Time To Wean Ourselves From Chinese Semiconductors


Time To Wean Ourselves From Chinese Semiconductors

Jun 15, 2023 6 min read

Commentary By

Brian J. Cavanaugh @brianjcavanau

Visiting Fellow, Border Security and Immigration Center

Bonnie Glick

Director, Krach Institute for Tech Diplomacy at Purdue University

A worker makes and tests semiconductor power device chip products of a microelectronics company in Binhai New Area, Hai 'an City, East China's Jiangsu Province, March 23, 2023. Costfoto / NurPhoto / Getty Images

Key Takeaways

Relying on an adversary to supply critical components in equipment that our nation deems mission-essential is, to put it mildly, foolish.

It is imperative that U.S. industry and government work together to reinvigorate a strategic supply chain of semiconductors.

While implementing a Zero China Chips may not be easy, the urgent need for its implementation grows every day as the PRC looks for ways to circumvent U.S. law.

Relying on an adversary to supply critical components in equipment that our nation deems mission-essential is, to put it mildly, foolish. But that is exactly what the United States has been doing when it comes to China and semiconductors.

The expansion and robust implementation of a Zero China Chips policy, originally introduced in the FY2023 National Defense Authorization Act (NDAA), would help change this equation. It would mitigate the risks associated with depending on China, while simultaneously boosting semiconductor production domestically and among our allies and partner nations—a reliable path towards removing the PRC’s leverage over the U.S. and the globe.

From critical infrastructure and national defense to innovation for artificial intelligence, quantum computing, biotechnology, and 6G, semiconductors enable nearly every aspect of our digital society. Yet, untrustworthy semiconductors can introduce risks of compromise, malfunction, or sabotage capable of harming health, safety, and the economy. For these reasons and others, semiconductors underpin economic and national security competition between the United States and the People’s Republic of China (PRC).

Chinese Communist Party (CCP) Chairman Xi Jinping’s relentless crusade for technological, military, and economic supremacy depends on semiconductors and the weaponization of multinational corporations’ short-term earnings focus. Luring multinational corporations with below-market prices and the fleeting promise of market access, the PRC exploits companies’ cost-benefit analyses that prioritize bottom-line cost over supply chain security to siphon needed know how and capital. The revenues derived from outsourced, low-cost manufacturing are used to advance PRC capabilities, build excess capacity through investments in unmatched scale, and aggressively stockpile chokepoint technologies, such as semiconductor manufacturing equipment.

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The intent is clear: undercut and eliminate competitors to create global dependence on the PRC.

The PRC wields this pernicious playbook to control global supply of solar power, drones, and telecommunications infrastructure. The U.S. faces an adversary that has interwoven itself into the global economy through predatory and coercive measures that hindsight reveals as economic warfare. The stakes cannot be overstated; the PRC aims to create a new international order that threatens the United States and our allies.

Confronting this existential threat requires long term, strategic decision making by the public and private sectors. Policymakers need to take concrete steps to ensure the viability and availability of trustworthy semiconductors and reduce U.S. dependence on the PRC.

The ability to manufacture and innovate rests on both legacy chips and cutting-edge semiconductors, both of which are critical to national security. The reliability and security of critical infrastructure systems, power grids, water treatment plants, telecommunications, emergency services, dams, hospital operations, and transportation networks, depend on the availability of trustworthy semiconductors. Semiconductors that lack integrity can introduce a wide range of risks, including malfunction, security breaches, sabotage, safety hazards (including loss of life), supply chain disruptions, and adverse economic impacts. Ensuring critical systems and devices use trustworthy semiconductors with integrity is essential to protect public safety, national security, and the economy.

It is imperative that U.S. industry and government work together to reinvigorate a strategic supply chain of semiconductors, one that utilizes a matrixed approach of domestic production, near-shore, and allied-shore capacities. The nation must improve domestic chip manufacturing capacity to manage strategic vulnerabilities, such as the heavy reliance on foreign sources of semiconductors across leading edge and legacy logic, memory, and analog chips. Shifting demand signals and behavior is critical to fulfilling this objective. We must renew our focus on maintaining U.S. technological and global leadership, supporting innovation, driving R&D into domestic production, and avoiding empowering the PRC.

The nation has taken steps to diminish the speed at which China has been closing the gap on technological advancements, specifically surrounding semiconductors. The most notable example is the CHIPS and Science Act, which prioritizes the strengthening of the domestic chip supply chain. Yet more is needed to demonstrate our commitment to technological and global leadership. The success of CHIPS, which will increase domestic supply, ultimately hinges on demand. Chip designers and original equipment manufacturers must value security of supply in terms of integrity and utilize new domestic capacity. If they don’t, domestic capacity won’t be there in the future.

The U.S. government-imposed export controls on certain advanced computing and semiconductor manufacturing items and added several Chinese semiconductor manufacturers to the Entity List. Most recently, lawmakers included Section 5949 in the 2023 NDAA, which prohibits executive agencies from procuring electronic parts, products, or services that include semiconductors from certain Chinese entities linked to the People’s Liberation Army. Although the executive branch has existing authorities available to mitigate or block security threats, it has allowed taxpayer funds to indirectly subsidize Chinese military companies and allowed their chips to infiltrate government systems.

Through Section 5949, Congress took an important first step signaling that the status quo was unacceptable, Chinese military company chips have no place in American government and defense systems, and that all types of chips matter. However, Section 5949 does not go far enough to protect national security because of several provisions included that weaken the ability of the law to achieve its desired outcome.

Those counterproductive provisions, while intended to reduce the compliance burden on both industry and the federal government, represent a considerable shift away from Section 889 of the 2019 NDAA, which bans federal contractors’ and grantees’ use of Huawei and ZTE, and prohibits federal financial assistance from being used to purchase or use services or products from those barred companies. Although 85% of critical infrastructure is privately owned, critical infrastructure operators receive hundreds of millions of dollars in federal financial assistance annually, highlighting a key shortcoming of Section 5949, which fails to extend the prohibition to this area. Nothing prevents the executive branch from banning federal financial assistance for use or purchase of products or services with prohibited semiconductors. Whether the executive branch will do so outside the mandate of Congress remains to be seen.

Section 5949, which is not retroactive, includes a five-year period before prohibitions are implemented. There’s no requirement for the Federal Communications Commission to designate covered semiconductor products and services to its List of Covered Communications and Equipment Services, which would ban their sale in the United States, and government contractors are not required to conduct third-party audits of their supply chain or cease using products or services with prohibited semiconductors.

Policy makers interested in countering the PRC should consider a Zero China Chips policy to send a strong signal to Beijing, and the broader semiconductor industry and original equipment manufacturers. The message to the industry is critical, especially given that messaging has been predominantly focused on advanced microprocessors. A Zero China Chips policy would enhance the security and resiliency of the semiconductor supply chain by ensuring long term availability of reliable leading edge and legacy chips.

Achieving an expanded Zero China Chips policy can be done through a broadening of Section 5949 to include expanding the prohibition of covered semiconductor products or systems used by contractors and grantees to service suppliers and beyond “critical systems” as defined by the 2023 NDAA, requiring the FCC to designate covered semiconductor products and services to its List of Covered Communications and Equipment Services as appropriate, and establishing a formal process by which certifications attesting compliance can be validated.  

Section 5949 currently requires government contractors that supply products, not services, supporting “critical systems” to take steps to inventory all U.S. government deliverables to ensure they are not procuring products or services for their internal use that contain the prohibited microelectronics. “Critical systems,” are defined as telecommunication or information systems operated by the federal government that involve intelligence and cryptologic activities; command and control of military forces; equipment that is an integral part of a weapon or weapons system; or any other system identified by the Federal Acquisition Security Council or Department of Defense.

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The scope of “critical systems” in Section 5949 should be expanded to include systems that support Primary Mission Essential Functions (PMEFs). PMEFs are federal government functions that need to be continuous or resumed within 12 hours after a catastrophic event. These systems comprise the foundation of continuity programs and capabilities and are the primary focus of the Federal Government before, during, and after a catastrophic emergency. Making this adjustment would not preclude “critical systems,” it would simply broaden the policy to systems used by many departments and agencies.

Requiring the FCC to designate covered semiconductor entities on its List of Covered Communications and Equipment Services would further secure equipment and service used to provide advanced communication service, if the equipment or service includes or uses electronic components. This compliments the original intent of the Secure and Trusted Communications Networks Act of 2019 by ensuring the integrity and reliability of advanced communications equipment at the core component level, the semiconductor.

Finally, given the heightened scrutiny of the semiconductor industry, businesses—especially federal government contractors and grantees—must have visibility into the materials and services they are providing in U.S. government deliverables. This means conducting comprehensive due diligence of suppliers, vendors, service-providers, and contract and/or grant counterparties and considering appropriate actions to address the evolving supply chain risks. Establishing a process to validate contractors’ and grantees’ due diligence is prudent and will drive government suppliers to obtain a more developed understanding of their own supply chain risks.

While implementing a Zero China Chips may not be easy, the urgent need for its implementation grows every day as the PRC looks for ways to circumvent U.S. law. Our laws must prevent CCP or People’s Liberation Army efforts to cleave industry from government—now, more than ever, the public and private sectors must partner to ensure the security of our nation.

This piece originally appeared in RealClear Defense