Semiconductors and China:  Different tools, or different strategy? 

Commerce Secretary Gina Raimondo finds Huawei’s ability to market a cell phone built around an advanced 7 nanometer (nm) chip produced in China to be “incredibly disturbing.” In theory, the Biden administration’s restrictions on exporting semiconductor manufacturing equipment to China were supposed to prevent that type of technological advancement. In Raimondo’s Oct. 4 testimony before the Senate Commerce Committee, she requested help from Congress: “We need different tools,” she said, and “We need additional resources around enforcement.” 

Here’s a reality check. It will be impossible to stop China’s semiconductor development completely, and very difficult to slow it down for a meaningful length of time. What is needed are not more-restrictive tools, but rather a fundamental change in strategy. 

The Biden team may not have paid sufficient attention to some basic facts. China has become the world’s most effective country at obtaining technology from overseas — either by purchasing it legally or through theft. Chinese research institutes and companies have demonstrated unparalleled skill at copying products from elsewhere, then manufacturing them in China. Semiconductor development appears to be a very high priority of Chinese President Xi Jinping; it’s reasonable to assume a lot of resources will be devoted to the effort. And China knows well that technology exists to make extremely sophisticated 2 nm chips elsewhere in the world. They don’t have to invent something new, they only have to figure out how others have done it. 

It would not be prudent to underestimate China’s willingness and ability to obtain the desired trade secrets through illegal means. The Dutch firm ASML produces the world’s most technologically refined machinery for manufacturing high-end semiconductors. Earlier this year the firm acknowledged its second theft of proprietary information by Chinese entities in the past two years.  How long will it be before China has a similar machine? Two years? Five? Trying now to restrict China’s access to advanced semiconductors seems a bit like closing the barn door after the horses have bolted. 

The Biden administration appears enamored with China’s use of industrial policy to guide its economy. So much so, in fact, that the United States now is pursuing its most-aggressive industrial policies in decades. Prime examples are the electric vehicle (EV) subsidies included in the so-called Inflation Reduction Act (IRA) and semiconductor subsidies embedded in the CHIPS and Science Act. These interventions amount to copying China’s central-planning approach. They will reallocate investments away from more efficient alternatives and are unlikely to put America on a path toward high-tech success. 

National Security Advisor Jake Sullivan has spoken explicitly about the desirability of abandoning America’s post-WWII efforts to sustain a rules-based global economic order in favor of pursuing special treatment for favored sectors of the U.S. economy. The short-term fun of picking winners — and not worrying much about the losers — may be satisfying for today’s top policymakers. Future leaders will have to deal with the consequences of American choices that are making the U.S. and world economies less fair, equitable and efficient.   

What sort of high-tech strategy actually would make sense for the United States? To start with, we should recognize that, although China is very good at copying things, it has a hard time coming up with cutting-edge inventions. Beijing may be able to provide a lot of money to researchers, but its heavy use of surveillance and government control also tend to stifle innovation. Rather than attempt to mirror China’s ill advised policy prescriptions, the United States should focus on removing barriers that hinder domestic firms’ competitiveness. 

The United States, by contrast, has a history of strong institutions that support and position entrepreneurial people to be successful in a relatively free market. This has led to a whole lot of scientific and commercial innovation. America arguably has done more than any other country in the past century to develop and market technologies that have raised living standards around the world. 

So let’s accept the reality that China is likely to be a near-peer competitor for the next several decades. The focus for us should not be merely to focus on containing China’s growth in this critical space — but rather to adopt a comprehensive strategy that also helps maintain and widen America’s edge. This means embracing America’s traditional economic philosophy based on free enterprise, not relying on the heavy hand of government. Encouraging creative people to innovate in ways that lead to a flourishing high-tech sector is the best path to continued American success. 

James Czerniawski is a senior policy analyst in Technology and Innovation at Americans for Prosperity (AFP). Dan Pearson is a senior trade policy consultant to AFP and formerly served as chairman of the U.S. International Trade Commission.