Six Ways Washington Can Protect Against the Threat from Chinese Semiconductors
The incoming Biden Administration would be wise to continue a laser-like focus on the growing threat of the Chinese military.
As part of its ‘Made in China 2025’ plan, the Chinese Communist Party (CCP) is seeking to seize command of the global semiconductor market and leverage the supply chain as a geo-political weapon. As I recently concluded in a white paper for the Center for the Study of the Presidency and Congress, Washington must take decisive action to prevent China dominating this critical industry in the way they sought to dominate other strategically important industries in the past.
The Chinese threat to our national security is clear: modern defense systems are powered by semiconductors. As the People’s Liberation Army (PLA) acquires advanced semiconductors through something disguised as commercial trade, it will be able to apply those technologies against the United States on the battlefield and take advantage of vulnerabilities in our systems. Effectively, without proper controls, U.S. technology can be used against us.
Unlike American companies, there is little or no separation between Chinese semiconductor makers and the PLA. That porous line of civil-military fusion has empowered the Chinese military and intelligence services to steal semiconductor technology and the equipment to make the chips from market leaders, providing that intellectual property to domestic, state-backed Chinese companies that in turn spin off those advanced technologies to the PLA. Further, the Chinese government has created a $29 billion fund to grow its own domestic industry, they will guarantee market share for domestic “champions,” offer extensive state-backed lines of credit, and institute quotas and tariffs on imports as needed, among other predatory economic tools to protect a strategic industry.
As a result, China’s indigenous semiconductor industry has grown by leaps and bounds over the past ten years. Three major Chinese semiconductor makers have stepped onto the global scene in the last decade: ChangXin Memory Technologies (CXMT), Yangtze Memory Technologies Company (YMTC), and Fujian Jinhua Integrated Circuit Company (Jinhua). Each enjoys state support, and all are required to cooperate with China’s military and intelligence services under a 2017 law. A Senate investigation in 2012 found 1,800 cases of counterfeit electronic parts in defense equipment, each presenting its own potential vulnerability to our systems as well.
Washington has taken some steps to curb the flood of sensitive technology exports. In 2018, Congress passed the Export Control Reform Act to provide the Executive Branch with tools to identify and restrict the sale of sensitive technologies. In August, The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an advanced notice of proposed rulemaking finding that the export of semiconductor manufacturing equipment may pose a national security threat.
Earlier this year, the Trump Administration imposed a restriction that requires U.S. companies to obtain a license to sell semiconductors and equipment to China’s Semiconductor Manufacturing International Corporation (SMIC), the country’s largest producer. The control is a result of evidence that the company was sharing sensitive technology with the PLA, but stops short of adding SMIC to the United States’ Entity List — a blacklist that effectively prohibits American companies from selling to the designees.
The Executive Branch must go further to address the threat from Chinese state-backed semiconductor companies. Here are six policy recommendations:
1. Place known Chinese state-operated semiconductor companies on the Entity List. BIS should immediately add SMIC, CXMT and YMTC, which have known ties to the PLA, as well as potentially others.
2. Thoughtfully conclude the foundational technologies export restriction regulations.
3. Continue broad diplomatic pressure and add semiconductors to the State Department’s Clean Networks Initiative.
4. Provide robust domestic research and development and manufacturing tax credits to incent the U.S. domestic semiconductor industry.
5. Expand the U.S. Defense Industrial Base to semiconductors.
6. Prepare a strategy for retaliation by the CCP.
China seeks to dominate the modern technology market and the next-generation semiconductors that power it. The United States’ window to successfully mitigate this threat is closing.
As noted in the white paper, a national strategy to dominate the semiconductor industry by our primary geopolitical competitor cannot be met with wishful thinking. For the incoming Biden Administration, this will be an issue that needs to be addressed like our national and economic security depend on it.
EDITOR’S NOTE: Andy Keiser is a former Senior Adviser to the House Intelligence Committee and Deputy National Security Senior Advisor to the Trump transition team. He is currently a Principal at Navigators Global and a Senior Advisor to the Center of Study of the Presidency and Congress. Follow him on Twitter @AndyKeiser