Photographer: Giordano Trabucchi / EyeEm/Getty Images/EyeEm

China Chip Policy Poses Risk to U.S. Firms, White House Says

  • Obama panel says China investment threatens national security
  • Technology advisers recommend steps to counter China’s push

China’s push to develop its domestic semiconductor technology threatens to harm U.S. chipmakers and put America’s national security at risk, the Obama administration warned in a report that called for greater scrutiny of Chinese industrial policy.

China’s goal to achieve a leadership position in semiconductor design and manufacturing, in part by spending $150 billion over a 10-year period, requires an effective response to maintain U.S. competitiveness in the industry, according to the report released Friday.

“We found that Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk,” the President’s Council of Advisors on Science and Technology said in the report.

The warnings about China could give ammunition to President-elect Donald Trump two weeks ahead of his swearing in. Since winning the election, Trump has backed up fiery campaign rhetoric toward China with a series of pronouncements on Twitter and the appointment of China hawks to key roles. Trump’s attacks have stoked fears of a trade war between the world’s two biggest economies.

Chinese Scrutiny

China is prepared to step up its scrutiny of U.S. companies in the event Trump takes punitive measures against Chinese goods, according to people familiar with the matter, Bloomberg News reported Thursday.

The options include subjecting well-known U.S. companies or ones that have large Chinese operations to tax or antitrust probes, the people said, asking not to be identified because the matter isn’t public. Other possible measures include the launch of anti-dumping investigations and scaling back government purchases of American products, according to the people.

"China has gained from global openness but has been less committed to sustaining it -- and, in some cases, has worked against it," the White House report said. "Now, globally, more countries are questioning the benefits of economic openness -- a trend that will shape, and be shaped by, how the United States responds to challenges in the semiconductor arena."

U.S. industry leaders don’t want Trump to engage in a standoff with China. Giving corporate tax breaks to U.S. companies is the way Trump advocates bringing back jobs to this country, according to Intel Corp. Chief Executive Officer Brian Krzanich.

"The real answer is not a trade war, it’s not restrictions, it’s really about making the U.S. more competitive," Krzanich said on CNBC Friday. "Lowering the tax rates, making it easier for people to do manufacturing here, that’s what will bring manufacturing back to the U.S."

Working Group

Krzanich attended the recent meeting between the president-elect and leaders of technology companies. The Council of Advisors on Science and Technology’s semiconductor working group includes several industry executives such as Paul Otellini, the former chief executive officer of Intel, and Paul Jacobs, the chairman of Qualcomm Inc.

Foreign acquisitions of U.S. businesses are routinely reviewed for national security risks by a panel of officials led by the Treasury Department. That panel -- the Committee on Foreign Investment in the U.S. -- has frustrated some Chinese investment in the U.S. semiconductor industry. In December, President Barack Obama blocked a Chinese company from buying the U.S. business of Germany’s Aixtron SE, a semiconductor-equipment supplier.

The White House report recommends a strategy for U.S. policy makers that includes countering “innovation-inhibiting” Chinese industrial policy and improving the business environment for U.S. chipmakers. It suggests broadening what is considered a national security risk as part of CFIUS reviews in certain circumstances, while also cautioning against blanket opposition to China’s advancement in the industry. U.S. officials should also work with allies to strengthen global export controls, according to the report.

Industry Leaders

The U.S. has led the semiconductor industry since it took off in the 1960s. Companies such as Intel and Qualcomm have pushed the technical bounds of innovation in the $300 billion market. In 2015, China didn’t have one company among the top 10 industry suppliers. China, the world’s most populous country, is nonetheless the biggest buyer of the electronic components.

The main rivals to the U.S.’s dominance are in South Korea and Taiwan, where companies such as Samsung Electronics Co., the second-largest chipmaker by revenue behind Intel, and Taiwan Semiconductor Manufacturing Co. have gained ground over the last decade.

Chinese Subsidies

To strengthen its position in chip manufacturing, China relies on subsidies for domestic suppliers, according to the White House report. That can harm U.S. firms by allowing Chinese companies to sell below cost and reduce U.S. market share, the report says. China also encourages domestic customers to buy only from Chinese suppliers and requires technology transfer to China in exchange for access to its market, the White House said.

A representative of the Chinese embassy in Washington didn’t respond to an e-mail seeking comment about the report.

Underlining some of the difficulties that U.S. chipmakers have faced gaining unfettered access to their largest market, in February 2015, Qualcomm announced it had paid $975 million to settle a case brought by China’s National Development and Reform Commission accusing the company of abusing its dominant position in the chip market for mobile phones. Under the settlement, Qualcomm agreed to lower its licensing fees for phones sold in China to rates that are lower than it charges in other countries, but it’s still striving to get Chinese handset makers to pay up.

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