U.S. Launches Trade Investigation into Chinese Semiconductor Industry

The United States is intensifying its crackdown on China’s rapidly expanding semiconductor industry. The Biden administration announced on December 23 the launch of a formal trade investigation into Beijing’s support for China’s semiconductor industry due to its alleged harm to U.S. commerce and national security.

The investigation lays the groundwork for additional trade restrictions, which have the potential to frustrate Beijing’s economic and military modernization. The results of the inquiry may allow the incoming administration to retaliate against Beijing by imposing additional import duties and suspending trade concessions, among other measures.

U.S. Investigation Targets China’s ‘Legacy’ Semiconductors

The new investigation will address concerns that Beijing’s financial support for Chinese producers of “legacy” semiconductors may allow them to sell their chips below cost to foreign buyers. These less advanced semiconductors are primarily used in consumer products, such as “smart” dishwashers and refrigerators, along with some military systems and equipment. U.S. Trade Representative Katherine Tai explained that China’s policies could undercut American producers while allowing Chinese companies to gain substantial market share, potentially creating “supply chain choke points.” The investigation she said, demonstrated the administration’s commitment to “increasing the resilience of critical supply chains.”

Targeting the producers of legacy chips complements the administration’s announcement earlier in December that it would tighten the U.S. export control system to limit China’s access to cutting-edge semiconductor technologies and related production equipment.

Chinese Excess Manufacturing Capacity is a Threat to U.S. National Security

The new investigation highlights the threats posed to U.S. national security by China’s persistent overcapacity issues. Spurred by the Chinese Communist Party’s efforts to boost economic growth and transition the country’s manufacturing sector towards more high-value products, including solar panels, electric vehicles, and now semiconductors, Chinese firms have dramatically expanded their production capacity. However, in the current absence of sufficient global demand, these efforts have contributed to a glut of discounted products, driving down prices and taking market share from U.S. and other Western manufacturers.

This could harm U.S. national security since dependence on Chinese imports for legacy semiconductors may produce potential chokepoints in American commercial and military supply chains, limiting Washington’s ability to access these critical technologies in the event of a conflict. Moreover, in relying on state assistance to offset lost revenue from charging lower rates, Chinese firms can drive down global prices, rendering U.S. domestic production unprofitable and reducing the effectiveness of previous government investments in reshoring semiconductor manufacturing under the CHIPS Act.

Washington Should Work with Allies and Partners to Shore Up Defenses Against Economic Warfare

The effectiveness of Washington’s measures to defend its supply chains may depend on coordination with its allies and partners. In particular, they can coordinate potential retaliatory tariffs against China’s semiconductor industry, copying previous measures to harmonize export restrictions on advanced semiconductors. These measures should be coupled with further export restrictions to cut off China’s access to key inputs into the semiconductor manufacturing process, including design software and other raw materials.

Jack Burnham is a research analyst in the China Program at the Foundation for Defense of Democracies (FDD). For more analysis from Jack and FDD, please subscribe HERE. Follow Jack on X @JackBurnham802. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.