Last week the U.S. Department of Commerce released new regulations designed to prevent Chinese technology giant Huawei from buying U.S.-made computer chips. This action is one part of a larger effort by the Trump Administration to keep the most advanced U.S. semiconductor technology out of China. While attempting to deny technology to a competitor is a reasonable and common tactic, the path the administration has taken does come with costs, especially to the US semiconductor industry. The U.S. needs to build a strategy around these tactical decisions that offset costs and improve the chance of long-term success.

China imports more semiconductors than oil to power its economy — $312 billion worth from the US in 2018 alone — and while Chinese leaders believe that homegrown semiconductor manufacturing is central to its future economic stability and military power, that shift is likely to take years. In 2014, the Chinese government published guidelines, through the China National IC Plan (also known as the “China Big Fund”), that called for $150 billion in funding to increase the domestic capacity and sophistication of the national integrated circuit industry, the core of the information technology industry supporting the economy and national security.  As of 2018, Chinese semiconductor companies were not producing the quantity, quality, or the revenue projected.   Today, China is still years behind the leading semiconductor producers and U.S. pressure through trade and foreign direct investment controls will widen it.

In the meantime, majority of China’s semiconductor imports have come from the U.S., producing significant revenue for American companies that in turn have permitted massive research and development investments.

Since the end of the Cold War, U.S. military superiority, has been built on private sector research and development. That R&D has been funded, in turn, but global sales and equity investment.  Without market access (or government support), R&D capacity will fall significantly. When it comes to semiconductors this is particularly worrisome. Without access to the Chinese market, the US semiconductor industry risks losing 22% of its total revenue. This could have a serious impact on the ability of US firms to develop the leading-edge technologies that our military needs.

Based on its recent regulatory actions, it is unclear if the Administration understands the consequences of its policies. Hastily cutting off major market buyers from key technology sectors without an overarching strategy is breathtakingly myopic and deeply counterproductive. Without action to offset the impact on US manufacturing, the impact could be catastrophic. At the same time, a U.S. version of China’s government directed investments is likely to be politically unpalatable, viewed by many as government intervention in the market.  Policymakers must also consider a related challenge: Foreign firms might see US action as a risk to them and dump US suppliers or design U.S. semiconductors out of their supply chain.

Exporting semiconductors to China is not necessarily selling the rope, particularly in the form of exporting cell phone-level chipsets. Technology denial can and should be an important component to an overall geoeconomics strategy. However, cutting off semiconductor exports to China will hurt the target but will likewise damage the sender, particularly if it too broad spectrum. There are a few ways that US policymakers could address this threat: increased promotion of STEM curriculum (including a rational visa policy), enhanced counterintelligence to prevent intellectual property theft, and improved market incentives and guarantees to keep and grow national semiconductor expertise. The U.S. semiconductor industry is a strategic asset and technological marvel. It deserves informed and thoughtful policy.