In One Sentence

• On December 23, 2024, the Office of the U.S. Trade Representative (USTR) launched a Section 301 investigation into Chinese government practices in the semiconductor industry, with an initial focus on China’s legacy chip sector.
• U.S. Trade Representative Katherine Tai explained that the purpose of the probe is to protect the American and the global semiconductor industry from China’s massive state-driven efforts to build up its domestic chip supply.
• The departing Biden administration has already placed a 50% tariff on Chinese semiconductors that was set to take effect on January 1, 2025.
• China has strongly opposed the Section 301 decision and called the U.S. claims of Chinese “non-market practices” self-contradictory given the prevalence of massive U.S. chip subsidies.

Mark the Essentials

• The Biden administration noted that the Section 301 probe will be handed to President-elect Donald Trump when he takes office on January 20, 2025 for completion.
• The probe will expand the previous U.S.-China chip competition scope beyond high-end semiconductors to include older or legacy chips that power everyday consumer electronics and telecoms gear.
• The probe, when completed, could result in additional tariffs or other measures to block Chinese chips from entering the U.S. market, in addition to the existing 50% tariffs and the additional 60% tariffs on Chinese imports threatened by incoming President-elect Trump.

Keeping an Eye On…

• First, it was the denial of chips to Huawei during the first Trump administration. Next, it was controls on the supply of advanced node semiconductors to a wide spectrum of Chinese users, along with their designation as “foreign entit(ies) of concern” in the CHIPS Act. Thereafter, it was the turn of semiconductor manufacturing equipment to be denied to Chinese users. Not yet done, on December 23, 2024, President Biden’s U.S. Trade Representative Katherine Tai opened a Section 301 investigation of China’s policies and practices with regard to ‘foundational’—or mature node or legacy—semiconductors. This is not the first chip-related Section 301 action; Trump’s broad-based China Section 301 investigation had led to 25% tariffs on Chinese semiconductors (increased subsequently by Biden to 50% in May 2024). Per USTR’s December 23 announcement, China seeks to use its non-market policies and practices to dominate the global manufacturing of mature node chips, with its share projected to reach approximately 40-50% of world capacity by 2029. It is a foregone conclusion that USTR will find that this overconcentration within the global legacy chip market threatens critical U.S. supply chains for telecoms, automotive, defense, medical and other items. And on the strength of this finding, it will impose trade restrictions on Chinese legacy chips. It is just as foregone that China will challenge and defeat the trade restrictions thereafter at the WTO dispute settlement body’s panel stage, much as it had defeated the Trump Section 301 tariffs at the WTO in September 2020 or, for the matter, the European Community had obtained a favorable GATT commission ruling (related to price fixing) in 1988 against the 1986 U.S.-Japan semiconductor agreement that was the outcome of an earlier Section 301 investigation of Japanese policies and practices. The real question going forward, rather, relates to the purpose and type of restrictions that are likely to be imposed by Trump’s U.S. Trade Representative following the conclusion of the investigation. Legacy semiconductors are, after all, dime-a-dozen in modern industrial goods. An average car, for instance, contains over 1,700 chips, with just a handful of them fabricated at a facility in China—be it at a foreign-owned or Chinese-owned facility. Reliability and quality considerations are likely to dominate sourcing decisions just as much as considerations of cost are. Besides, semiconductors are intermediate goods where the buyer of record is typically an original equipment manufacturer (OEM) rather than a final branded goods seller. Component tariffs linked to the value added embodied in the chip, rather than on the final product, will thus have to be imposed. This is no simple task. Sorting through legacy semiconductor supply chains is fiendishly complex given the limited visibility into the origin of legacy chips embedded in final products. Finally, the CHIPS Act envisages significant investment in domestic foundational chip production capacity to reshore critical supply chains for telecoms, automotive, defense, medical and other items. Protective tariffs too have already been imposed. One implication of the potential Section 301 measure therefore is that the U.S. is now seeking to reorder the market incentives for global—rather than domestic—production of legacy chips, and thus bifurcate the sourcing choices and supply chains of global OEMs from that of Chinese OEMs. If this is indeed the case, it is not likely to succeed. As Chinese foundries narrow the reliability and quality gap while also enabling Chinese OEMs to deliver a cost advantage vis-à-vis their global rivals, a greater share of China-origin mature node chips is likely to be embedded in IT and electronic goods globally. And for this state of affairs, it is the United States’ chip export controls starting with the clampdown on Huawei, which concentrated Chinese minds on building out a self-sufficient end-to-end mature node chip production ecosystem, that ultimately and ironically bears a greater share of the blame rather than China’s non-market policies and practices.

Expanded Reading

• U.S. Takes Aim At China’s Production Of Essential Computer Chips, The New York Times, December 23, 2024
• U.S. Launches New Probe Into Legacy Chinese Chips As Tech Pressure On Beijing Escalates, CNBC, December 23, 2024
• FACT SHEET: President Biden Takes Action to Protect American Workers and Businesses from China’s Unfair Trade Practices in the Semiconductor Sector, The White House, December 23, 2024
• Biden Launches New Chinese Chips Trade Probe, Will Hand Off To Trump, Reuters, December 23, 2024