Limiting semi sales to China will reduce U.S. competitiveness

Following the Biden administration’s proposal to ratchet up export controls on chips to China, the Information Technology and Innovation Foundation (ITIF) says that many in Washington have landed on export controls of semiconductors and advanced chip-making equipment as a critical weapon to limit China’s advancement.

“Last October, the administration released sweeping export controls to limit China’s capabilities in producing advanced semiconductors,” says Robert Atkinson president of ITIF, a leading think tank for science and technology policy.

This week, the administration doubled down on these controls, in part on an attempt to “close loopholes” in the earlier controls. Limiting sales of semiconductors to China risks significantly reducing allied semiconductor competitiveness, partly by spurring even more “indigenous innovation” efforts in China and by reducing allied firm sales, according to Atkinson.

Semiconductors have high fixed costs relative to marginal costs, costing billions to design and make the first chip, but far less to make the millionth. This is at the heart of the issue of export controls to China. By cutting off U.S. sales, U.S. firms will lose the most profitable part of their market, significantly reducing profits that otherwise would be invested in research and development for the next generation of chips.

Atkinson says the issue here is not whether the United States works to restrict Chinese innovation advancement; it’s how to do that in a way that is effective without hurting U.S. capabilities.