US takes aim at China's production of essential computer chips

The Biden administration initiated a trade investigation Monday 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 US 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. US 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.

US 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 U.S. officials argue threatens the viability of chip plants in Europe and the United States.

Katherine Tai, the U.S. trade representative, said in a call 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.

In a statement, a spokesperson from China's Ministry of Commerce said that China "strongly deplores and firmly opposes" the investigation, and that the country would "take all necessary measures to resolutely defend its rights and interests."

The United States has provided huge subsidies to its own chips industry, and Chinese chip exports to the United States are far lower than its imports from the United States, the ministry said.

"This is obviously self-contradictory," the statement said.

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 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% 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 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 chipmaking facilities in the United States, including more than $4 billion for legacy chip production.

The Commerce Department memo said modeling by its CHIPS program office suggested that new Chinese capacity could mean 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 Sunday.

According to a government survey, Chinese suppliers had been offering chips at prices 30% to 50% 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 revenues of U.S. companies, and therefore the multibillion-dollar investments that the U.S. government was making in new factories.

"That makes the entire CHIPS Act come unglued," 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 "everybody in the free world" believed that China's market practices were unfair.

Wu, a semiconductor expert, said 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 U.S. if it is able to build up significant expertise in making advanced chips, said Jeremy Chang, CEO 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 Trump.

Many of 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 Trump could view the tariffs as a bargaining chip to use in trade negotiations, a strategy he often pursued during his first term.

Industry groups urged the government to proceed carefully. Jason Oxman, president of the Information Technology Industry Council, said in a statement that it was "critically important that the administration conduct a thorough investigation and not prejudge the outcome."

He called the timing of the investigation "concerning," and said, "We strongly urge officials in the current and incoming administrations to conduct the inquiry in an objective and collaborative manner."

This article originally appeared in The New York Times.