The Biden administration on Monday initiated a trade investigation into China’s production of older types of computer chips that are integral for cars, dishwashers, telecom networks and military weaponry.
The probe could ultimately result in tariffs or other measures to block Chinese chips from entering U.S. markets, though the decision of which, if any approach to take would fall to the incoming Trump administration.
In industry after industry — from steel and ships to solar panels and electric vehicles — China has pumped money into building world-class manufacturing facilities, creating a surge of low-cost products that ultimately flood global markets. American companies, along with firms in many other countries, finding themselves unable to compete, have shut down, leaving Chinese firms largely in control of the global market.
United States officials have been worrying that the semiconductor industry could be next. Chinese companies have been massively ramping up their production of chips, particularly the older types of semiconductors that continue to power a wide array of machinery and appliances. China is building more new semiconductor factories than any other country, a development that American officials argue threatens the viability of chip plants in Europe and the United States.
Katherine Tai, the United States Trade Representative, said in a call on Sunday that China’s policies were enabling its companies to rapidly expand and to “offer artificially lower-priced chips that threaten to significantly harm, and potentially eliminate, their market-oriented competition.”
That resulted in supply chains that “are more vulnerable and subject to supply chain choke points that can be used to economically coerce other countries,” she said.
This type of investigation allows the U.S. government to take an array of actions to respond to discriminatory foreign government practices that burden U.S. commerce. It will be carried out by the Office of the United States Trade Representative under Section 301 of the Trade Act of 1974. Experts said it typically takes between six months and a year for an investigation to conclude.
Tensions between the United States and China have grown during the Biden administration, as the U.S. has clamped down on shipments of advanced technology to China out of national security concerns. China has fired back by restricting mineral exports that are used to make cars, semiconductors and weaponry.
The Biden administration has issued a series of export controls in recent years to try to stifle China’s ability to make the most advanced computer chips, arguing that the technology could help Beijing develop new weapons and artificial intelligence to augment its military capabilities.
But the Biden administration has not done much to target China’s production of older types of chips, what are sometimes called “legacy chips.” The Chinese government and companies based in China have poured money into making these types of chips, which are still essential for modern economies and militaries.
China’s focus on legacy chips may have other benefits for the country, as well. It could help its chipmakers to advance technologically: As they attract new customers, Chinese producers will likely absorb new knowledge about manufacturing. A large output of such chips also eats away at the profits of rival foreign chip makers, who rely on older chips to bolster profits as they research cutting-edge semiconductors.
China’s production of the chips would also make the global semiconductor trade more difficult for the United States to control. In recent years, the Biden administration has struggled to cut off the flows of less sophisticated American chips to Russia, where they are used in missiles and drones. If China managed to become an epicenter of legacy chip production, that flow would likely increase.
Massive chip-producing factories have rapidly sprung up around China in the past few years, with the help of hundreds of billions of dollars of state investment. Almost half the world’s capacity for new factories to make older types of chips that will be constructed in the next three to five years will be built in China, the U.S. government has said.
China does not dominate global chip production yet, but its market share is growing fast. The U.S. government estimates that China could be responsible for more than 40 percent of global capacity in foundational chips by 2032, with more than half of the world’s capacity in some segments.
A memo written by the Commerce Department, which was sent to other government agencies in November and viewed by The New York Times, said that China was on track to dominate the supply chain for legacy chips by 2030. That could present serious risks to U.S. national security, like eroding the U.S. industrial base, creating supply chain choke points and leading to potential cyber threats, the department said.
The memo also argued that China’s chip expansion posed a threat to new chip facilities the U.S. government is currently investing in. Using funding from the 2022 CHIPS law, the Commerce Department has been signing contracts to invest tens of billions of dollars in chip making facilities in the United States, including more than $4 billion for legacy chip production.
The Commerce Department memo said that modeling by its CHIPS program office suggested that new Chinese capacity could mean that factories in the United States and allied countries end up producing fewer chips than needed for them to remain economically viable.
“In the face of these trends, we’ve seen chip companies hesitate to invest in the U.S.,” Gina Raimondo, the secretary of commerce, said in the call on Sunday.
According to a government survey, Chinese suppliers had been offering chips at prices 30 percent to 50 percent lower than those of U.S. suppliers, and in some cases lower than the cost of production, the memo said.
Matt Turpin, a former Trump administration official and a senior adviser at Palantir Technologies, said that China’s chip production threatened the multibillion dollar investments that the U.S. government was making in new factories.
If semiconductor company revenue “is undermined by the fact that they can’t sell their chips into China because they’re being replaced by Chinese chips, that makes the entire CHIPS Act come unglued,” Mr. Turpin said.
In Taiwan, the world’s semiconductor capital, the Chinese plans have also set off alarm bells. Speaking at a media briefing in December, Cheng-Wen Wu, the minister of Taiwan’s National Science and Technology Council, said that “everybody in the free world” believed that China’s market practices were unfair.
Mr. Wu, a semiconductor expert, said that China’s low production prices would attract chip designers, who in turn would teach Chinese factories how to make higher quality chips in more efficient ways.
“That’s a very important technology leak,” he said.
China could also “gain increasing leverage” against the United States if is able to build up significant expertise in making advanced chips, said Jeremy Chang, chief executive at Taiwan’s Research Institute for Democracy, Society and Emerging Technology. “Through supply chain disruptions, China could impose sanctions on the U.S. and its allies, eventually reversing the dynamics of the chip war,” he added.
The Biden administration has been considering taking action on legacy chips for several years. In recent months, the administration had weighed whether to carry out the investigation under Section 301, which is focused on unfair trade practices, or whether to use a law related to threats to national security, Section 232, which is administered by the Commerce Department.
The trade investigation was deemed less likely to rankle allies and, perhaps, to invite national security-related measures from China as retaliation, people familiar with the matter said.
Some officials expressed dismay that the investigation had not begun sooner and that the ultimate decision about what to do with the findings would fall to President-elect Donald J. Trump.
Many of Mr. Trump’s advisers appear to agree with the challenges posed by Chinese legacy chip production, but some in government and the chip industry have speculated that Mr. Trump could view the tariffs as a bargaining chip to use in trade negotiations, a strategy he often pursued during his first term.
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