Industry

U.S. Chip Industry Is Cool on Chinese Purchase Offer – The Wall Street Journal


Chips from Micron Technology and other American companies enter China from factories outside the U.S.


Photo:

kai pfaffenbach/Reuters

WASHINGTON—As U.S. officials press China to buy more than $1 trillion in American exports as part a trade deal, computer-chip makers are saying: Count us out.

U.S. semiconductor firms say they have told the Trump administration not to include them in any deal that calls for Beijing to step up purchases of American goods and services. Because U.S. production costs are so high, mandatory-purchase quotas would essentially force U.S. chip makers to open new factories in China, these companies say, potentially giving China more control over their production.

That, the companies say, would benefit their Chinese competitors and make the U.S. firms more dependent on Beijing.

“Whatever the number, the Chinese chip purchase offer is a distraction that risks deepening Chinese state influence in an environment that is otherwise market-based,” said John Neuffer, president of the Semiconductor Industry Association. “The market should determine commercial success, not government fiat.”

China has offered to buy $30 billion of U.S. chips over six years, industry officials say, which would essentially double U.S. semiconductor exports to China. That is down from a previous offer to buy $200 billion in chips over six years.

After conference calls arranged by the SIA in early March, semiconductor makers rejected the plan. For Beijing to guarantee the sales would require it to put together a kind of quota system, industry officials argued, and that mechanism could later be used to dole out contracts to Chinese firms.

Handel Jones, president of International Business Strategies Inc., a Los Gatos, Calif., chip-research firm, says a deal makes sense for the U.S. so that American companies could assure Chinese customers that they can count on uninterrupted supplies. Chinese firms now are “afraid they’ll be caught off guard by the U.S.,” because of the continuing trade battle, Mr. Jones said.

But industry officials say customer anxiety is of lesser concern to them.

“For this to be effective, it would have to represent a genuine expansion of the overall semiconductor market in China” because of stronger demand, a senior executive at a U.S. semiconductor company said. “Otherwise, it’s not sustainable and ultimately not helpful.”

U.S. Trade Representative Robert Lighthizer, Washington’s chief negotiator, “isn’t advocating for anything the industry doesn’t want,” a senior Trump administration official said.

The chip industry’s reluctance highlights the difficulty Washington has in putting together a deal that both changes Chinese industrial and technology policies and also wins applause back home.

Treasury Secretary Steven Mnuchin has said Beijing is ready to buy $1.2 trillion in additional goods and services, which other officials have said cover a six-year period—an export boost of more than 30% annually.

But trade experts say a surge of that magnitude would be extremely difficult to pull off. Since China joined the World Trade Organization in 2001 and rose to become the world’s largest trading nation, U.S. annual goods exports to China increased at least 30% in only two years. Goods exports have fallen in three years.

Along with semiconductors, U.S. officials are trying to put together a sales package that includes farm products, financial services and natural gas, among other items.

President Trump has especially promoted the benefits for farmers, lauding Chinese trade envoy Liu He for pledging to make a special purchase of five million tons of soybeans, an offer that Agriculture Secretary Sonny Perdue later said had risen to 10 million tons.

Roy Moore, an Illinois soybean farmer and chairman of the American Soybean Association, said a ramp-up in Chinese purchases would be welcome news, but given the massive soybean stockpiles in U.S. grain bins in the wake of Chinese tariffs last year, a boost in exports alone wouldn’t significantly lift prices.

Semiconductor makers say they back other parts of the administration’s China fight, especially efforts to improve protection of intellectual property and reduce government subsidies for domestic firms. As part of the trade talks, Mr. Lighthizer is pressing Beijing to reach a deal with

Micron Technology
Inc.,

which alleges that a Chinese state-owned firm and its Taiwan partner have stolen its trade secrets.

But Trump officials have also pushed chip makers to endorse the purchasing push and have gotten nowhere, industry officials say.

During talks last spring aimed at heading off U.S. tariffs, China’s National Development and Reform Commission, its planning agency, proposed to boost U.S. semiconductor purchases by $200 billion over six years.

Last year, the U.S. exported $6.7 billion of chips to China. But that vastly understates the importance of the Chinese market to U.S. firms.

Many chips from such companies as Micron and

Intel
Corp.

enter China from factories outside the U.S., including in Malaysia and elsewhere in Southeast Asia. U.S. companies sell about $80 billion of chips used in China, estimates Mr. Jones, of IBS. Other estimates put the total even higher. Overall, about 90% of the $250 billion in chips used in Chinese manufacturing are supplied by foreign firms, IBS estimates.

The U.S. semiconductor industry rebuffed the $200 billion proposal, arguing that the only way it could hit those targets was by moving factories to China.

A chip produced in the U.S., shipped to Malaysia for testing and assembly and then flown to China is counted as a Malaysian export. If the assembly work was moved to China, the export would be credited to the U.S.—without the American companies having produced any more chips—and U.S. companies would be more dependent on China.

The spring 2018 negotiations fell apart after Mr. Lighthizer convinced Mr. Trump that China’s purchase pledges weren’t worth much. In July 2018, the U.S. levied tariffs on the first $34 billion of Chinese goods—a number that has risen to $250 billion.

Last month, the Commerce Department and China’s planning agency, again looking for a big number they could promote in a trade deal, dusted off the same proposal and were rejected again by the U.S. chip industry. After that, negotiators reduced the purchase number to $30 billion over six years.

Mr. Lighthizer has come to embrace added purchases of U.S. goods by China—so long as they are part of a package that includes changes to China’s technology and industrial policies, the senior administration official said.

Write to Bob Davis at bob.davis@wsj.com

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