In a July 12 letter to Commerce Secretary Gina Raimondo, Congressman Michael McCaul (R-TX) and Senator Bill Hagerty (R-TN) argued that Chinese semiconductor maker Yangtze Memory Technologies Company (YMTC) should be included on the Commerce Department's Entity List, on the basis that the company has "clear ties to the Party-state and military and plays a significant role in CCP plans to control the supply chain for a strategic dual-use sector." Placing YMTC on the list would make it difficult for the company to obtain crucial inputs for its products.
As McCaul and Hagerty described it in their letter, "YMTC is the PRC’s state-owned national champion for memory chips — a type of semiconductor with defense, artificial intelligence, and aerospace applications." YMTC leadership, they said, "has extensive ties to the Party-state, including executives with previous employment at the Semiconductor Manufacturing International Corporation (the PRC’s leading national semiconductor foundry and a CCP military company) and the arm of the Ministry of Industry and Information Technology that provides C4ISR-related technology to the CCP military." They also contended that "YMTC is linked to the CCP military through its complex corporate network."
According to McCaul and Hagerty, the national security threat is as follows: "The CCP is implementing an unprecedented industrial plan to vertically control each segment of the semiconductor supply chain. Because memory chip producers in market economies complete largely on cost, irrational state subsidies and non-financial support — including forced procurement of PRC technology and theft of intellectual property — given to PRC firms such as YMTC, threaten to give the CCP a growing and potentially commanding share of global production in this dual-use technology." They see the following negative impact on the United States: "YMTC’s entry into the global semiconductor market may cause the industry to lose $101 billion in revenue by 2026. PRC industrial policies and market share targets are incentivizing YMTC to pursue a business strategy of oversupplying the market without regard to traditional economic profit drivers, which may result in YMTC’s market share going from 1 percent currently to 17 percent by 2026. Such a sharp, distortive increase in production would likely severely harm U.S. and allied country manufacturers and disrupt the ability of the U.S. government and its critical infrastructure sector to have a secure, trusted supply of memory chips." They note that: "As you have rightfully highlighted, production deficiencies in the U.S. semiconductor supply chain are 'a national security risk and an economic security risk.'"
To address this security risk, they advocate putting YMTC on the Commerce Department's Entity List. Such an action makes sense, they say, because "YMTC’s reliance on U.S. and other foreign sources of equipment and software … makes export controls … an effective option to mitigate this threat to U.S. national security, economic security, and foreign policy interests." With no Chinese firm or alternative foreign provider "capable of providing YMTC with comparable equipment and software — including high aperture etching tools, metrology and inspection tools, and cleaning systems," they argue, "a unilateral control with a foreign direct product rule would significantly hinder YMTC’s ability to implement a CCP industrial plan designed to weaken U.S. national and economic security and increase its reliance on the PRC."
This request by members of Congress for the Commerce Department to act against a specific company helps demonstrate the fine line between genuine national security concerns, on the one hand, and interest group demands for limiting competition with rivals, on the other. There are always going to be reasonable concerns related to national security about economic relationships with countries who are geopolitical rivals. At the same time, however, domestic companies sometimes have a financial interest in restricting competition from abroad.
In the case at hand, what is not mentioned in the letter is that semiconductor producer Samsung has operations in the Texas district that McCaul represents. As McCaul explained elsewhere: "I have Samsung in my district, the largest foreign investment, and that’s coming out of South Korea." Furthermore, media reports have indicated that YMTC is likely to provide tougher competition for Samsung in advanced semiconductors ("Top Chinese memory chip maker Yangtze Memory Technologies plans to double its output this year and start producing advanced chips rivaling those from Samsung and other global leaders").
The pandemic has highlighted the importance of semiconductors, as many industries have faced shortages. (McCaul has been a big supporter of federal government support for semiconductor manufacturing in the United States.) As a result, governments around the world are engaging in fights over where semiconductors are produced. "National security" is likely to be linked to these economic battles, but when that issue is raised, it's worth looking to see if there is also a company's financial interest at stake.