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China Economy

China’s chip policy poses risk to US firms and national security, White House says

Obama administration calls for greater scrutiny of China’s industrial policy as Beijing targets leading position in semiconductor design and manufacturing

PUBLISHED : Saturday, 07 January, 2017, 4:43pm
UPDATED : Saturday, 07 January, 2017, 10:43pm

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

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

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

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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.

The real answer is not a trade war, it’s not restrictions, it’s really about making the US more competitive
Brian Krzanich, chief executive of Intel Corp

Trump’s attacks have stoked fears of a trade war between the world’s two biggest economies.

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

The options include subjecting well-known US companies or ones that have large Chinese operations to tax or antitrust inquiries, the people said, asking not to be identified because the matter was not 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.”

US industry leaders do not want Trump to engage in a standoff with China. Giving corporate tax breaks to US companies was the way Trump advocated bringing back jobs to this country, according to Brian Krzanich, chief executive of Intel Corp.

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“The real answer is not a trade war, it’s not restrictions, it’s really about making the US more competitive,” Krzanich said on CNBC on Friday. 

“Lowering the tax rates, making it easier for people to do manufacturing here, that’s what will bring manufacturing back to the US.”

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

Foreign acquisitions of US 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 (CFIUS) in the US – has frustrated some Chinese investment in the US semiconductor industry.

In December, US President Barack Obama blocked a Chinese company from buying the US business of Germany’s Aixtron, a semiconductor-equipment supplier.

The White House report recommends a strategy for US policy makers that includes countering “innovation-inhibiting” Chinese industrial policy and improving the business environment for US chip makers.

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. US officials should also work with allies to strengthen global export controls, according to the report.

China’s tech sector blasted for ‘innovation mercantilism’ and other protectionist policies aimed at giving it an unfair advantage

The US 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 US$300 billion market.

In 2015, China did not 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 US’ dominance are in South Korea and Taiwan, where companies such as Samsung Electronics, the second-largest chip maker by revenue behind Intel, and Taiwan Semiconductor Manufacturing have gained ground over the last decade.

To strengthen its position in chip manufacturing, China relies on subsidies for domestic suppliers, according to the White House report. That could harm US firms by allowing Chinese companies to sell below cost and reduce US market share, the report said.

China also encouraged domestic customers to buy only from Chinese suppliers and required technology transfer to China in exchange for access to its market, the White House said.

A representative of the Chinese embassy in Washington did not respond to a request for comment about the report.

Underlining some of the difficulties that US chip makers have faced gaining unfettered access to their largest market, in February 2015, Qualcomm announced it had paid US$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 is still striving to get Chinese handset makers to pay up.