SUBSCRIBER+ EXCLUSIVE REPORTING — Even by the standards of recent Congressional warnings about China, the recent session of the House Committee on the Chinese Communist Party (CCP) about China’s advances on three fronts was downright dire.
“The CCP seeks to control the key technologies and sectors that will determine future conflicts,” said Chairman John Moolenaar, R-Mich., as he convened the June 26 session, called From High Tech to Heavy Steel: Combatting the PRC's Strategy to Dominate Semiconductors, Shipbuilding, and Drones. “In all three, America’s industrial capacity has waned while China has gained dominance or is in the process of gaining dominance over each.”
The committee is among the most powerful Washington voices on China policy, and throughout the hearing its members and witnesses argued that in a global competition for these three critical assets – drones, ships and computer chips – the U.S. is losing its competitive edge, to an adversary that aims to use all three for economic and military purposes. They made the case that Beijing’s multi-pronged efforts to extend sector domination, as in shipbuilding and drones, or to undermine Western advantages where they exist, as in computer chips, carry risks as varied as a U.S. recession to Chinese aggression against Taiwan.
To defend its industrial base and national security, Moolenaar concluded, the U.S. response must be multi-layered and firm.
“We need to install market access barriers in strategic sectors to prevent malign PRC companies from taking over our domestic economy,” he said. “We need to cut off access to the U.S. technology and capital that helps fuel PRC national champions and critical sectors. And we need to coordinate with our allies to encourage them to mirror these steps.”
None of this will be simple or easy, he acknowledged, but he added that “no one has ever been rewarded for betting against America.”
Chips: Here, there and everywhere
The committee’s star witness on computer chips was Chris Miller, Associate Professor at the Fletcher School of Law and Diplomacy and author of the best-selling book “Chip War.” The case he made was twofold: These chips are everywhere; and a prospective Chinese manufacturing boom in so-called “foundational chips” carries grave risk for the U.S.
“Toys and tractors; planes and pacemakers; coffeemakers and construction equipment; microwaves and medical devices—inside almost every device with an on-off switch is a foundational semiconductor,” Miller said. “These chips don’t require the most advanced manufacturing processes, but modern economies can’t work without them. A new car can have a thousand such chips inside, managing fuel injection, controlling windshield wipers, operating the automatic braking system, or modulating power supply from the battery.”
Miller and others stressed that the military also depends on foundational chips. “Military systems have dozens, hundreds, or thousands of foundational chips inside,” Miller said.
Foundational chips, also known as “legacy” or “mainstream” chips, are not the newest, sexiest member of the semiconductor family. Those would be the so-called “advanced logic chips” that are essential for artificial intelligence, smartphones, data centers, networking equipment, and a broad range of so-called smart “edge” devices such as automotive self-driving systems. According to the U.S. Semiconductor Industries Association, these advanced chips are produced almost exclusively in Taiwan and South Korea; the Biden administration pushed the U.S. CHIPS and Science Act, signed into law in August 2022, as a major effort to incentivize American production of these chips. The SIA estimates that the U.S. will boost its share of the advanced chips market from zero to nearly 30 percent of global supply by 2032.
China’s push is aimed less at this top end of the market (the SIA expects China to go from zero to a trivial two percent of the advanced chip market by 2032), and more at the foundational chip industry that Miller was talking about. That’s where China is putting its money and focus, and it’s why experts like Miller are worried.
“China is pouring billions of dollars into several dozen major new [foundational] chipmaking facilities, known as fabs,” Miller testified. “The implications for America’s manufacturing base are even greater, because every industry relies on foundational chips.”
He added, “China’s growing production volumes coupled with state subsidies and Beijing’s mandates to ‘buy Chinese’ make Chinese firms highly likely to win market share, both in China and—unless policy action is taken—abroad.”
China is currently the world’s largest importer of semiconductors. In 2023, according to the South China Morning Post, China imported 479.5 billion integrated circuit units – chips, that is – worth about $350 billion. Miller and others say that is changing – and likely to shift even more dramatically in the years ahead. In 2023, Bloomberg News reported, Chinese imports of machinery used to make computer chips rose by 14 percent, to almost $40 billion.
“On current trends, China will be substantially more self-sufficient in producing foundational chips in just a handful of years,” Miller said. “Without policy action, U.S. manufacturers will become meaningfully more dependent on Chinese chips. This would be a highly destabilizing dynamic.”
Other experts see global security implications in the shift.
In an April 2024 analysis, researchers at the Center for Strategic and International Studies wrote about the dangers of China's growing dominance in the so-called legacy or foundational chip sector. “Fears are accelerating about China’s potential weaponization of legacy-node chips,” CSIS researchers Emily Benson, Catharine Mouradian, and Pau Alvarez-Aragones wrote. Among the fears they cited: that China could “create a dependency and cut off supply, creating both military and broader economic vulnerabilities,” and that “Chinese chips could contain backdoors” that could transmit sensitive information to Chinese intelligence and military.
Bradley Martin, Ph.D., a senior policy researcher at RAND who studies the national security aspects of supply chain problems, told The Cipher Brief that if China expands its market dominance in lower-end chips, the risk also increases that China will make a move on Taiwan.
According to the SIA, Taiwan produces 69 percent of the most advanced logic chips, those that power AI and the most sophisticated devices, and 18 percent of all chips. China must import low-end chips to meet the needs of its huge manufacturing sector producing consumer goods for export.
The danger to Taiwan, Martin says, is an unintended consequence of U.S. sanctions that succeeded in preventing China from getting cutting-edge chip-making technology. “Put into a geopolitical perspective,” says Martin, “the vast majority of the highest-end chips, logic chips for example, are made in Taiwan…The way that China gains a decisive advantage in the semiconductor field is by absorbing Taiwan.”
In the event that Chinese leaders decide to absorb Taiwan or blockade the island so it can trade and communicate only through China, the global economy would be shaken severely, as The Cipher Brief outlined in a recent analysis.
In the shipyards, a numbers issue
When it comes to the U.S., China and shipbuilding, some basic statistics tell the story.
Scott N. Paul, president of the Alliance for American Manufacturing, a partnership of manufacturers and U.S. steelworkers union, offered a bleak contrast between American and Chinese shipbuilding capacity.
“Today, China controls over half the world’s shipbuilding and began construction on nearly 1,800 large oceangoing vessels in 2022,” Paul said. “During the same year, the United States began construction on just five such vessels…China’s shipbuilding capacity is 232 times greater than our own.”
Paul said that in addition to these huge gaps in production, an acute concern involves the absence of “surge capacity” in the U.S. He argued that unlike the WWII era, when rapid industrial conversions allowed the U.S. to “very quickly scale up battleship building,” in current circumstances “we are dangerously deficient when it comes to scaling up to meet the kind of conflict that you're talking about for any sustained amount of time.”
RAND’s Martin, who did four command tours as a U.S. Navy surface warfare captain and served in various senior positions in the Navy, takes a less pessimistic view.
“China is the world's biggest shipbuilder, and a lot of that is merchant-type shipping that their commercial shipping uses,” Martin said. “A lot of it is fairly small coastal-type of trade vessels and so on. They (the Chinese) are at a stage of economic development where it made a lot of sense for them to build that type of facility and to encourage that type of industry and so they do it.”
For those reasons, Martin argued that the U.S. shipbuilding lag is less of a worry. “I think conflating their ability to make merchant shipping with their potential challenge to the Navy, to the U.S. maritime dominance, might be misleading. They certainly can make a lot of ships. It doesn't necessarily mean they can make the most sophisticated ships that are going to be decisive in war.”
Drones - and China’s “whopping” market share
Among the triad of chips, ships and drones, drone manufacturing is perhaps the most dynamic and fast-growing – with huge implications for both the military and technology sectors.
“China currently controls a whopping 90 percent of the U.S. drone market,” Rep. Raja Krishnamoorthi, D-IL, said, referring to commercial drones and not far more sophisticated, highly classified military drones.
The House panel expressed some concern about the competitiveness of U.S. drone companies in day-to-day business applications – photographing real estate for property assessments, for example, or crop surveys for big agribusinesses, but more about the potential for China-made drones to transmit data surreptitiously to Beijing’s spy services. Molenaar raised the specter of “hundreds of thousands of spy balloon equivalents operating daily across our nation—not only jeopardizing our homeland but giving the PRC a dominant position in an industry that is already playing a key role on the frontline of modern warfare.”
Adam Bry, CEO of drone maker Skydio, accused China of using economic gamesmanship to drive foreign competitors out of the drone business.
“Over the last ten years, I’ve watched dozens of U.S. and allied drone companies go under in a market distorted by foreign subsidies,” Bry said. “The Chinese government…(pours) resources into national champions, taking aim at competitors in the U.S. and the West, tilting the playing field in China’s favor.”
But Bry also said that some of the problems U.S. manufacturers face are homegrown, involving U.S. regulations in the immigration and aerospace fields.
“We have to jump through all kinds of crazy hoops to get Ph.D.s and Master's-level folks” through immigration channels, he said. “It’s not a zero-sum game…one brilliant scientist or engineer can create 10 or a hundred or thousand other jobs by bringing good ideas to the table.”
Bry added that the U.S. lags behind other nations, including China, in permitting advanced drone applications such as “being able to fly beyond visual line of sight, which is incredibly useful for large infrastructure inspection as well as responding to emergencies and public safety.” U.S. regulations, Bry suggested, need to reflect “the next century of aviation” to promote innovation in the U.S. and enhance competitive prospects for the domestic industry.
In the near term, Bry encouraged Congress to close loopholes in tariff and other trade measures that allow China, in particular, to “get around these by going into (U.S. markets) through other countries.”
Where chips, ships and drones meet: Taiwan
Throughout the hearing, the potential for Taiwan tensions to erupt into hostilities was never far from mind. Armed conflict involving Taiwan would reverberate through multiple sectors – phones, computers, telecommunications, infrastructure, and AI applications, to name a few. All these areas, Miller predicted, “would face enormous delays, huge inflation as a result of any disruption to the chip production in Taiwan.”
Continuing and intensifying efforts already underway to diversify and create secure supply chains, he concluded, are a crucial facet of the West’s response to these potential crises.
The recent G7 summit unanimously endorsed efforts at sourcing chips from “trustworthy providers.” Western and Pacific allies, Miller said, appeared to be united in taking policies and actions that protect the manufacturing supply chains of like-minded countries.
Rep. Ritchie Torres, D-N.Y., turned the attention back to ships when he raised the near-apocalyptic vision of “ a third world war between the United States and China” – and said that “a war in the Indo-Pacific… would largely be a naval war.”
“According to the Secretary of the Navy, one Chinese shipyard has more capacity than all of our shipyards combined,” Torres said. “Are we truly the naval superpower of the world when we have no independent ship-building capacity and when ours pales in comparison to our greatest rival?”
Martin, from RAND, agreed that the House China committee was “looking at the right places,” and he warned against following up with impractical and even alarmist actions.
As for the chip and drone industries, he said he wasn’t convinced that China’s position in those markets called for concerted action such as U.S. efforts to dismantle China’s industries or bar U.S. purchases of Chinese drones.
“I worry that as we look at situations like the industries that you've mentioned and all we do is apply some sort of quantitative yardstick, I worry that we miss what's really significant and what the real vulnerability is,” he told The Cipher Brief. “And I also worry that we're rather unrealistic about…our ability to replace the industry with anything in a reasonable period. Getting too worried about the fact that China produce drones more quickly than we can — okay, so, my hair is not on fire about that. Just buy the drones.”
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