Addressing China's Legacy Chip Threat: Reviving Section 421
Jonathan Harman and Lillian Ellis have discussed a significant issue regarding China's potential monopoly on legacy chips. These are less advanced microchips that are crucial for both civilian and military technology. The People's Republic of China (PRC) has been known for making its geopolitical competitors reliant on it for materials vital for national security. They achieve this by flooding the market with inexpensive Chinese products. The PRC now aims to use this strategy to gain control over the production of legacy chips. To counter this potential threat to American national security, Harman and Ellis suggest that Congress should reinstate and update Section 421 of the 1974 Trade Act. This would allow the federal government to assess and recommend tariffs to the President for specific Chinese imports.
The PRC has a history of dominating international markets by subsidizing strategic industries to overproduce and saturate the market with low-cost products. This was demonstrated in the 1980s when cheap Chinese labor and production costs led to the closure of almost all competing rare earth mines in the United States and other countries. As a result, Chinese rare earths now make up nearly 80 percent of U.S. rare earth imports.
Although China finds it challenging to produce advanced chips like those made by TSMC in Taiwan, the Chinese Communist Party (CCP) aims to eventually dominate the production of low-end legacy chips. These chips are used in everything from everyday appliances to military technology.
The PRC's "Made in China 2025" plan, initiated in 2015, continues to use government subsidies to fund production in strategic industries like legacy chips. This is done beyond market demand while exporting them at much lower prices. The goal is that these market distortions will contribute to "the great rejuvenation of the Chinese nation."
China's plan seems to be succeeding, as it has the world's largest capacity for legacy chip production. In the first quarter of 2024, Chinese legacy chip manufacturing increased by 40 percent and is expected to account for 33 percent of the global market by 2027. According to U.S. Commerce Secretary Gina Raimondo, this figure will likely increase to 60 percent in the next few years.
China's potential dominance in legacy chip manufacturing poses risks to U.S. national security as it creates significant vulnerabilities in U.S. defense industry supply chains. Legacy chips, although basic, are essential for everything from cars to F-35 fighter jets.
The U.S. government has taken measures to prevent the PRC from acquiring the tools to produce more advanced chips through the CHIPS Act. However, it has not addressed Chinese legacy chip production. One way the federal government can curb China's progress in this industry is by reinstating and modernizing Section 421.
Section 421 was added to the US-China Relations Act of 2000, which normalized trade with China as it entered the World Trade Organization (WTO). It established a "safeguard" against potential disruptions to U.S. producers. This safeguard, which expired in 2013, allowed the U.S. International Trade Commission (ITC) to determine whether specific imports from China posed a significant threat to U.S. domestic industry and recommend tariffs for the President to implement.
The definition of a "threat" in Section 421 is intentionally broad. It states that if a Chinese product is imported into the U.S. "under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product, the President shall … proclaim increased duties or other import restrictions." The case for Chinese legacy chips easily satisfies these requirements.
Imposing sanctions does not come without costs. In 2009, President Obama implemented Section 421 on Chinese tire imports—the only time a President has implemented Section 421 recommendations. These tariffs, while successfully reducing Chinese tire imports by 30 percent, led to higher costs for U.S. consumers while companies sourced tires from other global suppliers.
However, because microchips play such a critical role in U.S. national security, the benefits of Section 421 far outweigh the usual drawbacks of protectionist policy. Indeed, because China's share of global microchip production is still in its infancy, it is in America's interest to decouple sooner rather than later. As Liza Tobin, Senior Director for Economy at the Special Competitive Studies Project, noted at the Global Taiwan Institute’s 2023 Symposium : “We in the West have learned the hard way that efficiency maximization shouldn't be the only criteria that determines our trade and investment decisions.”
Scott Paul, president of Alliance for American Manufacturing, recommended reviving Section 421 while testifying before Congress, calling it a "smart move by congress."
Support for Section 421 is bipartisan. Last December, the Select Committee on the CCP released a joint report that recommended restoring Section 421 given its PRC-specific safeguards. It explained that the section does not require the explicit evidence of an unfair trade practice. As ranking member Representative Krishnamoorthi (D-IL) stated, in reference to Section 421: “It’s a trade tool that allows us to impose targeted, quicker counter measures against CCP market disruptions … it is time to revive and modernize Section 421.”
To ensure that a restored Section 421 is successful, it should be coupled with policies that promote domestic industry. As Riley Walters, a senior fellow at the Hudson Institute, said in an email on July 19th, tariffs are generally “a bit of a vicious cycle unless the root of the problem (Chinese overproduction) is addressed.” In the case of legacy chips, Section 421 tariffs could work in tandem with the $2 billion set aside in the CHIPS Act to build up domestic legacy chip manufacturing.
The PRC could still produce Chinese-made chips elsewhere to get around Section 421 tariffs—a problem the Biden Administration had to resolve after implementing the CHIPS Act. To ensure tariffs are effective, a modernized Section 421 will need to address these potential loopholes.
While politicians and experts should proceed with caution when implementing any sort of protectionist policy, a modernized Section 421 would present a unique mechanism for securing America's supply chains while promoting U.S. producers. The federal government should take these steps now to prevent the U.S. from becoming dependent on its greatest geopolitical rival for legacy chips and other products necessary for national security in the future.
Jonathan Harman is a Summer Fellow at the Global Taiwan Institute and a student at Brigham Young University. He was previously an intern at the Heritage Foundation’s Center for National Defense.
Lillian Ellis is an intern at the Global Taiwan Institute. She is a recent graduate from Scripps College, where she majored in Politics and minored in Chinese. She has previously worked as a campaign manager in Washington state and as an intern for The Borgen Project.
Bottom Line
The potential for China to dominate the production of legacy chips poses a significant threat to U.S. national security. The suggested revival and modernization of Section 421 could offer a way to counter this threat. However, it's important to remember that such measures come with their own set of challenges and potential drawbacks. What are your thoughts on this issue? Do you agree with the proposed solution? Share this article with your friends and join the discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
Addressing China's Legacy Chip Threat: Reviving Section 421
Jonathan Harman and Lillian Ellis have discussed a significant issue regarding China's potential monopoly on legacy chips. These are less advanced microchips that are crucial for both civilian and military technology. The People's Republic of China (PRC) has been known for making its geopolitical competitors reliant on it for materials vital for national security. They achieve this by flooding the market with inexpensive Chinese products. The PRC now aims to use this strategy to gain control over the production of legacy chips. To counter this potential threat to American national security, Harman and Ellis suggest that Congress should reinstate and update Section 421 of the 1974 Trade Act. This would allow the federal government to assess and recommend tariffs to the President for specific Chinese imports.
The PRC has a history of dominating international markets by subsidizing strategic industries to overproduce and saturate the market with low-cost products. This was demonstrated in the 1980s when cheap Chinese labor and production costs led to the closure of almost all competing rare earth mines in the United States and other countries. As a result, Chinese rare earths now make up nearly 80 percent of U.S. rare earth imports.
Although China finds it challenging to produce advanced chips like those made by TSMC in Taiwan, the Chinese Communist Party (CCP) aims to eventually dominate the production of low-end legacy chips. These chips are used in everything from everyday appliances to military technology.
The PRC's "Made in China 2025" plan, initiated in 2015, continues to use government subsidies to fund production in strategic industries like legacy chips. This is done beyond market demand while exporting them at much lower prices. The goal is that these market distortions will contribute to "the great rejuvenation of the Chinese nation."
China's plan seems to be succeeding, as it has the world's largest capacity for legacy chip production. In the first quarter of 2024, Chinese legacy chip manufacturing increased by 40 percent and is expected to account for 33 percent of the global market by 2027. According to U.S. Commerce Secretary Gina Raimondo, this figure will likely increase to 60 percent in the next few years.
China's potential dominance in legacy chip manufacturing poses risks to U.S. national security as it creates significant vulnerabilities in U.S. defense industry supply chains. Legacy chips, although basic, are essential for everything from cars to F-35 fighter jets.
The U.S. government has taken measures to prevent the PRC from acquiring the tools to produce more advanced chips through the CHIPS Act. However, it has not addressed Chinese legacy chip production. One way the federal government can curb China's progress in this industry is by reinstating and modernizing Section 421.
Section 421 was added to the US-China Relations Act of 2000, which normalized trade with China as it entered the World Trade Organization (WTO). It established a "safeguard" against potential disruptions to U.S. producers. This safeguard, which expired in 2013, allowed the U.S. International Trade Commission (ITC) to determine whether specific imports from China posed a significant threat to U.S. domestic industry and recommend tariffs for the President to implement.
The definition of a "threat" in Section 421 is intentionally broad. It states that if a Chinese product is imported into the U.S. "under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product, the President shall … proclaim increased duties or other import restrictions." The case for Chinese legacy chips easily satisfies these requirements.
Imposing sanctions does not come without costs. In 2009, President Obama implemented Section 421 on Chinese tire imports—the only time a President has implemented Section 421 recommendations. These tariffs, while successfully reducing Chinese tire imports by 30 percent, led to higher costs for U.S. consumers while companies sourced tires from other global suppliers.
However, because microchips play such a critical role in U.S. national security, the benefits of Section 421 far outweigh the usual drawbacks of protectionist policy. Indeed, because China's share of global microchip production is still in its infancy, it is in America's interest to decouple sooner rather than later. As Liza Tobin, Senior Director for Economy at the Special Competitive Studies Project, noted at the Global Taiwan Institute’s 2023 Symposium : “We in the West have learned the hard way that efficiency maximization shouldn't be the only criteria that determines our trade and investment decisions.”
Scott Paul, president of Alliance for American Manufacturing, recommended reviving Section 421 while testifying before Congress, calling it a "smart move by congress."
Support for Section 421 is bipartisan. Last December, the Select Committee on the CCP released a joint report that recommended restoring Section 421 given its PRC-specific safeguards. It explained that the section does not require the explicit evidence of an unfair trade practice. As ranking member Representative Krishnamoorthi (D-IL) stated, in reference to Section 421: “It’s a trade tool that allows us to impose targeted, quicker counter measures against CCP market disruptions … it is time to revive and modernize Section 421.”
To ensure that a restored Section 421 is successful, it should be coupled with policies that promote domestic industry. As Riley Walters, a senior fellow at the Hudson Institute, said in an email on July 19th, tariffs are generally “a bit of a vicious cycle unless the root of the problem (Chinese overproduction) is addressed.” In the case of legacy chips, Section 421 tariffs could work in tandem with the $2 billion set aside in the CHIPS Act to build up domestic legacy chip manufacturing.
The PRC could still produce Chinese-made chips elsewhere to get around Section 421 tariffs—a problem the Biden Administration had to resolve after implementing the CHIPS Act. To ensure tariffs are effective, a modernized Section 421 will need to address these potential loopholes.
While politicians and experts should proceed with caution when implementing any sort of protectionist policy, a modernized Section 421 would present a unique mechanism for securing America's supply chains while promoting U.S. producers. The federal government should take these steps now to prevent the U.S. from becoming dependent on its greatest geopolitical rival for legacy chips and other products necessary for national security in the future.
Jonathan Harman is a Summer Fellow at the Global Taiwan Institute and a student at Brigham Young University. He was previously an intern at the Heritage Foundation’s Center for National Defense.
Lillian Ellis is an intern at the Global Taiwan Institute. She is a recent graduate from Scripps College, where she majored in Politics and minored in Chinese. She has previously worked as a campaign manager in Washington state and as an intern for The Borgen Project.
Bottom Line
The potential for China to dominate the production of legacy chips poses a significant threat to U.S. national security. The suggested revival and modernization of Section 421 could offer a way to counter this threat. However, it's important to remember that such measures come with their own set of challenges and potential drawbacks. What are your thoughts on this issue? Do you agree with the proposed solution? Share this article with your friends and join the discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
