As Trump presidency approaches, US warns China on semiconductors

A White House working group has issued recommendations to counter China's alleged rigging of the semiconductor market

The U.S. has accused China of rigging the steel, aluminum, and green technology markets, and the semiconductor industry is the latest in the crosshairs.

A White House working group has accused China of rigging the global semiconductor market by artificially reducing prices of chips. The President's Council of Advisors on Science and Technology (PCAST) also recommended ways to ward off the China threat and to strengthen the domestic market.

China is encroaching on the U.S. semiconductor market through acquisitions and using state-driven policies and interference to hurt innovation, PCAST said in its report.

Semiconductors are used in many products with an on and off switch. Semiconductors are used in computers, cars, factory machines, weapons, airplanes, and other products critical to the U.S. economy.

Circuits are used in military equipment critical to national security. That's another reason why the U.S. is paying close attention to Chinese actions affecting semiconductors.

The report comes two weeks ahead of Donald Trump's inauguration as the next U.S. president. The working group hopes the recommendations will carry over to the next administration.

All isn't well between the U.S. and China on the technology front. The U.S. has banned the export of key high-technology products to China and has found security flaws in products from Chinese companies. Roadblocks put in place by China have made it difficult for U.S. companies to do business in the country. Companies like HP, Intel, and Qualcomm have had to partner with Chinese companies to expand their businesses.

Bolstering innovation is one way to counter the Chinese semiconductor threat, and PCAST recommended private-public partnerships to develop new types of computers and chips.

The ideas proposed by PCAST include the development of quantum computers and chips for medicine and biodefense systems. These are radically different chips than ones currently used, and in some cases, impractical, but if achieved, they could put the U.S. leaps ahead and devalue the Chinese semiconductor market.

The council also said partnerships and investments would foster the development of talent to drive chip innovation ahead. Stronger security and export controls could limit Chinese access to technologies.

The semiconductor clash partly stems from different economic systems and government agendas in China and the U.S. China is pushing semiconductor development through government funding. Its most famous mega-chip powers the world's fastest computer called TaihuLight.

The U.S., on the other hand, uses private funding and public-private partnerships to foster computing innovation. Companies like Intel, AMD, Nvidia, and IBM come up with chip and manufacturing technologies that help make computers and mobile devices smaller and faster.

China is subsidizing chip development with a US $150 billion investment over a 10-year period, announced in 2014. That has spawned the development of low-cost semiconductors, and China hopes to increase the number of devices in its country using homegrown chips from 9 percent to 70 percent by 2025.

But China's dependence on homegrown technology is having an effect on the world semiconductor market. Low-cost Chinese chips, which have inferior technology but are cheaper than the U.S. chips, are being used in more devices than ever, and that threatens the position of U.S. companies in the semiconductor market.

"In the short run, Chinese subsidies can benefit U.S. consumers and firms that use semiconductors by reducing costs and lowering product prices. In the long run, however, subsidies to incumbent technologies tend to reduce innovation," PCAST said.

After airplanes and cars, semiconductors are the third largest export for the U.S., said the Semiconductor Industry Association, which lauded the PCAST report. The industry employs about 250,000 people and supports an additional 1 million jobs in the U.S.

"China is a critical market and an important part of the global value chain, yet it appears a significant number of its policies are not market-based or impose market-access restrictions," John Neuffer, SIA president and CEO, said in a blog entry.

But U.S. companies have been feeling the pinch of the high costs of manufacturing in the U.S., and are moving production to fabrication plants in China. One example is Intel, which is getting chips for its latest Optane storage from a plant in Dalian, China.

The U.S. had only 13 percent of the worldwide fabrication capacity in 2015, a decline from 42 percent in 1980, when semiconductor manufacturing started taking off.

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