Testimony by Chris Miller for The House Select Committee on the CCP

June 26, 2024

Source: AEI

Written by: Chris Miller

Testimony by Chris Miller for The House Select Committee on the CCP.

Toys and tractors; planes and pacemakers; coffeemakers and construction equipment; microwaves and medical devices—inside almost every device with an on-off switch is a foundational semiconductor. These chips don’t require the most advanced manufacturing processes, but modern economies can’t work without them. A new car can have a thousand such chips inside, managing fuel injection, controlling windshield wipers, operating the automatic braking system, or modulating power supply from the battery. It was shortages of foundational chips during the pandemic that disrupted supply chains and cost U.S. manufacturers hundreds billions of dollars in losses. And it isn’t only the civilian economy that requires foundational chips. Military systems, have dozens, hundreds, or thousands of foundational chips inside.

Today most foundational chips are manufactured either in the U.S. or in close partner countries like Japan, Europe, Taiwan, Korea, or Singapore. Yet China is pouring billions of dollars into several dozen major new chipmaking facilities, known as fabs. Though China’s efforts to reach cutting edge capabilities have attracted the most attention, most of China’s new chipmaking facilities will produce foundational chips. China’s subsidy campaign for semiconductors is rivalled only by its effort to build solar panels and electric cars. The implications for America’s manufacturing base are even greater, because every industry relies on foundational chips.

Today, China has open access to the tools and components needed to manufacture foundational chips. It also has sufficient domestic expertise needed to manufacture them. In some segments of the foundational chip market, Western firms may retain technological differentiation for years to come, but for more commoditized foundational chips, China’s growing production volumes coupled with state subsidies and Beijing’s mandates to “buy Chinese” make Chinese firms highly likely to win market share, both in China and—unless policy action is taken—abroad.

This creates four risks for U.S. security and the U.S. manufacturing base:

Chinese firms receiving vast state funding or benefiting from state ownership don’t operate according to market principles. If they produce uneconomic volumes and sell below market prices, they will put pressure on Western semiconductor firms’ profitability. Most problematic, they will deter new chipmaking investments in the West. This is already impacting the calculus of Western chipmakers and their investors.
If U.S. or Western manufacturers—of autos, airplanes, medical devices, tractors, or any other important sector—become more reliant on Chinese-made chips, Beijing gains new opportunities for economic coercion. Beijing regularly uses export restrictions as a foreign policy tool. It is already restricting exports of critical chipmaking materials like gallium and germanium. If Western firms become dependent on Chinese chips, Beijing could threaten to cut them off. The pandemic-era shortages illustrated that losing access even to a small volume of foundational chips can cause many billions of dollars in losses. Becoming more reliant on Chinese foundational chips presents severe economic security risks.
China’s growing role in foundational chip production will likely serve as a beachhead for increased reliance on Chinese electronics in Western manufacturing supply chains, raising data security concerns. One cyber security researcher recently found that 90% of the data collected by a Chinese electric vehicle—including geolocation data, camera data, voice data, and other types of data—was transmitted to servers in China. Greater reliance on Chinese chips will likely lead to greater reliance on Chinese electronics systems more generally—and thus intensified data security issues.
China’s race toward self-sufficiency in foundational chips degrades the “mutually assured economic destruction” that many analysts hope will keep peace in the Taiwan Strait. Today, China is the world’s largest importer of semiconductors, largely from the U.S., allies, and partners. However, on current trends, China will be substantially more self-sufficient in producing foundational chips in just a handful of years. Without policy action, U.S. manufacturers will become meaningfully more dependent on Chinese chips. This would be a highly destabilizing dynamic.

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