US-China tech war: US chip innovation is hurt by Beijing’s ‘mercantilist’ strategies, Washington think tank says
- US think thank ITIF estimates that China’s protectionist policies have led to 5,100 fewer US semiconductor patents annually
- Beijing has ramped up support for its domestic semiconductor industry amid US sanctions and increased tension between the two countries
China’s policy of using government incentives to boost its semiconductor industry has hurt innovation at companies in the US and other market-driven economies, according to a report from a Washington-based think tank released on Thursday.
The assertion from the Information Technology and Innovation Foundation (ITIF), a non-profit organisation founded in 2006 by Robert Atkinson, comes as China continues to pour resources into its local semiconductor industry to reduce the country’s reliance on imported technologies. That effort has intensified in recent years amid US restrictions of hi-tech exports to Chinese businesses such as Shenzhen-based Huawei Technologies Co and Shanghai-based Semiconductor Manufacturing International Corp (SMIC).
The ITIF report, authored by the foundation’s director of global innovation policy Stephen Ezell, said China has adopted a “mercantilist” approach in its semiconductor industry, using a “state-directed” strategy that distorts the global chip market with subsidies and intellectual property theft. The Chinese government has always denied that it has engaged in any theft of foreign intellectual property.
Absent Chinese government interference, “there would be 5,100 more US patents” in the semiconductor industry annually, according to ITIF. This is because the industry is heavily reliant on research and development to maintain profits that fund the next generation of innovations. As subsidies have helped Chinese firms gain market share, US companies have invested less in R&D than they otherwise would, according to the report.
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The think tank suggested that Washington work with like-minded nations and to enhance domestic chip capabilities by granting its own subsidies, including spending US$10 billion to attract chip manufacturing facilities and investing US$7 billion in semiconductor research agencies over five years.
In the report, titled Moore’s Law Under Attack: The Impact of China’s Policies on Global Semiconductor Innovation, ITIF also suggests the US to enhance “investment screening” to combat state-sponsored economic espionage.
It is unknown whether the report might have any influence on thinking in US President Joe Biden’s administration, but it mirrors recent scepticism in Washington concerning China’s hi-tech ambitions, even as China’s most recent push for “self-reliance” has been driven in part by hostile policies initiated under former US president Donald Trump. Chinese President Xi Jinping has said repeatedly that China must own its core technologies, including semiconductors, so the country will not be at mercy of others.
The Chinese market remained the largest for semiconductors in 2020, with sales totalling US$151.7 billion, according to figures released by the Semiconductor Industry Association. According to China’s own customs data, China spent US$380 billion in importing chips and related devices in 2020, or nearly a fifth of the country’s total imports.
While the ITIF said China’s strategy to bolster its semiconductor industry has evolved over the years with improved results, the country’s past efforts to subsidise the growth of chip plants is dotted with failures. An ambitious foundry project in Wuhan, known as the Wuhan Hongxin Semiconductor Manufacturing Company, collapsed last year, with its former CEO describing the experience as a “nightmare”.
However, government programmes enable Chinese firms to endure long periods of low returns, giving them a competitive edge over Western firms that play by market rules, the ITIF said. The foundation cited the National Integrated Circuit Industry Investment Fund, a state-owned fund playing the role of an angel investor for chip projects. The fund was established in 2014 and became part of Made in China 2025 – a plan that Beijing has played down over the last couple years following a backlash from Washington and Brussels.
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Yet China continues its push for self-sufficiency in chips amid continued US sanctions against many of its home-grown tech champions.
Last August, China’s State Council unveiled a major tax incentive for qualifying integrated circuit (IC) projects and enterprises. The incentive allows companies that have operated for more than 15 years to be exempt from corporate income tax for up to 10 years if they employ the 28-nanometre process or more advanced nodes.
