Executive Summary
Semiconductors are essential to modern life. Progress in semiconductors has opened up new frontiers for devices and services that use them, creating new businesses and industries, and bringing massive benefits to American workers and consumers as well as to the global economy. Cutting-edge semiconductor technology is also critical to defense systems and U.S. military strength, and the pervasiveness of semiconductors makes their integrity important to mitigating cybersecurity risk.
U.S . semiconductor innovation, competitiveness, and integrity face major challenges. Semiconductor innovation is already slowing as industry faces fundamental technological limits and rapidly evolving markets. Now a concerted push by China to reshape the market in its favor, using industrial policies backed by over one hundred billion dollars in government-directed funds, threatens the competitiveness of U.S. industry and the national and global benefits it brings.
The global semiconductor market has never been a completely free market: it is founded on science that historically has been driven, in substantial part, by government and academia; segments of it are restricted in various ways as a result of national-security and defense imperatives; and it is frequently the focus of national industrial policies. Market forces play a central and critical role. But any presumption by U.S. policymakers that existing market forces alone will yield optimal outcomes – particularly when faced with substantial industrial policies from other countries – is unwarranted. In order to realize the opportunities that semiconductors present and to effectively mitigate major risks, U.S . policy must respond to the challenges now at hand.
Our core finding is this: the United States will only succeed in mitigating the dangers posed by Chinese industrial policy if it innovates faster. Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread. And, as U.S . innovators face technological headwinds, other countries’ quest to catch up will only become easier. The only way to retain leadership is to outpace the competition.
That does not mean that the U.S. government should be silent or passive in the face of Chinese industrial policies. We found 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. While stepping up the pace of innovation, the United States should also act in the short term to try to reduce this market- distorting behavior and its impacts. Our recommendations therefore focus on three approaches. First, the United States should attempt to influence Chinese behavior by working to improve transparency around Chinese policy through discussions in bilateral and multilateral forums, joining with allies to coordinate and strengthen inward investment security and export controls, and responding firmly and consistently to Chinese violations of international agreements. The United States also should calibrate its application of national-security controls in response to Chinese industrial policy aimed at undermining U.S . security.
