The Biden administration is preparing a trade investigation into China’s production of older-model semiconductors, in response to fears that the United States’ growing dependence on these products could pose a national security threat, according to people familiar with the matter and government and industry documents reviewed by The New York Times.
The investigation could ultimately result in tariffs, import bans or other actions on certain Chinese chips and the products that contain them. But the decision about what course to take would fall to the incoming Trump administration. The Biden administration may initiate its investigation in the coming weeks, but it would most likely take at least six months to conclude.
The U.S. government has already tried to clamp down on China’s access to the most advanced types of semiconductors due to national security concerns. But it has largely left untouched China’s production of older types of chips, which are still vital for powering a huge swath of products including smartphones, cars, dishwashers, refrigerators and weaponry, along with American telecommunications networks.
But with Chinese companies and the government now investing heavily in new factories, or fabs, to make those “legacy” or “foundational” chips, U.S. officials are concerned that Chinese production could put chip factories in the United States or allied countries out of business. That could increase U.S. supply chain dependence on China and potentially pose cybersecurity threats as those chips are integrated into American infrastructure or weaponry.
“China is subsidizing those chips in these new fabs, dumping them into the global market and tanking the price,” Gina Raimondo, the commerce secretary, said at the Reagan Defense Forum in Simi Valley, Calif., on Dec. 7. “That isn’t fair. And there may be a case for tariffs on that.”
The Biden administration has been weighing whether to proceed with a trade investigation under two different laws. One is Section 232 of the Trade Expansion Act, which focuses on threats to national security and falls to the Commerce Department. The other option is Section 301 of the Trade Act of 1974, which applies to acts that are “unjustifiable” or “unreasonable” and burden U.S. commerce, and is carried out by the Office of the United States Trade Representative.
The administration appears to have embraced the latter action, according to several people familiar with the plans. In a letter to its members last week, one Washington-based trade association said that the Biden administration had decided in a meeting that week to pursue the Section 301 investigation, and that the trade representative’s office could begin its preparations for initiating the investigation the next week.
The office and the Commerce Department declined to comment. Biden officials have been considering the action for much of Mr. Biden’s term, but had been debating the best way to target these kinds of chips, which are part of opaque and complex global supply chains.
Pressure has been growing on the U.S. government to help protect companies that make more types of semiconductors, particularly because the United States and its allies are investing hundreds of billions of dollars to try to build up domestic chip production.
There are concerns that Chinese companies could put new U.S. factories out of business. China is projected to add almost half of the world’s new factory capacity for legacy chips in the next three to five years, according to U.S. government statistics.
That will most likely put downward pressure on global prices. U.S. companies in the solar, battery and electric vehicle industries have faced similar challenges, as Chinese factories flush with government subsidies pump out cheap but high-quality products. The Biden administration has responded by placing tariffs on those products.
A Nov. 21 government document reviewed by The Times showed that the Commerce Department had been briefing other agencies on China’s production of legacy chips and had proposed carrying out a national security investigation under Section 232.
The department proposed investigating the import “of all products containing P.R.C. chips” — a reference to the People’s Republic of China — not just the chips itself, since most Chinese chips come into the United States in the form of other products.
The department said the investigation could look into something called a “component tariff,” which would apply a tariff not to the whole imported product but just to the chip inside, depending on where it came from. Applying such a tariff would require gathering much more information about what kinds of chips U.S. imports contain. Such a tariff has never been attempted “at scale,” the Commerce Department said, but the investigation could give it the opportunity to assess its viability.
The Biden administration this year put tariffs on legacy chips that are direct imported into the United States from China. But analysts have said the impact of that move will be limited, since most Chinese-made chips are not directly imported into the United States. Rather, they are incorporated into dishwashers, computers, toys and other products in other factories in Asia, before being exported to American consumers.
The Commerce Department said initiating an investigation now could come with a risk that the next administration would change direction or refuse to see the process through, according to the document. But it would allow the Biden administration to set the direction of the investigation, provide a forum for chipmakers and others to make the case for action, and hopefully result in action before U.S. companies became more dependent on Chinese chips, the document said.
The measure would send a strong market signal to companies that purchase chips “that cost advantages of Chinese suppliers may be short-lived,” and it could encourage allies, like the European Union, to take more aggressive steps to counter Chinese oversupply, the document said.
Citing the results of a recent survey, the Commerce Department said Chinese suppliers were offering prices 30 to 50 percent lower for chips than those in the United States, and sometimes lower than the cost of production. That was making companies hesitant to invest in new chip factories in the United States and Europe without government subsidies of more than 40 percent of their capital costs, and leading to some chip projects being stalled or canceled, the document said.
The survey, which the Commerce Department released publicly this month, showed that Chinese chips were present in about two-thirds of electronic products made by U.S. companies, but still in very low quantities.
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