How Biden can avoid China getting its hands on sensitive military technology

13.12.2020 23:00

Fortune.com

Semiconductors enable the supercomputing needed to project military power.

What is more important: the corporate profits of a select few American companies, or the U.S.’s long-term economic security, national security, and human rights interests? President-elect Biden will soon have to decide when setting his administration’s China trade policy.

U.S. semiconductor and semiconductor manufacturing equipment (SME) makers have enjoyed robust demand from China in recent years. While that’s been good for their bottom line, it poses a threat to America’s national security. That’s because China lags behind the U.S. and is using these exports to acquire sensitive dual-use technology for its military. Semiconductors are the coin of the realm in enabling the supercomputing and artificial intelligence needed for future military advantage.

Wall Street is betting that the Biden-Harris White House will capitulate to China and SME makers. Postelection market reports have exclaimed that SME companies have “seen green since the election,” and that Lam Research, Applied Materials, and KLA—the three largest U.S. SME makers—are “the ultimate Biden stocks,” contingent on a change in the China policy. As CNBC’s Jim Cramer put it, these are “the ultimate Biden stocks…Business is going to be very good.”

That policy change refers to impeding the Trump administration’s plans to impose more rigorous export controls. Recognizing that SME “can be tied to indigenous military innovation efforts in China,” the Commerce Department has restricted sales to Chinese companies with known affiliations to the country’s Communist Party and People’s Liberation Army.

The same semiconductor technology that powers a smartphone can be used for missile guidance systems or to surveil citizens. In the wrong hands, these dual-use technologies can be weaponized against American troops and reverse-engineered to reveal vulnerabilities in our national security networks.

China’s chip-making capabilities trail leading countries’, including America’s, but it is working hard to close the gap. The Chinese government invested $200 billion in its semiconductor industry between 2014 and 2018. Its “Made in China 2025” plan commits another $120 billion and aims to achieve parity with the most advanced technology by 2030 by any means necessary—including stealing technology to build up its production abilities.

Export controls on semiconductor equipment are a chokepoint, a limiting factor for China, which relies on foreign suppliers (namely the U.S., Japan, and the Netherlands, which produce more than 90% of the world’s SME) for chip-making technology.

The Commerce Department has added over 320 Chinese companies to the Entity List, which prevents U.S. companies from selling to those named. In September, it placed restrictions on China’s largest chip maker, Semiconductor Manufacturing International Company (SMIC), citing “an unacceptable risk of diversion to a military end use.”

Even so, those controls have not been enough—and SME makers acknowledge it. “We continue to see no meaningful impact on our business,” Applied Materials’ CEO said recently. The CFO of KLA expressed the same sentiment: “We just don’t see it having a material impact.”

These companies don’t want to thwart China’s ambitions. It would be bad for their profits. China accounted for 31% of Lam Research’s sales in the last fiscal year, 29% of Applied Material’s 2019 revenue, and 25% of KLA’s 2019 sales. “China’s demand…has to be satisfied by somebody,” Lam Research’s CEO argued recently.

So, what needs to happen? First, the Commerce Department should implement tighter export controls on SME makers, including Lam Research, Applied Materials, and KLA.

Second, the department should add more Chinese companies affiliated with the People’s Liberation Army to the Entity List. Companies like Yangtze Memory Technologies Company and ChangXin Memory Technologies—who, like SMIC, have known ties to China’s military—are a good place to start.

The Trump administration appears intent on achieving those goals in its final two months. Recently, senior officials said the administration will seek to cement a series of hard-line export policies against China and installed a new post to lead the effort.

Whatever progress the Trump team makes, the Biden administration should pick up the mantle to sustain America’s competitive edge in the semiconductor market. The U.S. should not aid China’s march to develop its own advanced chip manufacturing capability. To do so would compromise our national security to make a quick buck.

James Marks, a retired major general, served more than 30 years in the U.S. Army, is an adjunct professor at Georgetown University and is a member of the Military Intelligence Hall of Fame.

Robert S. Walsh, a retired lieutenant general, completed his 35 years of service as the commanding general of the U.S. Marine Corps Combat Development Command and serves on the advisory board of Academy Securities.