By Akinori Kahata
This blog post is the third a series on U.S.-China technology competition. Click here to read the previous posts in this series, Managing U.S.-China Technology Competition and Decoupling, and Assessing the Impact of U.S.-China Technology Competition and Decoupling: Focusing on 5G.
In recent years, the U.S. government has taken a variety of steps to both control China’s access to semiconductor technology as well as to improve the United States’ own ability to lead in chip design and production. Key among these were the export controls enacted by the Trump administration against companies including Huawei and Semiconductor Manufacturing International Corporation Incorporated (SMIC), and the passage of the National Defense Authorization Act for Fiscal Year 2021, which included funding for semiconductor manufacturing and research.
Technological competition around semiconductors is not only happening between the U.S. and China. In December 2020, a group of European Union countries announced “A European Initiative on Processors and Semiconductor Technologies” with the aim of increasing Europe’s semiconductor production capability throughout the value chain. Recent reports indicate that the European Commission has entered into discussions with TSMC and Samsung about investing in advanced manufacturing facilities on the continent to reduce its dependence on China and the United States.
As discussed in previous blog posts, technology competition and the resulting movement towards decoupling could have damaging economic consequences not just for China, but also for the nations working to distance themselves from their reliance on Chinse firms. To manage technological competition, it is essential to reach a consensus on the strategic significance of semiconductors, especially advanced semiconductors, from the standpoint of national security. By using this consensus to guide policy, decision-makers can determine the appropriate policy for protecting and supporting semiconductor technology. Comparing advanced semiconductors with natural resources, a typical example of strategic products, can help illuminate the national security significance of advanced semiconductors.
Semiconductors and Natural Resources
Advanced semiconductors and natural resources share two important characteristics: First, both are indispensable for our society. Second, both have limited production capacity.
Without gas, oil, and coal, our electricity and modern-day transport systems could not function. Similar to these natural resources, semiconductors also serve an essential role in society. From military equipment and automobiles to cloud computing and critical infrastructure like 5G telecommunication systems, modern technology could not work without semiconductors. In addition, both natural resources and advanced semiconductor production capacity are limited. The production of natural resources is obviously limited because volumes of natural resource reserves are limited. By contrast, advanced semiconductors’ production capacity is limited due to technological and economic factors. Since advanced semiconductors manufacturing processes are extremely complicated and require highly sophisticated technology, it is difficult for firms to develop and maintain the ability to produce cutting-edge chips. A large investment in both research and development (R&D) and factory construction is required for manufacturers to compete. Because of this, only a small number of firms in select countries have the ability to produce advanced semiconductors.
To understand why advanced semiconductors are critical to national security, there are several key principles to bear in mind. First, if a country does not have the capacity to produce something so essential for its economic and national security, it must depend on other countries. Countries that can produce advanced semiconductors could have strong economic power. Since this power can be a tool to advance geopolitical interests, it is necessary to consider advanced semiconductors in a national security context.
Second, it is worth noting that this leverage will emerge only when the production capacity is limited and monopolized by a single country or a small number of countries. For products that are easier to produce, nations can always find alternate suppliers in a different region or even shift quickly to increase domestic production if the need arises. This point is critical when considering semiconductor policies because not all semiconductors are equally difficult to produce. The accessibility of advanced semiconductors, which are difficult to produce, therefore has a significant impact on national security.
Policy Implications
There are two policy approaches the United States can take to ensure it does not lose its lead in the semiconductor industry: promoting its domestic semiconductor industries, and preventing its technology from being transferred to rival countries.
In policy making, it is important to keep in mind that only the production of advanced semiconductors should be viewed as a possible national security issue. Lawmakers should be careful to limit the scope of their policies to only cover technologies that raise specific and pressing national security concerns, avoiding other areas of semiconductor production where government interference may cause unintended harms to domestic firms or global industries. Key factors to consider when making this determination are how essential the particular semiconductors are for society and how limited production capacity is.
If the target scope is not appropriately chosen, policies do not work well. An example might be if the U.S. instituted an export ban of certain chips to firms in a specific country. If companies in other nations have the ability to make chips of comparable quality, then the only result will be encouraging manufacturers to switch away from U.S. suppliers. As a result, U.S. firms would lose market share and ultimately become weak. On January 25, the semiconductor manufacturing industry association SEMI sent a letter to the Biden administration explaining this problem. To avoid this, policymakers should carefully choose the target of policies to avoid unintended consequences. For other type of policies, such as promoting R&D, identifying the appropriate target scope is also essential. If a product can already be made competitively by a large number of firms, government support will have little benefit and could risk distorting the market.
In contrast, some believe the export regulations are not yet strong enough to protect the advanced semiconductor technology. For example, in December 2020, Senators Michael T. McCaul and Macro Rubio sent a letter to the Secretary of Commerce, insisting that scope of export controls against SMIC is too narrow. They said that the policy’s target of limiting access to equipment “required to produce semiconductors at 10 nanometers and below,” would still allow the company access to nearly all semiconductor manufacturing equipment. The new administration has to decide on a path forward despite this difference in opinion.
From this point of view, we can evaluate whether the Trump administration’s policies were appropriate or not.
Evaluating Export Restrictions on Huawei and SMIC
In 2019, the U.S. Department of Commerce Bureau of Industry (BIS) added Huawei to its entity list, and in August 17, 2020, the restrictions against Huawei were strengthened. After that, not only U.S. firms but also other foreign companies using U.S. origin technology have been required to apply for a license before exporting to Huawei. SMIC was similarly added to the entity list in December 2020 because they were allegedly supplying their products for Chinese military modernization.
The export controls against Huawei may have made a negative impact on Huawei's smartphone business and their base station business. According to the Chinese media, Huawei’s smartphone market share during January in China fell to third place. Also, it sold the Honor brand to save it from U.S. sanctions. In addition, some reports have pointed out that Huawei's ability to supply 5G base stations has become tenuous because they are highly depend on U.S. technology. Based on these facts, it can be said that the export controls had a negative effect on Huawei. This is because essential semiconductors which are not be able to be made by Chinese firms are included in the target scope of export controls.
On the other hand, the target scope may be wider than necessary. Responding to the regulation, semiconductor industries in the U.S. and Europe criticized the U.S. government’s decision. They insisted that the export controls are harmful to the global supply chain of semiconductors, and that most semiconductor exports to Huawei are not sensitive to national security. According to news articles, many companies, including Qualcomm, Intel, Samsung, SK Hynix, Sony, and Kioxia, applied for and received export licenses of some semiconductors to Huawei. These actions indicate how important Huawei is for semiconductor firms as a customer, and that the initial scope of regulation may have been wider than necessary.
In the SMIC case, the target of controls is the manufacturing equipment necessary to produce semiconductors at the 10nm or lower processes. The objective of this policy is to prevent SMIC from gaining cutting-edge technology that would allow them to produce advanced semiconductors on their own. SMIC released an official comment saying that the export controls may affect the production of advanced chips, but that other areas of its business will not be significantly impacted. This result is desirable in terms of national security; however, as described in the earlier, some believe that the target scope is too small. The Biden administration should continuously review the state of the industry and gather feedback from industry and security experts to ensure these policies remain scoped effectively.
Steps the New Biden Administration Should Take
First, it is necessary for the Biden administration to establish a public strategy outlining the concepts and the goals of technology competition. The most important point is defining what types of technology and products should be considered a national security issue. For example, recently several automobile companies publicly announced that they have had to reduce their production of new cars due to a shortage of semiconductors. To alleviate this shortage, the governments of the U.S., Germany, and Japan asked the Taiwanese government for support in boosting production. This example shows how semiconductors and their production capability is essential for our society, and can become an issue of geoeconomics significance. Again, a public strategy outlining the concepts and the goals of technology competition should be based on how essential the technology is to economic and national security, and how limited production capacity is globally.
Second, the new administration can evaluate the former administration’s policies and decide whether to modify their scope. After that, the administration can decide whether to take any new, concrete measures. At this time, international collaboration must be a priority because semiconductors’ global supply chain cannot be managed by one country. As described previously, a unilateral approach would be harmful to the United States’ interests.
The next blog post in this series will discuss the appropriate scope of semiconductor policies and possible concrete measures.
Akinori Kahata is a visiting researcher with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.
The Technology Policy Blog is produced by the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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