Keep advanced semiconductors out of China

painfully drives it home, but for years there have been good reasons to move or
keep certain supply chains out of China.
Beyond COVID-related materials, advanced semiconductors may top the list. This
is well recognized in Congress, and new legislation seeks to boost the chip
industry. To strengthen the US versus the PRC, though, legislation must be
precisely crafted.

month, one bipartisan group of senators proposed the CHIPS for
 Act, then another bipartisan group offered the American Foundries Act. Their efforts merged, this
week producing amendments 2244 and 2245 to the National Defense
Authorization Act. (The latter has fund amounts stipulated, the former
doesn’t.) Parallel work is underway in the House.

support for industry is a book-length topic. Three points of many:

  1. Subsidies are at the heart of China’s development model. The PRC also coerces transfer of technology or steals. Genuine market competition is off the table.
  2. It benefits America greatly to avoid monopoly power in an industry, including monopolies entirely based in the US or the friendliest of countries.
  3. When trying to keep supply chains out of China, a minimal requirement is the US government doesn’t effectively encourage more supply in China.

The senators’ efforts are rightly aimed at the PRC’s economic predation — point 1 — and focused on an industry both militarily and economically important. Point 2 is a challenge because semiconductors require heavy investment. A large company can plan a US facility, appealing in production capacity and job creation, which would absorb the bulk of the original estimate of $22-$25 billion in funding.

Employees work at a factory of Renesas Semiconductor Co. during a government organised tour of the facility following the outbreak of the coronavirus disease (COVID-19), in Beijing, China May 14, 2020. REUTERS/Thomas Peter

would be a serious error. The government would be undermining rather than
ensuring competition, competition vital to reliable, long-term national supply
and innovation. The final result of American government support of an industry
should never be embrace of a single corporate partner. Individual firms should
face a hard limit on how much they can receive.

3 calls for plugging possible leaks. Both amendments limit cooperation with
China for firms receiving US support. In the final legislation, provisions must
be airtight — the supply chain involved kept entirely out of the PRC. This
requires legal restrictions; incentives won’t cut it.

reason: China is a far better subsidizer than the US (thankfully). There is no
Chinese process where competing political interests fight over resources or
principles or taxpayers demand accountability for use of their money. Even if
the legislation moves very quickly, implementing regulations will take months.
Beijing can respond in a day.

set of needed legal restrictions is export controls applied to all advanced
products and technologies developed with government funds. Two years ago,
Congress overwhelmingly passed stricter export controls, which the Department
of Commerce has not implemented. If semiconductor technology isn’t tightly
controlled, the PRC’s subsidies advantage will be pivotal.

if a company receives American government support in some form, neither it nor
its affiliates should then be able to quickly hike investment in China
or in concert with Chinese companies and whether for research or output.
companies receiving US support can freely tap the PRC’s incentives, facilities
here will end up outsized and possibly outclassed.

the full supply chain must be addressed. An obvious play by Beijing is to
target particular materials or equipment indispensable to high-end chip
production. Advances created through support of the industry could then be
hostage. Limits on direct and indirect Chinese influence should apply to all
firms participating in the chain.

supply chain shouldn’t, however, be confined to the US. If friendly countries
abide by export controls and restrictions on cooperation with the PRC, there
are important advantages to their participation. America is in a long-term
competition with China, and being able to benefit from new semiconductor chains
will pull countries and companies toward helping us.

Even so, the competition will be expensive. Beijing will not concede its semiconductor ambitions just because Washington allocates $25 billion. It will try to outbid for key multinationals — another reason for US government support to be split among multiple participants. Semiconductors are one of very few products worth government intervention, but care is still required.