April 16, 2021
This commentary is a lightly edited version of a comment submitted to the U.S. Department of Commerce.
Western companies benefited for decades from inserting China into their supply chains and by selling to the Chinese market. This occurred during a long period of good relations. But that period ended with the arrival of President Xi Jinping. The United States now finds itself in competition with China because of decisions by Xi’s government.
This September 2019 CSIS report discussed broad policy for managing technology transfer to China. Semiconductors are a technology focal point for this competition. The United States has sought for years to maintain superiority in semiconductor technology over China. China, in turn, has repeatedly launched major investment programs (accompanied by the usual industry espionage) to develop an indigenous industry.
While China has repeatedly failed to develop an indigenous semiconductor industry, it is persistent, well resourced, and continues to try. Until recently, China was following the same path as other semiconductor producers such as Japan and South Korea in building a domestic industry, starting in less advanced sectors (usually memory chips) and progressing to more advanced chips. U.S. sanctions slowed China’s progress, and it will likely take a decade for China to create an indigenous industry. For now, China is dependent on Western suppliers for “fabless” production services, most chips, and semiconductor manufacturing equipment (SME).
China will eventually succeed in building an indigenous industry, but U.S. decisions can affect the pace of this. China is very unlikely to end predatory commercial policies or adopt a less confrontational international stance. This argues for greater restriction, but restriction must be balanced against the need to protect (as far as possible without damaging national security) the robustness of the U.S. semiconductor industry and that of its allies. As an aside, China is unlikely to observe any agreements on trade or cybersecurity absent strong verification and compliance mechanisms and multilateral support, so they are not worth pursuing at this time.
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