Report to Congress on China’s New Semiconductor Policies

April 22, 2021 9:50 AM

The following is the April 20, 2021 Congressional Research Service report, China’s New Semiconductor Policies: Issues for Congress.

From the report

Since August 2020, the government of the People’s Republic of China (PRC or China) has issued several new related policy measures to boost the development of its semiconductor and software industries. In August 2020, China’s State Council issued the Notice on Several Policies to Promote the High-quality Development of the Integrated Circuit Industry and Software Industry in the New Era, which provides a broad framework. In March 2021, the Chinese government issued several implementing measures that include criteria companies must meet to qualify for government preferences, as well as tax and tariff provisions. The Chinese government is expected to issue lists with more details about specific companies, projects, technologies, raw materials, and components that are to be encouraged by the state.

China’s new policies encourage U.S. and foreign semiconductor companies—including those from Taiwan, Hong Kong, and Macau—to transfer certain technology, intellectual property (IP), talent, and research and development (R&D) to operations in China. These policies target capabilities across the semiconductor value chain, including integrated circuit (IC) design, fabrication, equipment, software design and tools, packaging and testing, and materials. These policies offer preferential terms over the next ten years—including tax, tariff, financing, and IP protection—for firms willing to establish capabilities, including production facilities, in China. These policies require companies to transfer certain IP—including a specific number of invention patents, depending on the subsector—to ownership by a China-based business that is legally separate from its corporate parent, potentially giving the Chinese government greater control over certain technologies, including through the use of China’s new export control law.

A semiconductor (also known simply as an integrated circuit, a microelectronic chip, or a computer chip) is a tiny electronic device (based primarily on silicon or germanium) composed of billions of components that store, move, and process data. Semiconductors are a uniquely important enabling technology. They are fundamental to nearly all modern industrial and national security activities, and they are essential building blocks of other emerging technologies, such as artificial intelligence, autonomous systems, 5G communications, and quantum computing. For more than six decades, consistent growth in semiconductor capabilities and performance and concurrent cost reductions have boosted U.S. economic output and productivity and enabled new products, services, and industries.

Many Members of Congress and U.S. policymakers are concerned that China’s state-led semiconductor policies, if successful, could lead to the loss of U.S. technological leadership and significantly shift global semiconductor production and related design and research capabilities to

China. Chinese semiconductor competencies could support a range of technology advancements, including military applications. Although some countries, including the United States, support their domestic semiconductor industry, the scope and scale of China’s state-led efforts are unprecedented when considering the amount of state funding involved, the Chinese government’s ambitions to lead across the entire semiconductor value chain, the targeting of U.S. and foreign capabilities, and the particular methods that China is using, which appear to challenge current global rules and norms.

U.S.-China Phase One Trade Deal Commitments 

These new measures build on China’s existing state-led semiconductor initiatives by providing new specific technology requirements tied to preferential market treatment and economic benefits.5 In establishing a direct quid pro quo link between technology transfer and qualifications for particular government incentives, China appears to be pursuing trade practices—that previously were detailed in USTR’s Section 301 report from March 2018—of concern to the U.S. government and many in Congress.6 Specifically, China’s new semiconductor policies may violate provisions in the January 2020, U.S.-China Phase One Trade Deal, particularly in Chapter 2 of the agreement that addressed some aspects of China’s technology transfer policies and practices.7 Among related commitments, in Article 2.3 of the agreement, China agreed it would not require or pressure firms to transfer technology in relation to investment transactions, or as a condition for parties to receive or continue to receive any advantages conferred by China.8 In late March 2021, China’s planning agency, the National Development and Reform Commission, issued further guidance on the new policies; the guidance clarifies that the Chinese government will require the relevant patents and IP mandated under its measures to be owned by a legally distinct and independent business in China, and cannot be simultaneously owned or controlled outside of China.9 According to these policies, patents and related IP submitted to the Chinese government for review will require government authorization, which creates an opening for the Chinese government to determine and require the specific know-how that companies must transfer to China to meet the policy requirements.

Download the document here.

Get USNI News updates delivered to your inbox