50% of the global foundry capacity within a decade. The award for Microchip Technology would be the second in a $52.7 billion program approved in 2022 to bolster U.S. semiconductor manufacturing and research called ‘Chips for America.’ Last week, the Select Committee made recommendations to restrict U.S. investment in the Shanghai-based tech company Quectel Wireless Solutions citing  risks from its contributions to China’s defense industries along with the presence of its products in smart devices. 

Likely Outcomes:

  • If the U.S., along with its allies, can successfully ramp up production of these legacy chips, there may be an incentive to impose protectionist policies to prevent Chinese market dominance of these ubiquitous components. The Select Committee has proposed ‘component tariffs’ that would place import duties on the chips themselves but not the finished products that they are part of. This would likely come to the forefront as a serious consideration in order to avoid extreme effects on consumer goods.
  • China ramping up its own production of these chips is important in securing its own supply chains from turbulent trade relations with the West, not only for the production of export goods but also for domestic sales of household items as well as in more sensitive defense applications. Even if the U.S. places restrictions on older-generation chips from China, Beijing’s successful mass-production of these chips would likely give it a greater edge in export-oriented consumer goods that use them.

Quotables:

"We need to move from studying the problem to actually addressing the strategic risk to the U.S. industrial base. It is time for action... our military and economic well-being may run the risk of being overly reliant on the CCP." – Mike Gallagher and Raja Krishnamoorthi, leaders of the Select Committee on the Chinese Communist Party

"China's looming dominance of the legacy chip market will create new national security and economic vulnerabilities for the U.S., but can only be addressed effectively through close collaboration with allies.” – Jimmy Goodrich, semiconductor expert and senior advisor to the RAND Corporation

"Winning the chip war with China requires retaining dominance in advanced semiconductors and reducing dependencies on Chinese legacy chips. Legacy chips underpin everything from dishwashers to military weapons systems. Just as it did with solar, China could box out foreign competitors through dumping, rendering the United States – and the rest of the world – dependent on China for mature chips." – Megan Hogan, research analyst at the Peterson Institute for International Economics

“The US is going after the Chinese chip industry neither for national security reasons nor as part of a legitimate competition. This is unilateral bullying without principles or bottom lines that essentially denies emerging markets and developing countries the right to a better life for their people. The US behavior is taking a serious toll on the stability of the global industrial and supply chains. It poisons the atmosphere for international cooperation and fuels division and confrontation. This selfish move will inevitably backfire.” – Mao Ning, foreign ministry spokesperson

Good Reads:

Biden Urged to Curb China’s Dominance of Older-Generation Chips (WSJ)

U.S. nervous about 'flood' of older-generation chips from China (Nikkei)

Letter to Secretary Raimondo on Foundational Semiconductors (Select Committee)

US plans $162 million award to Microchip Technology to boost production (Reuters)