What to Do When the Chips Are Down
I’ve been asked a number of times over the past few weeks what we should do about legacy chips. For the non-tech nerds, those are the non-cutting-edge semiconductors made with “older” designs and technologies. While these chips are dual-use in that they have military applications as well as civilian ones, most of them end up in the latter category running our computers, automobiles, and, thanks to the internet of things, our refrigerators, toasters, and heating systems. The problem is that we may be about to be buried in imports of these chips from China directly and indirectly. One explanation for that is the U.S. export controls on high end chips and manufacturing technology are pushing China to focus on the low end, but I think it’s more fundamental than that, and it’s a movie we’ve seen before. When the government allocates credit rather than the market, you inevitably get overinvestment, overcapacity, overproduction, and then global dumping, as China exports its excess production and attempts to capture market share and drive foreign competitors out of business. That has happened in steel, aluminum, wind turbines, solar panels, and is about to happen with legacy chips and electric vehicles. Coming down the road are commercial aircraft. Governments, including the United States and European Union, are thinking about what tools they have to deal with this and whether there are new ones they need to put in place.
Currently, the United States has three tools it can use to combat this tactic, and none of them are short. If any action is ultimately taken, it will more likely be in 2025 than this year. The first is to treat this as a traditional dumping and subsidy problem. To prevail, you have to prove that the offense has occurred, and that you have been injured by it. The remedy is a tariff in the amount of dumping or subsidy. While this is the logical approach legally, there are problems with it. Filing a case is expensive, and the investigation usually takes a year or more. A bigger issue for chips, however, is these laws are designed to combat imported items, but many more chips enter the country as part of a different end product—car or computer, for example—than as chips. In such cases, the subsidized import is the car, not just the chips in it. Complaints can still be brought (if a part or component is subsidized, the end product benefited from the subsidy as well) but they must be brought by the affected industry—in this example autos, not chip manufacturers. Since many of the chips in question cost only pennies per unit, the amount of the subsidy will only be a small percentage of the car’s price, making it a less effective remedy.
Another approach is Section 232 of the Trade Expansion Act of 1962, which permits the president to take trade actions to protect our national security. Former president Trump used this law to impose tariffs on steel and aluminum, which shrouded the provision in controversy. The U.S. has lost World Trade Organization (WTO) cases on its use of the provision and will continue to do so. The process is a bit less than a year, the shortest of the three options, but still long. If substance matters, use of the provision is complicated because it is often hard to agree on what constitutes a national security threat. Many experts disagreed with the steel and aluminum decisions on the merits, and a decision on legacy chips would likely produce the same disagreement. There would also be debate over the negative economic impact if chip imports were banned or had high tariffs attached.
Finally, we have the all-purpose trade statute—Section 301 of the Trade Act of 1974, which authorizes presidential action against unfair or unjustifiable acts after a 12-month investigation by the U.S. Trade Representative (USTR). This provision was largely dormant from 1994 to 2018 because the United States had agreed in the Uruguay Round to only use it in conjunction with a favorable WTO panel decision. Trump ignored that commitment and revived it to justify extensive tariffs on Chinese imports, which the Biden administration has not removed. That use of the provision has also led to unfavorable WTO outcomes. USTR seems to have some affection for this provision, but it has not yet taken any new actions.
While these tools have provided relief to various sectors in the past, there are two problems with them when it comes to chips. First is the problem mentioned above—legacy chips most often enter the country as components of a different product. Tariffs solely on chip imports would have a limited impact, while tariffs or other limits on imports of the many products that contain them would have a significant inflationary impact on the economy. Second, as in the case of steel, our tools are unilateral while the basic problems of over-capacity and over-production are multilateral. Restraining imports into the United States is like squeezing a balloon—the imports simply pop up somewhere else, which means China does not pay a price for its policy. However, producing a multilateral action plan when there are few producers is difficult. Asking a country that does not make chips to impose tariffs on them in the interest of countering Chinese policy will only produce an eye roll. We would be asking them to raise costs to their manufacturers in order to accommodate our companies’ interests. Not likely to happen.
Make no mistake: this is a serious problem with long-term consequences for the global economy, but dealing with it effectively will be a lot more difficult than people think.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.