Semiconductors and the China Threat:

Reviewing a National Security Approach to

Economic Policy

Raj Ashar | May 2021

(Clockwise from top left) A computer chipboard with a Lattice semiconductor, Joe Biden with Chinese President Xi Jinping in 2011, Marines of the Chinese People's Liberation Army, Intel headquarters in Santa Clara, CA. Intel is the largest semiconductor in the US by revenue.

I

n President Biden’s recently-announced $2 trillion infrastructure package, the American Jobs Plan, he calls for $50 billion to be spent on the US semiconductor industry. This comes as policymakers on both sides of the aisle are becoming increasingly concerned about China’s growing power in the semiconductor industry.

 

To understand why Biden has called for this large investment, let’s take a look at what semiconductors are and their uses. Semiconductors are conductors of electricity that are integral to a variety of products such as smartphones, medical equipment, and gaming hardware. More importantly, they will also be an integral aspect of future technologies in both the artificial intelligence and internet of things spaces. Currently, the US has a 12% share of global semiconductor manufacturing capacity, which is down from a 37% share in 1990. Moreover, in the next decade, 6% of new manufacturing capacity developed will be in the United States, while a whopping 40% of new manufacturing will be located in China, whose Made in China 2025 plan aims for the country to achieve semiconductor dominance in all sectors by 2030.

 

When Economic Policy Becomes National Security Policy

So how did we get here? Why, when the US was on the top of the semiconductor manufacturing world, did we suddenly lose market share? The reason is that other countries, many in Asia, began to offer financial incentives to semiconductor manufacturers to produce in their respective countries. Furthermore, US manufacturers began to open factories abroad, likely due to cheaper labor costs.

 

Today’s moment in the semiconductor industry represents a unique situation. Usually, one thinks of trade as a largely economic endeavor: one country exports to another due to their competitive advantage in producing a specific product. In the past, that’s how the semiconductor industry functioned. The U.S. exported large amounts to various countries, including China, and these products were used in the creation of some of China’s largest tech companies. However, today, with the growing tensions between the two countries, trade cannot be viewed as just an economic endeavor. With all countries, especially China, national security interests must be taken into account. 

 

Policymakers are specifically concerned with the rise of China as a semiconductor manufacturer. On the Right, Republican Senator Tom Cotton (R-AR) and Representative Michael McCaul (R-TX) wrote a joint letter to the U.S. Secretary of Commerce, Gina Raimondo, urging her to place more restrictions on the sale of electronic design automation (EDA) tools, a precursor to semiconductor production. This comes after the U.S. sold EDA software to a seemingly civilian Chinese company, who then used the software to design semiconductors for computers at a hypersonic weapons facility run by the People’s Liberation Army (PLA). 

 

On the Left, Democratic Majority Leader Chuck Schumer (D-NY) called for the creation of a bill to directly counter China’s rise, noting the special investments necessary in the semiconductor industry. At this point in time, a time where Democrats and Republicans are so divided, there seems to be an overwhelming amount of bipartisan support for increasing American manufacturing in the semiconductor industry in an effort to counter China. There are a few different ways the US can proceed in doing this.

 

Domestic Production Incentives 

The first seems to be what Biden aims to do in his infrastructure bill: provide government funding to spur domestic production. The details of this are still vague: the American Jobs Plan fact sheet says “The President is also calling on Congress to invest $50 billion in semiconductor manufacturing and research, as called for in the bipartisan CHIPS Act.” The CHIPS Act was a bill introduced in June 2020 with sponsors from both sides of the aisle. However, the bill, which called for an investment tax credit as well as a $10 billion federal grant, stalled in Congress. Despite this, the recently passed 2021 National Defense Authorization Act (NDAA) authorized the government to fund research in the semiconductor industry along with providing funding for semiconductor manufacturing. 

 

The effects of the direct investment seem like they could be promising; a report by the Semiconductor Industry Association, a lobbying group, claimed that every $1 invested by the government into semiconductor industry R&D would yield an increase in GDP of $16.50. While this picture may be a bit too rosy, it is logical that increased R&D spending would positively impact job creation as well as technological innovation. 

Strengthening Trade with Our Allies

Another path forward could be the strengthening of ties with countries other than China that produce semiconductors. Some of the other top manufacturing countries are Japan, South Korea, and Taiwan. Europe does produce some, but has a smaller market share than that possessed by countries in East Asia. While the interplay between the US, Taiwan, and China is already tense to say the least, the U.S. can focus on maintaining and strengthening ties with both Japan and South Korea, countries that share an interest in countering China. The U.S. could craft policies to promote the importation of semiconductors from these countries, which would then reduce any reliance on China, limiting their strategic dependency in the semiconductor industry. This strategy need not be mutually exclusive with the investment in the U. industry, but rather can be used in tandem with a domestic incentives policy. 

 

Trading with China More Carefully

Relating to Congressmen Cotton and McCaul’s letter, the third measure that can be taken is a reassessment of the current semiconductor exports to China. While these are often measures taken by U.S. private companies, the U.S. government should ensure that the country is not putting itself at a strategic disadvantage regarding China by exporting technologies that can be used for military purposes. The difficulty with this is trying to tease out state actors as opposed to private actors. Due to the Chinese government’s extensive control over industry, it is difficult to tell the degree to which a company is insulated from government influence. However, China seems like it would support independence from US imports: their goal is to produce all chips for Chinese companies in China by 2030, and the government already offers subsidies to companies that produce a large proportion of chips for domestic use. Based on these factors, it seems likely that US semiconductor exports to China will decrease in the next decade. 

 

In Conclusion

President Biden’s American Jobs Plan calls attention to an important issue regarding our investments in the semiconductor industry. It also demonstrates the importance of combining economic interests with national security interests; limiting free trade may not be the best path forward economically, but the implications for national security may very well outweigh these considerations. With this in mind, it's likely that there will be increased public investment in the U.S. semiconductor industry, along with an emphasis on ties with semiconductor manufacturers outside China, as the US tries to counter China’s rise. 

 

As globalization continues and countries with seemingly diametrically opposed political interests become increasingly interdependent upon one another, Biden’s approach to the semiconductor industry stands as a symbol for a new type of economic policy: one that explicitly takes into account national security interests and the importance of trading with and investing in our allies. For the issue extends beyond mere economic surplus; it might directly involve the survival of Western hegemony.

Raj Ashar is a Senior Editor at Midwestern Citizen and is a rising senior at the University of Michigan studying Economics. In the future he hopes to attend law school and combine his interest in economics with the law. Outside of MC, Raj enjoys watching movies and running.