Dear Acting United State Trade Representative Millán:
I am writing on behalf of Frontiers of Freedom to provide input on the Office of the United State Trade Representative’s (USTR) Section 301 Investigation of China’s Acts, Policies, and Practices Related to Targeting of the Semiconductor Industry for Dominance (Docket No. USTR-2024-0024).
Frontiers for Freedom supports this investigation and encourages USTR, in coordination with the appropriate federal agencies, to implement trade restrictions to prevent the People’s Republic of China (PRC) from further usurping the United States’ production advantages and to foster continued free-market competition.
Frontiers for Freedom believes this investigation is warranted, and that trade restrictions are necessary, for the following reasons:
- Mature-Node Semiconductors are Critical to Technological and Economic Growth
Semiconductors are used in virtually all modern electronics, and while advanced chips have often been the focus of U.S. policy, mature-node, or legacy chips are also critical and deserve more attention. Some are quick to dismiss their significance, but these microprocessors are used to power everything from consumer devices like smartphones and tablets to household appliances, automobiles, industrial manufacturing, medical devices, and military systems, among other applications.
Furthermore, a 2023 report by the Center for Strategic & International Studies (CSIS) aptly points out: “Despite the name, legacy chips are not stale technology. The connotations associated with terms like ‘mature,’ ‘older,’ and ‘legacy’ are misleading because these categories of chips are constantly being refined for new requirements and applications.”
Ultimately, this common refrain is true: “Whoever controls semiconductors controls the future.” We need to make sure China isn’t in the driver’s seat.
- China is Rapidly Expanding its Legacy Chip Manufacturing Capacity
China has steadily grown its share of the legacy chip market, threatening to create dependence on Chinese-made semiconductors. China produced 31% of the world’s legacy chips in 2023, up from 17% in 2015, and the country continues to widen its lead. Chinese output increased 40% in the first quarter of 2024, and it is projected to account for more than 60% of new production capacity through the end of the decade. Additionally, Asia Times reported that by the end of last year, 32 Chinese wafer fabs will expand their capacity for making legacy chips.
Ironically, Chinese manufacturers’ shift to legacy chips owes largely to U.S. export controls. U.S. export restrictions initiated under the Biden-Harris administration intentionally omitted 28 nm or older process technology to ensure supply chain security. As a result, Chinese chipmakers shifted production to this market segment. “China’s national semiconductor output of legacy chips reached an all-time high, with 36.2 billion units produced in March [2024] alone,” an industry publication reported last year.
- China’s Upstream Expansion: Silicon Carbide (SiC) Production
Silicon Carbide (SiC) substrates offer a more versatile and durable semiconductor base over traditional silicon due to their improved efficiency, thermal conductivity, high-power load bearing, and resilience in harsh conditions. These characteristics partially span the operational divide between advanced chips and legacy chips and make SiC-wafer semiconductors useful in a broad range of applications.
SiC-wafer chips are critical in power grids, defense systems, electric vehicle manufacturing, and more.
A research paper by American Integrated Circuits, Inc. underscores the importance of SiC to defense in particular:
“The US Department of Defense (DoD) recognizes the transformative potential of SiC and its alignment with defense objectives. By leveraging SiC technology, the DoD can achieve unprecedented power density, reliability, and performance in critical defense applications.
… SiC’s impact on defense electronics extends beyond military ground vehicles and aerospace systems. Its applications in healthcare equipment, renewable energy systems, and heavy machinery used in challenging environments present opportunities for broader adoption and cost savings across the defense sector.”
Recognizing the importance of SiC-wafer semiconductors, China has quickly begun to align its production capabilities. A December 2024 KnowMade report found more than 70% of SiC patent applications filed in 2023 were made by Chinese entities, which the “Chinese government has been strongly encouraging.”
- China’s SiC and Legacy Chip Growth are a Result of Unfair Market Policies & Practices
Publicly available information broadly supports that China has expanded its share of global chip and chip-input markets by leveraging government subsidies, suppressing wages and creating artificially cheap labor, and favoring indigenous industries to create production overcapacity, flood markets and depress prices, and crowd out competition. The Chinese government applies this strategy to both semiconductor and upstream input markets.
The Chinese government “is using the same playbook it has before to power its own growth at the expense of othersby continuing to invest despite excess Chinese capacity and flooding global markets with exports that are underpriced due to unfair practices,” the Director of the White House National Economic Council said last year. That is fair assessment of China’s semiconductor and semiconductor component strategy.
In October, DIGITIMES Asia reported that Chinese manufacturers’ “dramatic” ramp-up of SiC production caused global prices to “collapse.” The same month TrendForce reported that 6-inch SiC substrate prices had fallen to as much as 20% below production by the fourth quarter, and that 8-inch SiC substrate prices had been revised down 50% within six months.
“[The] price collapse has forced most businesses to sell at a loss. However, despite the low prices, buyers remain hesitant to make purchases, as they anticipate that prices will continue to decline,” the TrendForce article states.
Last year the CCP launched a third phase of its National Integrated Circuit Industry Investment Fund, or “Big Fund,” which will provide $47.5 billion of state-sponsored investment—further signaling the Chinese government’s commitment to dominating the full spectrum of semiconductor manufacturing.
In 2021, Chinese media reported that the CCP tapped president Xi Jinping’s “right-hand man,” Liu He, to lead a “whole-country” to achieve chip autonomy. The report notes that He is “leading the formulation of a series of financial and policy supports for [Chinese semiconductor] technology”—which can be plainly read as further development of a national framework to provide Chinese chipmakers with advantages over the United States and democratically aligned nations.
- China’s Growing Semiconductor Advantage Could Be Used Against the U.S.
Because legacy semiconductors are used in a broad spectrum of devices and networks—both domestic and military—dependence on China poses a significant economic and national security threat. Late last year U.S. Commerce Secretary Gina Raimondo warned that two-thirds of U.S. products contain Chinese-made legacy chips, and half of U.S. companies do not know the origin of their chips, “including some in the defense industry.” That reality should sound an alarm for policymakers, especially because continued market manipulation could further force U.S. chipmakers out of the market, further accelerating China’s monopolization of the legacy chip market.
To date, U.S. policy has proven ineffective at curbing China’s semiconductor growth and at strengthening the United States’ domestic production capabilities. As noted above, export controls have steered China into the legacy chip market, where it has quickly gained an upper hand, while the CHIPS Act, while well-intentioned, failed to produce the domestic capacity necessary to keep pace with other countries. U.S. investment, no matter how large, will not be able to compete with China’s subsidization program, I would argue.
Preventing China’s legacy chip dominance will require controls on products entering the United States, the largest semiconductor market. President Trump has rightly proposed imposing significant tariffs on foreign-made products—a tool prior administrations, including President Biden, also used—which offers the only immediate lever to stop the CCP’s manipulative practices (and, when coupled with U.S. subsidies and exports controls, may foster accelerated chip technology and production development).
American consumers experienced the economic pains and frustrations of supply chain disruptions during the COVID pandemic. As China’s grip on the semiconductor markets tightens, the impacts could be even worse next time—whether a disruption is the result of a global health incident or a military conflict. The United States must take action now to prevent the PRC from gaining an unfair advantage. Otherwise, the U.S. semiconductor manufacturing base will continue to dwindling, and national dependence on China and other foreign producers will continue to rise—trends that will become harder to reverse.
Frontiers of Freedom encourages the USTR to complete this investigation quickly and move immediately to implement the trade restrictions to protect U.S. manufacturers and free-market competition.
Thank you for your consideration.
Sincerely,
