Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21,

1, 9:36 AM

Semiconductors as Natural
Resources – Exploring the National
Security Dimensions of U.S.-China
Technology Competition
February 17, 2021

By Akinori Kahata

This blog post is the third a series on U.S.-China technology competition.

Click here to read the previous posts in this series, Managing U.S.-China
Technology Competition and Decoupling, and Assessing the Impact of U.S.-
China Technology Competition and Decoupling: Focusing on 5G.

In recent years, the U.S. government has taken a variety of steps to both
control China’s access to semiconductor technology as well as to improve
the United States’ own ability to lead in chip design and production. Key
among these were the export controls enacted by the Trump administration
against companies including Huawei and Semiconductor Manufacturing
International Corporation Incorporated (SMIC), and the passage of the
National Defense Authorization Act for Fiscal Year 2021, which included
funding for semiconductor manufacturing and research.

Technological competition around semiconductors is not only happening

between the U.S. and China. In December 2020, a group of European Union
countries announced “A European Initiative on Processors and
Semiconductor Technologies” with the aim of increasing Europe’s
semiconductor production capability throughout the value chain. Recent
reports indicate that the European Commission has entered into discussions

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 1 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

with TSMC and Samsung about investing in advanced manufacturing

facilities on the continent to reduce its dependence on China and the United
States.

As discussed in previous blog posts, technology competition and the

resulting movement towards decoupling could have damaging economic
consequences not just for China, but also for the nations working to distance
themselves from their reliance on Chinse firms. To manage technological
competition, it is essential to reach a consensus on the strategic significance
of semiconductors, especially advanced semiconductors, from the
standpoint of national security. By using this consensus to guide policy,
decision-makers can determine the appropriate policy for protecting and
supporting semiconductor technology. Comparing advanced
semiconductors with natural resources, a typical example of strategic
products, can help illuminate the national security significance of advanced
semiconductors.

Semiconductors and Natural Resources

Advanced semiconductors and natural resources share two important
characteristics: First, both are indispensable for our society. Second, both
have limited production capacity.

Without gas, oil, and coal, our electricity and modern-day transport systems
could not function. Similar to these natural resources, semiconductors also
serve an essential role in society. From military equipment and automobiles
to cloud computing and critical infrastructure like 5G telecommunication
systems, modern technology could not work without semiconductors. In
addition, both natural resources and advanced semiconductor production
capacity are limited. The production of natural resources is obviously limited
because volumes of natural resource reserves are limited. By contrast,
advanced semiconductors’ production capacity is limited due to

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 2 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

technological and economic factors. Since advanced semiconductors

manufacturing processes are extremely complicated and require highly
sophisticated technology, it is difficult for firms to develop and maintain the
ability to produce cutting-edge chips. A large investment in both research
and development (R&D) and factory construction is required for
manufacturers to compete. Because of this, only a small number of firms in
select countries have the ability to produce advanced semiconductors.

To understand why advanced semiconductors are critical to national

security, there are several key principles to bear in mind. First, if a country
does not have the capacity to produce something so essential for its
economic and national security, it must depend on other countries.
Countries that can produce advanced semiconductors could have strong
economic power. Since this power can be a tool to advance geopolitical
interests, it is necessary to consider advanced semiconductors in a national
security context.

Second, it is worth noting that this leverage will emerge only when the
production capacity is limited and monopolized by a single country or a small
number of countries. For products that are easier to produce, nations can
always find alternate suppliers in a different region or even shift quickly
to increase domestic production if the need arises. This point is critical when
considering semiconductor policies because not all semiconductors are
equally difficult to produce. The accessibility of advanced semiconductors,
which are difficult to produce, therefore has a significant impact on national
security.

Policy Implications
There are two policy approaches the United States can take to ensure it
does not lose its lead in the semiconductor industry: promoting its domestic
semiconductor industries, and preventing its technology from being

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 3 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

transferred to rival countries.

In policy making, it is important to keep in mind that only the production of

advanced semiconductors should be viewed as a possible national security
issue. Lawmakers should be careful to limit the scope of their policies to only
cover technologies that raise specific and pressing national security
concerns, avoiding other areas of semiconductor production where
government interference may cause unintended harms to domestic
firms or global industries. Key factors to consider when making this
determination are how essential the particular semiconductors are for
society and how limited production capacity is.

If the target scope is not appropriately chosen, policies do not work well. An
example might be if the U.S. instituted an export ban of certain chips to firms
in a specific country. If companies in other nations have the ability to make
chips of comparable quality, then the only result will be encouraging
manufacturers to switch away from U.S. suppliers. As a result, U.S. firms
would lose market share and ultimately become weak. On January 25, the
semiconductor manufacturing industry association SEMI sent a letter to the
Biden administration explaining this problem. To avoid this, policymakers
should carefully choose the target of policies to avoid unintended
consequences. For other type of policies, such as promoting R&D,
identifying the appropriate target scope is also essential. If a product can
already be made competitively by a large number of firms, government
support will have little benefit and could risk distorting the market.

In contrast, some believe the export regulations are not yet strong enough to
protect the advanced semiconductor technology. For example, in December
2020, Senators Michael T. McCaul and Macro Rubio sent a letter to the
Secretary of Commerce, insisting that scope of export controls against SMIC
is too narrow. They said that the policy’s target of limiting access to

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 4 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

equipment “required to produce semiconductors at 10 nanometers and

below,” would still allow the company access to nearly all semiconductor
manufacturing equipment. The new administration has to decide on a path
forward despite this difference in opinion.

From this point of view, we can evaluate whether the Trump administration’s
policies were appropriate or not.

Evaluating Export Restrictions on Huawei and SMIC

In 2019, the U.S. Department of Commerce Bureau of Industry (BIS) added
Huawei to its entity list, and in August 17, 2020, the restrictions against
Huawei were strengthened. After that, not only U.S. firms but also other
foreign companies using U.S. origin technology have been required to apply
for a license before exporting to Huawei. SMIC was similarly added to the
entity list in December 2020 because they were allegedly supplying their
products for Chinese military modernization.

The export controls against Huawei may have made a negative impact on
Huawei's smartphone business and their base station business. According to
the Chinese media, Huawei’s smartphone market share during January in
China fell to third place. Also, it sold the Honor brand to save it from U.S.
sanctions. In addition, some reports have pointed out that Huawei's ability to
supply 5G base stations has become tenuous because they are highly
depend on U.S. technology. Based on these facts, it can be said that the
export controls had a negative effect on Huawei. This is because essential
semiconductors which are not be able to be made by Chinese firms are
included in the target scope of export controls.

On the other hand, the target scope may be wider than necessary.
Responding to the regulation, semiconductor industries in the U.S. and
Europe criticized the U.S. government’s decision. They insisted that the

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 5 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

export controls are harmful to the global supply chain of semiconductors,

and that most semiconductor exports to Huawei are not sensitive to national
security. According to news articles, many companies, including Qualcomm,
Intel, Samsung, SK Hynix, Sony, and Kioxia, applied for and received export
licenses of some semiconductors to Huawei. These actions indicate how
important Huawei is for semiconductor firms as a customer, and that the
initial scope of regulation may have been wider than necessary.

In the SMIC case, the target of controls is the manufacturing equipment

necessary to produce semiconductors at the 10nm or lower processes. The
objective of this policy is to prevent SMIC from gaining cutting-edge
technology that would allow them to produce advanced semiconductors on
their own. SMIC released an official comment saying that the export controls
may affect the production of advanced chips, but that other areas of its
business will not be significantly impacted. This result is desirable in terms of
national security; however, as described in the earlier, some believe that the
target scope is too small. The Biden administration should continuously
review the state of the industry and gather feedback from industry and
security experts to ensure these policies remain scoped effectively.

Steps the New Biden Administration Should Take

First, it is necessary for the Biden administration to establish a public
strategy outlining the concepts and the goals of technology competition.
The most important point is defining what types of technology and products
should be considered a national security issue. For example, recently several
automobile companies publicly announced that they have had to reduce
their production of new cars due to a shortage of semiconductors. To
alleviate this shortage, the governments of the U.S., Germany, and Japan
asked the Taiwanese government for support in boosting production. This
example shows how semiconductors and their production capability is
essential for our society, and can become an issue of geoeconomics

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 6 of 7
Semiconductors as Natural Resources – Exploring the National Securit…hnology Competition | Center for Strategic and International Studies 10/18/21, 9:36 AM

significance. Again, a public strategy outlining the concepts and the goals of
technology competition should be based on how essential the technology is
to economic and national security, and how limited production capacity is
globally.

Second, the new administration can evaluate the former administration’s

policies and decide whether to modify their scope. After that, the
administration can decide whether to take any new, concrete measures. At
this time, international collaboration must be a priority because
semiconductors’ global supply chain cannot be managed by one country. As
described previously, a unilateral approach would be harmful to the United
States’ interests.

The next blog post in this series will discuss the appropriate scope of
semiconductor policies and possible concrete measures.

Akinori Kahata is a visiting researcher with the Strategic Technologies

Program at the Center for Strategic and International Studies in Washington,
DC.

The Technology Policy Blog is produced by the Strategic Technologies

Program at the Center for Strategic and International Studies (CSIS), a
private, tax-exempt institution focusing on international public policy
issues. Its research is nonpartisan and nonproprietary. CSIS does not
take specific policy positions. Accordingly, all views, positions, and
conclusions expressed in this publication should be understood to be
solely those of the author(s).

https://www.csis.org/blogs/technology-policy-blog/semiconductors-natural-resources-–-exploring-national-security Page 7 of 7