Saif M. Khan
The countries with the greatest capacity to develop, produce and acquire state-of-the-art semiconductor chips hold key advantages in the development of emerging technologies. At present, the United States and its allies possess significant leverage over core segments of the supply chain used to produce these chips. This policy brief outlines actions the United States and its allies can take to secure that advantage in the long term and use it to promote the beneficial use of emerging technologies, such as artificial intelligence.Download Full Report
The United States and a small number of democratic allies dominate supply chains producing advanced computer chips, but this advantage could erode without new, targeted policies. Advanced computer chips underpin virtually all important technology today. China is investing heavily in becoming a new center of gravity in chip production and could succeed in developing state-of-the-art capabilities.
The United States and its allies should undercut China’s efforts with “protect” and “promote” policies aimed at improving supply chain security and maintaining China’s dependence on the United States and its allies for imports of advanced chips—especially state-of-the-art logic chips, which perform calculations that power advanced applications like artificial intelligence. By controlling the production of advanced chips, the United States and allied democracies can ensure that these technologies are developed and deployed safely and ethically to broadly benefit the world.
To protect, they should limit China’s access to key supply chain inputs with export and investment controls and challenge China’s market-distorting state subsidies. To promote, they should fund research and development, create financial incentives, develop and retain top talent, and reduce unnecessary trade barriers.
Advanced chip supply chains are among the world’s most complex and globalized. Their globalization sustains innovation by bringing together worldwide resources and talent pools. Indigenizing the entire supply chain for producing advanced chips would prove incredibly difficult and costly for any country, including the United States. But together, the United States and its allies—above all, Japan, the Netherlands, Taiwan, South Korea, the United Kingdom, and Germany—enjoy a competitive advantage at nearly every step of the supply chain needed to produce these chips.
Historically left out of advanced segments of these supply chains, China seeks to join semiconductor leaders. China is lavishing unprecedented subsidies on its semiconductor industry to indigenize its supply chains. It heavily subsidizes chip design firms and chip factories (“fabs”) turning their designs into chips. Together, these efforts have given China local chip production capabilities—albeit several generations behind the state of the art.
China’s efforts pose risks to national and international security. First, China’s subsidies could provide an independent ability to manufacture state-of-the-art chips. Underpinning all industry, the information economy, and military power, these chips are especially necessary for many emerging technologies, such as artificial intelligence. China could then deploy these technologies in dangerous and destabilizing ways (e.g., by starting arms races) or violate human rights and democratic values (e.g., by enhancing surveillance and other authoritarianism friendly technologies). Second, rising costs, economies of scale, and the clustering of know-how allow only small numbers of semiconductor firms to profitably operate at the state of the art. China’s success in developing state-of-the-art firms could displace leading U.S. and allied semiconductor firms, thereby harming their countries’ supply chain security.
The United States and its allies should protect national and international security by maintaining China’s advanced chip dependence and retaining key supply chain sectors on friendly shores. China’s subsidies to its chip designers and factories fund purchases of foreign inputs from the United States and its allies, including advanced semiconductor manufacturing equipment (SME), advanced materials, electronic design automation (EDA) software, and licenses to chip design intellectual property (IP). These elements are “chokepoints” in China’s chip supply chains: necessary to produce advanced chips, and for now, only available from the United States and its allies. Such chokepoints, described in detail in a companion CSET report, present a policy opportunity. To ensure China cannot build local capacity against market forces, and instead fortify that capacity in the United States and allied democracies, these countries should:
Apply export controls on chokepoints. The United States and its allies should control, with presumptive denial of licenses, advanced SME (especially extreme ultraviolet (EUV) photolithography and argon fluoride (ArF) immersion photolithography tools), advanced materials (photomasks and photoresists), and software necessary for China to build and use advanced chip factories. Or, as a backup option, they can consider limited controls on EDA software (for chip design) and intellectual property to slow improvement in China’s chip design capabilities. These controls would ensure China’s dependence on imports for advanced chips.
Then, the United States and its allies should monitor exports of (and as necessary, apply targeted export controls, such as end-use and end-user controls on) advanced chips underpinning dangerous or human-rights violating compute-intensive technologies particularly relevant for Chinese state actors. These could include military AI systems, cryptography, the design of nuclear weapons, and AI-enabled surveillance systems. However, the United States and its allies should broadly permit chip exports to China for peaceful, commercial uses and avoid unilateral controls when alternative suppliers exist.
See Figure 1 for a flowchart-style decision tree describing how the United States can navigate these controls.
Five other policies stand on their own but also increase the effectiveness of export controls. Specifically, the United States and allied democracies should:
Fund public-private partnerships. The United States should pursue additional public R&D funding in partnership with industry. This funding would consolidate and extend the U.S. and allied lead in semiconductors, compensate firms impacted by export controls, and convince allies to collaborate on them. The United States should also provide financial incentives to chipmakers building leading-edge chip factories in the United States.
Reduce unnecessary trade barriers. The United States and its allies should reduce industry-harming trade barriers, including economically motivated import tariffs and overbroad or unilateral export controls. These measures would strengthen the U.S. and allied semiconductor industries, which rely on global supply chains.
Challenge Chinese state subsidies for semiconductors. China’s subsidies distort global semiconductor markets, making them more brittle and taking global market share from the United States and allied democracies against market forces. Both of these trends threaten the U.S. and allied semiconductor industries. These countries should challenge China’s subsidies through trade negotiations (using reduced export controls as a bargaining chip) or at the World Trade Organization.
Develop and retain access to top talent. Maintaining the U.S. semiconductor industry’s competitiveness and drawing supply chains to U.S. shores requires access to top talent. The United States should invest in research and education, sustain and improve aspects of the U.S. immigration system, and revise deemed export controls to ensure foreign nationals can work in the U.S. semiconductor industry, rather than being driven away to competitors’ industries.
Screen investments to reduce technology transfer. Chinese entities and other competitors gain access to semiconductor technology through IP licensing, investment, and mergers and acquisitions. The United States and its allies should more thoroughly regulate these pathways to prevent unwanted technology transfer.
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