Plea for Tariffs on More Chinese Chips *WorldNetDaily* by Jonathan Harman and Lillian Ellis, Real Clear Wire

The People’s Republic of China (PRC) has long sought to make its geopolitical competitors dependent on it for materials needed for its national security by oversaturating the market with cheap Chinese products. Using the same strategy, the PRC is now seeking a monopoly on traditional microchips, the less advanced microchips needed for both civilian and military technology. To combat this and future threats to U.S. national security from the Chinese market, Congress should reinstate and modernize Section 421 of the Trade Act of 1974 to allow the federal government to assess and recommend to the president tariffs on specific Chinese imports.

The PRC has long dominated international markets by subsidizing strategic industries to overproduce and flood the market with cheap products. Take rare earths. Starting in the 1980s, cheap Chinese labor and production costs drove out nearly all competing rare earth mines in the United States and abroad. Chinese rare earths now account for nearly 80 percent of U.S. rare earth imports.

As China struggles to produce advanced chips made by companies like Taiwan’s TSMC, the Chinese Communist Party (CCP) hopes to eventually dominate the production of traditional low-end chips, chips used in everything from everyday household appliances to military technology.

The PRC’s “Made in China 2025” plan, created in 2015, continues to use government subsidies to finance production in strategic industries, such as traditional microchips, beyond market demand, while exporting them at much cheaper prices, in the hope that these market distortions will help achieve “the great rejuvenation of the Chinese nation.”

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With the world’s largest production capacity for traditional electronic chips, China’s plan is set to succeed. In the first quarter of 2024, China’s production of traditional electronic chips increased by 40% and is expected to account for 33% of the global market by 2027. This figure, according to US Secretary of Commerce Gina Raimondo, is expected to reach 60% in the coming years.

China’s dominance in traditional chip manufacturing poses risks to U.S. national security because it creates critical vulnerabilities in U.S. defense industry supply chains. Traditional chips, while rudimentary, are needed in everything from cars to F-35 fighter jets.

While the U.S. government has taken steps to prevent the PRC from obtaining the tools needed to produce more advanced chips through the CHIPS Act, it has not addressed the problem of China’s legacy chip production. One way the federal government can curb China’s progress in this sector is to reinstate and modernize Section 421.

Congress added Section 421 to the U.S.-China Relations Act of 2000, which normalized trade with China upon its entry into the World Trade Organization (WTO), to establish a “safeguard” against potential disruptions to U.S. producers. That safeguard, which expired in 2013, allowed the U.S. International Trade Commission (ITC) to determine whether specific imports from China posed a significant threat to U.S. domestic industry and recommend to the president that tariffs be imposed.

Section 421’s definition of “threat” is intentionally broad, stating that if a Chinese product is imported into the United States “under conditions that cause or threaten to cause a disruption of the market for domestic producers of a like or directly competitive product, the President shall … proclaim increased tariffs or other restrictions on the import.” The argument for traditional Chinese microchips easily meets these requirements.

Imposing sanctions is not without cost. In 2009, President Obama implemented Section 421 on Chinese tire imports—the only time a president has implemented Section 421 recommendations. These tariffs, while reducing Chinese tire imports by 30 percent, resulted in higher costs for American consumers as companies sourced tires from other global suppliers.

However, microchips play a crucial role in U.S. national security, and the benefits of Section 421 far outweigh the usual downsides of protectionist policies. Indeed, with China’s share of global microchip production still in its infancy, it is in the U.S. interest to decouple as soon as possible. As Liza Tobin, senior director of economics at the Special Competitive Studies Project, noted at the Global Taiwan Institute’s 2023 symposium, “We in the West have learned the hard way that maximizing efficiency should not be the sole criterion for determining our trade and investment decisions.”

In his testimony before Congress, Scott Paul, president of the Alliance for American Manufacturing, recommended reviving Section 421, saying it “would be a smart move for Congress to make.”

Support for Section 421 is bipartisan. Last December, the Special Committee on the CCP issued a joint report that recommended reinstating Section 421 given its PRC-specific safeguards, explaining that the section does not require explicit proof of an unfair trade practice. As ranking member Rep. Krishnamoorthi (D-IL) said of Section 421, “It is a trade tool that allows us to impose more rapid and targeted countermeasures against CCP market disruptions…it is time to revive and modernize Section 421.”

To ensure Section 421’s success, it would need to be paired with policies that promote domestic manufacturing. As Riley Walters, a senior fellow at the Hudson Institute, said in a July 19 email, tariffs are typically “a vicious cycle unless the root of the problem (Chinese overproduction) is addressed.” In the case of traditional microchips, Section 421 tariffs could work in tandem with the $2 billion in CHIPS to bolster domestic manufacturing of traditional microchips.

To circumvent the Section 421 tariffs, the PRC could still produce Chinese-made chips elsewhere, a problem the Biden administration had to address after implementing the CHIPS Act. To ensure the tariffs are effective, a modernized Section 421 would also need to close these potential loopholes.

While policymakers and experts should exercise caution before implementing any form of protectionist policy, a modernized Section 421 would provide a unique mechanism to secure U.S. supply chains while favoring U.S. producers. The federal government should take these steps now to prevent the United States from becoming dependent on its biggest geopolitical rival for traditional microchips and other national security products in the future.

Jonathan Harman is a summer fellow at the Global Taiwan Institute and a student at Brigham Young University. He was previously an intern at the Heritage Foundation’s National Defense Center.

Lilian Ellis is an intern at the Global Taiwan Institute. She is a recent graduate of Scripps College, where she majored in politics and Chinese. She previously worked as a campaign manager in Washington State and as an intern for The Borgen Project.

This article was originally published by RealClearDefense and made available via RealClearWire.

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