Disruption (Page 4)

Back in June, the Federation of American Scientists teamed up with Noahpinion, ChinaTalk, and Chris Miller to hold a crowdsourced policy competition.

We asked for ideas on how to deal with the problem of China potentially controlling the supply of foundational chips (also called “trailing-edge” semiconductors). Here was the post where we made the announcement:

The US has implemented export controls to try to stop China from getting a technological edge in advanced cutting-edge chips. But as I explained in a recent post, export controls have no hope of stopping China from building simpler types of chips — called “legacy chips”, “foundational chips”, or “trailing-edge chips.” These legacy chips are used for a huge number of things in our economy, from cars to smartphones to fighter jets.

And China is gearing up to build these legacy chips in absolutely staggering numbers. Check out this post by Jimmy Goodrich of the University of California Institute on Global Conflict and Cooperation and this post by the Rhodium Group for details. Basically, China is applying the same approach to legacy chips that it has successfully applied to batteries and EVs — massive scale and enormous subsidies. Already,

This basically presents at least three potential dangers to the US:

1. First, China could deprive non-Chinese chipmakers of huge amounts of revenue by outcompeting them in the legacy chip market, making it harder for them to sustain their leading-edge chip businesses. Already investors are pressuring US companies to avoid competing with China by canceling their semiconductor fabs.

• Second, if China controls the legacy chip market, it could cut off our supply of chips in a war.

• Third, Chinese security services might be able to put back doors into Chinese-made chips, using them to spy or even to attack US infrastructure.

In other words, there are plenty of national security reasons for keeping Chinese-made legacy chips out of our supply chain. But how can we do it? It’s a tough problem.

First of all, as things stand, we don’t even know which products contain Chinese-made chips. If a Vietnamese-made phone or a Mexican-made PC includes Chinese-made legacy chips, the US currently has no way of knowing.

Second, even if we did know, it might be politically unpopular to ban those chips. A lot of US companies want to get chips as cheaply as possible, especially for new AI applications. We’d need some way to make chip restrictions politically palatable.

And finally, lots of Chinese legacy chips — and the products that contain them — aren’t going to be sold in the US or our allied countries. How do we make sure non-Chinese chipmakers stay competitive in markets like Vietnam, Brazil, Indonesia, etc?

We asked contestants to give us their ideas for addressing this problem. In the end, we decided that four of the submissions we received really stood out. These winners are listed in alphabetical order by first author.

Winner #1: Weaponizing EDA and using targeted industrial policy

By: Zenghao (Mike) Gao, Charles Yockey, and Felipe Chertouh

Gao et al point out an important weapon in the US’ arsenal of export controls that hasn’t been used yet: Electronic design automation software (EDA). We hear a lot about where the production of chips happens, and some about where the production of chipmaking tools happens, but not very much about where the software used to design chips comes from.

In fact, almost all of it comes from America, with a little bit coming from US-allied countries like Japan and Australia. And this software doesn’t just design chips in the first place; it’s also what chipmakers use to correct problems with the fabrication process as they arise.

Gao et al. suggest that EDA could be “weaponized” by mandating that it run on US-based cloud servers:

In hosting all EDA in a US-based cloud—for instance, a data center located in Las Vegas or another secure location—America can force China to purchase computing power needed for simulation and verification for each chip they design. This policy would mandate Chinese reliance on US cloud services to run electromagnetic simulations and validate chip design.

Under this proposal, China would only be able to use the latest EDA software if such software is hosted in the US, allowing American firms to a) cut off access at will, rendering their technology useless and b) gain insight into homegrown Chinese designs built on this platform.

Since such software would be hosted on a US-based cloud, Chinese users would not download the software which would greatly mitigate the risk of foreign hacking or intellectual property theft.

While the United States cannot control chips outright considering Chinese production, it can control where they are integrated. A machine without instructions is inoperable, and the United States can make China’s semiconductors obsolete.

This idea wouldn’t stop China from making foundational chips — Chinese companies could still use American EDA software. But it might give the US one more piece of leverage to hold over China in case hostilities broke out — and another way to try to slow down the Chinese chip industry in general, if that becomes necessary.

On the defensive side of things, Gao et al. also call for the US to form a trade bloc with Latin American nations to ensure safe supply of rare earths and NAND memory. They also have some additional ideas, such as forcing Chinese companies to release the source code for the firmware and other software for their chips.

You can read Gao et al’s full policy proposal here.

Winner #2: Working with other countries on industrial policies and tariffs

By: Andrew Lee

Lee sees the creation of a non-China foundational chip supply chain as the central problem to be solved. He envisions a program modeled after Lend-Lease — the system by which the US delivered arms to the UK in World War 2, and by which it’s currently delivering arms to Ukraine. The program would license US technology cheaply to friends and allies in exchange for cooperation in creating completely China-free chip supply chains:

The United States Federal Government could negotiate with the “Big Three” EDA firms to purchase transferable licenses to their EDA software. The US could then “lend-lease” licenses to major semiconductor producers in partner countries such as Singapore, Malaysia, Vietnam, the Philippines, or even Latin America.

The US could license this software on the condition that products produced by such companies will be made available at discounted prices to the American market, and that companies should disavow further investment from or cooperation with Chinese entities.

Partner companies in the Indo-Pacific could further agree to share any further research results produced using American IP, making further advancements available to American companies in the global market.

(Side note: It occurs to me that this might dovetail well with Gao et al.’s proposal for putting EDA on a US-based cloud.)

Lee also suggests coordinating with friendly countries in order to put tariffs on Chinese foundational chips. Recall that one of the big challenges here is that we don’t currently know which products contain Chinese-made chips, so we have no idea how many we’re importing.

Lee’s solutions to this problem are 1) an international database of which products contain Chinese chips, and 2) reporting requirements for importers, enforced by random audits:

How would tariffs on final goods containing Chinese chips be enforced? The policy issue of sanctioning and restricting an intermediate product is, unfortunately, not new. It is well known that Chinese precursor chemicals, often imported into Mexico, form much of the raw inputs for deadly fentanyl that is driving the United States opioid epidemic.

Taking a cue from this example, we further suggest the creation of an internationally-maintained database of products manufactured using Chinese semi- conductors. As inspiration, the National Institutes of Health/NCATS maintains the Global Substance Registration System, a database that categorizes chemical substances, along with their commonly used names, regulatory classification, and relationships with other related chemicals.

Such a database could be administered by the Commerce Department’s Bureau of Industry and Security, allowing the personnel who enforce the tariffs to also collect all relevant information in one place.

Companies importing products into the US would be required to register the make and model of all Chinese chips used in each of their products, so that the United States and participating countries could to impose corresponding sanctions.

Products imported to the US would be subject to random checks involving disassembly in Commerce Department workshops, with failure to report a sanctioned semiconductor component making a company subject to additional tariffs and fines. Manual disassembly is painstaking and difficult, but regular, randomized inspections of imported products are the only way to truly verify their content.

Finally, he suggests efforts to protect US critical infrastructure by 1) identifying Chinese hardware within the infrastructure, and 2) improving cyber defense capabilities.

You can read Lee’s full policy proposal here.

Winner #3: An “Open Foundational” design standard and buyers’ group

By: Alex Newkirk

Newkirk also sees Chinese disruption of the chip supply chain — along with possible backdoors and other security issues — as the main problem to be solved. He proposes two ideas. First, Newkirk would create an “Open Foundational” design standard for legacy chips, in order to ensure that China doesn’t get proprietary control over any type of computer chip.

The chip companies who joined up to help create this standard would form a sort of cartel that could act to create a China-free manufacturing supply chain. Newkirk also suggests an international buyers’ group to create a strategic reserve of chips. This would serve the dual purpose of building up a chip stockpile and providing demand to encourage the adoption of the Open Foundational design standard. He writes:

To secure supply of foundational chips, I recommend development of an “Open Foundational” design standard and buyers’ group…[T]he US federal government…would establish a strategic microelectronics reserve to ensure access to critical chips. This reserve would be initially stocked through a multi-year advanced market commitment for Open Foundational devices. 

The foundational standard would be a voluntary consortium of microelectronics users in critical sectors, inspired by the Open Compute Project. It would ideally contain firms from critical sectors such as enterprise computation, automotive manufacturing, communications infrastructure, and others.

The group would initially convene to identify a set of foundational devices which are necessary to their sectors…and identify design features which…could be standardized.  From these, a design standard could be developed…

Steering committee firms will…be asked to commit some fraction of future designs to use Open Foundational microelectronics…[T]he buyers’ group would represent demand of sufficient scale to motivate investment, and that supply would be more robust to disruptions once mature. 

Government should adopt the standard where feasible, to build greater resilience in critical systems if nothing else. This should be accompanied by a diplomatic effort for key democratic allies to partner in adopting these design practices in their defense applications.

The foundational standard should seek geographic diversity in suppliers…The foundational standard also allows firms to de-risk their suppliers as well as themselves. They can stipulate in contracts that their tier one suppliers need to adopt Foundational Standards in their designs…

Having developed the open standard through the buyers’ group, congress should authorize the purchase through the Department of Commerce a strategic microelectronics reserve (SMR). Inspired by the strategic petroleum reserve, the microelectronics reserve is intended to provide the backstop foundational hardware for key government and societal operations during a crisis…

The foundational standard provides the product specification, and the advanced government commitment provides demand…This demand should be steady, with regular annual purchases at scale, ensuring producers consistent demand through the ebbs and flows of a volatile industry….The SMR could also serve as a backstop when supply fluctuations do occur, as with the strategic petroleum reserve…

This would ensure government access to core computational capabilities in a disaster or conflict scenario. But as all systems are built on a foundation, the SMR should begin with Foundational Standard devices. 

It’s notable how Newkirk’s ideas support each other. The international chip design standard he would create would make it easier to build up a stockpile of reliable chips. And building up the stockpile would create the guaranteed demand that would encourage adoption of the design standard.

That’s a very clever synergy. And as an added bonus, the consortium of companies that create and run the foundational chip standard would also be able to help carry out friend-shoring and de-risking, instead of leaving all the planning to the government.

You can read Newkirk’s full policy proposal here.

Winner #4: A legal plan for blocking Chinese chips

By: Ben Noon

Noon focuses on the difficult problem of identifying and restricting Chinese-made foundational chips contained within US imports from other countries. He vividly lays out the dangers of allowing China to control the foundational chip industry:

The list of examples of Chinese economic coercion is long…Washington faces less blatant coercion compared to its allies…This may be because Beijing does not believe it yet maintains necessary leverage over Washington…China’s growing position in the legacy semiconductor market could change that. How would Beijing’s behavior change if sales of the Ford F-150 relied on Beijing’s willingness to sell its semiconductors?

Noon argues that export controls have little or no hope of containing the Chinese foundational chip industry. And he argues that CHIPS Act-type subsidies alone are insufficient to maintain a US foothold in the market because Chinese subsidies will always be larger. Thus, he concludes, protectionism is necessary in order to keep China from dominating the global market for foundational chips.

The question, of course, is how to restrict imports of Chinese foundational chips contained in other products. Noon goes through and explains a list of various legal and administrative vehicles that the US government has at its disposal to accomplish that task:

• Investigation of and restrictions on imported goods linked to unfair trade practices

• Federal government purchasing restrictions

• The Office of Information and Communications Technology and

Services (ICTS) at the Commerce Department, a recently created agency with broad authority to protect critical infrastructure from dangerous imported products

Noon believes that the most important legal justification for tariffs on Chinese chips is Section 301 of the Trade Act of 1974, which both Trump and Biden have used extensively in order to put tariffs on Chinese products.

The really tough question, of course, is enforcement. Noon recommends “a major expansion of supply chain analytical capabilities across the US government,” but doesn’t say much more about that. He also suggests enlisting private companies as whistleblowers.

You can read Noon’s full policy proposal here.

Anyway, all of these proposals are quite interesting, and we’ve already contacted the authors to talk about following up on their development. I was very impressed by the diversity of ideas here — different contributors targeted different aspects of the problem, which helped them come at the issue from a variety of angles.

I continue to be impressed by the creativity and technical acumen of Noahpinion readers. Expect more policy contests at some point in the future!

This article was first published on Noah Smith’s Noahpinion Substack and is republished with kind permission. Read the original here and become a Noahopinion subscriber here.

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