China poses a threat to US dominance in semiconductor industry

China poses a threat to US dominance in semiconductor industry

Reuters

US Commerce Secretary Wilbur Ross sees the US semiconductor industry
as still dominant globally but said he is worried that it will be
threatened by China’s planned investment binge to build up its own
chip making industry.

Ross said in an interview this week that his agency is considering a
national security review of semiconductors under a 1962 trade law because
of their “huge defence implications” including their use in military
hardware and proliferation in devices throughout the economy.

He has launched similar “Section 232” reviews of the US steel and aluminium
sectors, where a flood of imports especially from China has depressed
prices, threatening the industries’ long-term health.

The probes could lead to broad import restrictions on the metals, and the
Trump administration could potentially take similar actions based on the
findings of a semiconductor investigation. “Semiconductors are one of our
shining industries, but they have gone from substantial surplus to the
beginnings of a deficit,” Ross said. “China has a US$150 billion program
to take that much further between now and 2025. That is scary.”

The 79-year-old billionaire investor was referring to China’s plans for
massive state-directed investments in semiconductor manufacturing capacity
under its “Made in China 2025” programme, which aims to replace mostly
imported semiconductors with domestic products.

Ross’ predecessor at Commerce, Penny Pritzker, warned last November about
looming market distortions if China builds too much semiconductor capacity

Ross added that while he understands Beijing’s logic in developing its
domestic chip industry, “that’s going to be a struggle” from a US trade
standpoint.

US semiconductor makers, meanwhile, have other ideas about how to secure
their future. Their major trade group, the Semiconductor Industry Association
(SIA), advocates open trade and increased access to international markets,
which now buy 80 per cent of US-made semiconductors.

US chip makers also depend on a complex global supply chain and have nearly
half their production capacity located overseas. “So while we fully support
efforts to ensure trade in semiconductors is fair and market-based, we do not
believe a Section 232 investigation is the right tool to be applied to our
industry” SIA President John Neuffer said. China hits milestone in developing
quantum computer ‘to eclipse all others’

One area where there appear to be some differences is how to define the industry’s
trade balance. Commerce Department trade data showed that “Semiconductors and
related device manufacturing” had a trade deficit of US$2.4 billion in 2016,
with exports of US$43.1 billion and imports of US$45.6 billion.

But that category includes rapidly growing imports of non-semiconductor devices
including solar cells and light-emitting diodes (LEDs) as well as some raw
materials. In a new submission late on Wednesday to Commerce for a study on trade
deficits, SIA said that excluding the non-semiconductor products shows the sector
had a US$6.4 billion trade surplus last year, with exports of US$41.3 billion
and imports of US$34.9 billion.

Neuffer said the industry was ready to work with the Trump administration to
find ways to persuade China to allow its semiconductor industry to develop in a
market-driven way and not discriminate against foreign firms.

He added the government could make the United States a more competitive environment
for semiconductor output through tax reform that does not penalise overseas earnings, immigration reform that allows the industry to attract new talent, improvements to
US education and more spending on basic research.

“The Chinese are determined to build a semiconductor industry,” Neuffer said.
“I think the strongest pillar of any strategy going forward has to be our government
helping to create an environment where we can pedal faster and stay as far ahead as
possible.”

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