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Chinese semiconductors may be the next target of a national security probe

Author(s): Riyaz Dattu, Peter Glossop, Gajan Sathananthan

May 18, 2017

Our last international trade brief dealt with SCOTUS rejecting an expropriation claim and the alternate process of seeking compensation using bilateral investment treaties to avoid sovereign immunity defences, dispute settlement and key improvements in the CFTA government procurement rules, and a Trade Case Alert discussing Boeing launching a trade remedies petition against Bombardier. In this brief, in several articles, we discuss Robert Lighthizer’s confirmation as U.S. Trade Representative, Chinese semiconductors potentially becoming the target of a U.S. national security probe, and our Trade Case Alert involving a Canadian anti-dumping and countervailing investigation for silicon metal.

In a recent interview with Reuters, U.S. Commerce Secretary Wilbur Ross suggested that a national security review of the importation of Chinese semiconductors may be launched under section 232(b) of the Trade Expansion Act of 1962. As discussed in our previous trade brief, section 232 was a rarely used provision but has been invoked twice within the past month by President Trump’s administration, specifically in relation to steel and aluminum imports. The provision allows the administration to examine the impact of imports on national security, and respond with broad import restrictions.

Though the potential invocation of a national security review to restrict imports of semiconductors from China is unusual and unique to this administration, the concern over the imports of semiconductors from China into the United States is not. The Obama administration commissioned a report on the subsidization of semiconductor production by the Chinese government late in 2016, after China announced it was spending $150 billion over 10 years to support the industry. At the time, the President’s Council of Advisors on Science and Technology wrote that “Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk.”[1]

The U.S. semiconductor industry itself feels that, while ensuring that trade is fair remains a priority, it is more important to ensure that international markets remain open for U.S. semiconductor exports.[2] U.S. producers accounted for 50% of the global semiconductor market in 2015,  including accounting for over half of all semiconductors sold into China.[3] The industry, which directly employs nearly a quarter of a million people in the U.S., relies heavily on exports to maintain its revenues. With China being the largest market for semiconductors in the world, the U.S. industry seems to be cautioning against aggressive actions, fearing any retaliatory sanctions that would restrict access to the Chinese market.

The nexus between national security and semiconductor imports appears to be more compelling than for steel and aluminum imports. Even if the investigation is not eventually launched, it puts a cloud over Chinese imports that may result in lower volumes being imported into the U.S. in the short term due to market uncertainty.  

 

[1]       David McLaughlin and Ian King, “China Chip Policy poses risks to U.S. Firms, White House says,” Bloomberg, January 6, 2017.

[2]       David Lawder, “Commerce’s Ross: China’s plans threaten U.S. semiconductor dominance,” Reuters, May 11, 2017.

[3]       Semiconductor Industry Association, “SIA 2016 Factbook,” March 2016.

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