China’s plan to dominate legacy chips globally sparks US probe

Under Joe Biden's direction, the US Trade Representative (USTR) launched a probe Monday into China's plans to globally dominate markets for legacy chips—alleging that China's unfair trade practices threaten US national security and could thwart US efforts to build up a domestic semiconductor supply chain. Unlike the most advanced chips used to power artificial intelligence that are currently in short supply, these legacy chips rely on older manufacturing processes and are more ubiquitous in mass-market products. They're used in tech for cars, military vehicles, medical devices, smartphones, home appliances, space projects, and much more. China apparently "plans to build more than 60 percent of the world's new legacy chip capacity over the next decade," and Commerce Secretary Gina Raimondo said evidence showed this was "discouraging investment elsewhere and constituted unfair competition," Reuters reported. Most people purchasing common goods don't even realize they're using Chinese chips, including government agencies, and the probe is meant to fix that by flagging everywhere Chinese chips are found in the US. Raimondo said she was "fairly alarmed" that research showed "two-thirds of US products using chips had Chinese legacy chips in them, and half of US companies did not know the origin of their chips including some in the defense industry." To deter harms from any of China's alleged anticompetitive behavior, the USTR plans to spend a year investigating all of China's acts, policies, and practices that could be helping China achieve global dominance in the foundational semiconductor market. The agency will start by probing "China’s manufacturing of foundational semiconductors (also known as legacy or mature node semiconductors)," the press release said, "including to the extent that they are incorporated as components into downstream products for critical industries like defense, automotive, medical devices, aerospace, telecommunications, and power generation and the electrical grid." Additionally, the probe will assess China's potential impact on "silicon carbide substrates (or other wafers used as inputs into semiconductor fabrication)" to ensure China isn't burdening or restricting US commerce. Some officials were frustrated that Biden didn't launch the probe sooner, the Financial Times reported. It will ultimately be up to Donald Trump's administration to complete the investigation, but Biden and Trump have long been aligned on US-China trade strategies, so Trump is not necessarily expected to meddle with the probe. Reuters noted that the probe could set Trump up to pursue his campaign promise of imposing a 60 percent tariff on all goods from China, but FT pointed out that Trump could also plan to use tariffs as a "bargaining chip" in his own trade negotiations. A public hearing on the probe will take place March 11-12. The USTR will begin fielding public comments starting on January 6.

How do China’s legacy chips threaten the US?

Over the past six years, the USTR warned, "China has nearly doubled its global share of foundational logic semiconductors production capacity." Specifically through a plan called "Made in China 2025," China "set numerical targets" to increase dominance and is currently "projected to reach approximately half of the world’s capacity by 2029," the USTR found. The US suspects that China isn't playing fairly. In the public notice, the USTR accused China of seeking to dominate the global legacy chip market through "extensive anticompetitive and non-market means," including:

"through Chinese Communist Party guidance, directives, and control within state and private enterprises; activities of state-owned or state-controlled enterprises; market access restrictions; opaque regulatory preferences and discrimination; wage-suppressing labor practices; massive and persistent state financial support of industry, including government guidance funds; and forced technology transfer, including state-directed cyber intrusions and cybertheft of intellectual property."

On a press call, US Trade Representative Katherine Tai explained that these alleged practices were enabling Chinese companies "to rapidly expand capacity and to offer artificially lower-priced chips that threaten to significantly harm and potentially eliminate their market-oriented competition," Reuters reported. Additionally, a Commerce Department memo shared results of a government survey showing that "Chinese suppliers had been offering chips at prices 30 percent to 50 percent lower than those of US suppliers, and in some cases lower than the cost of production," the Financial Times reported. In his announcement, Biden echoed that these practices allow Chinese "companies to significantly harm competition and create dangerous supply chain dependencies in foundational semiconductors." To prevent harm to American businesses and workers—and as one former Trump official, Matt Turpin, told FT, to keep the "entire" CHIPS Act from coming "unglued"—the US must understand the full impact of China's legacy chips plans on the US economy, Biden said. As Turpin explained, Biden's efforts providing multibillion dollar investments in the US domestic semiconductor supply chain could be threatened if the US can't compete with China. Potentially the biggest risk, a chief executive at Taiwan’s Research Institute for Democracy, Society and Emerging Technology, Jeremy Chang, told FT, is that China could leverage its global dominance of legacy chips to one day reverse "the dynamics of the chip war," perhaps by imposing sanctions on the US that could further hurt the US economy. Currently, the USTR is "requesting consultations with the Government of China." In addition to seeking public comments, the US is also releasing a Request for Information (RFI) to "solicit commercial ideas from industry that may inform future policymaking in support of the government-wide effort to leverage existing manufacturing capacity" in the US. They're hoping government contractors will help them "gauge the best ways" to "scale up their use of domestically manufactured chips, particularly for critical infrastructure." So far, China has not responded to Biden's announcement of the legacy chips probe and could remain somewhat quiet, much like China's muted response to Biden's 100 percent tariffs on Chinese EVs. "People familiar with the matter" told FT that officials expected the probe would be "less likely to rankle allies" or "invite national security-related measures from China as retaliation." But China hasn't been totally quiet in recent weeks. Earlier this month, China banned the US from importing critical metals used in tech manufacturing. Plus, China recently announced a probe into Nvidia's alleged anticompetitive behavior, which was viewed by some as a retaliative measure against a US company. And if Trump takes office and imposes a 60 percent sanction across the board on Chinese imports, then China "would likely retaliate," Peterson Institute for International Economics senior fellow Mary Lovely told Ars last month. Some industry leaders have already expressed support for the probe. In a press release Monday, the President and CEO of the Semiconductor Industry Association, John Neuffer, urged the USTR to "proceed deliberately" and "work closely with industry throughout the process" of probing China's legacy chips. He said that SIA looks "forward to working with the incoming Trump administration and the new Congress to preserve America’s semiconductor supply chain resilience and ensure the US semiconductor ecosystem is the global leader for many years to come," Neuffer said.