“China is showing both a penchant for dominating chokepoints in critical industrial supply chains and for weaponising them,” said Mihir Torsekar, CPA’s Senior Economist. “They have done it with rare earth elements and magnets, and now with semiconductors.”
The chips-for-rare earths deal already has some cracks in it. Beijing said this week that they would expedite sales of these special metals to the U.S., and Europe, but only for civilian use items. Boeing contractors are not going to get them to make parts for Eagle II F-15 fighter jets. In China’s view, the U.S. is doing the same with advanced chips in restricting sales to defense contractors there.
These tit-for-tat disputes hamper Washington trade negotiators because we are still in the early innings in writing the rules needed to reshore supply chains. Now is not the time to change the starting lineup, pull the starting pitcher, and revise the strategy. Instead, it’s time to double down on what got President Trump re-elected: a promise to create complete U.S. independence in critical sectors.
EU Trade Commissioner Maros Sefcovic said China agreed to “the further simplification of export procedures for Nexperia chips” for consumer goods. He added that discussions between Dutch and Chinese officials continue “as we work towards a lasting stable predictable framework that ensures the full restoration of semiconductor flows.”
The EU has its own CHIPS Act, but it is slower moving by comparison, and stuck in bureaucracy. In the meantime, judging by Sefcovic’s comments, the EU is beholden to China.
Washington should look at Nexperia as yet another “lesson learned” moment.
During COVID, the U.S. auto industry was forced to furlough workers not because people were sick, but because of lockdowns in Asia that resulted in supply chain bottlenecks from Taiwanese and Chinese ports.
The Netherlands’ concern about Wingtech closing Nexperia one day, and moving to China the next, was never addressed by the Chinese to turn down the volume. If so, The Netherlands has nothing to replace it without bold, immediate action. The U.S. would be wise not to put itself in a similar position.
“Most of the world’s advanced semiconductors are manufactured in Taiwan, which Beijing has repeatedly threatened to invade,” added Torsekar. “If China ever acted on that threat, we would lose access to the technological lifeblood of our economy and military overnight. That is an intolerable risk for a superpower.”
Why Do Western Governments Keep Folding to China? Nexperia Serves Up Another Example.
Imagine if Boeing could not finish building a few 757s in Renton, Washington because the UK said it would no longer sell us a Rolls Royce engine. For the UK to withhold a key export to the U.S. would signal a major escalation in the relationship. But this stuff happens all the time with China, and increasingly so. Yet, companies and governments continue to fold to China. Why? Because for many items China is the only game in town. This gives China a slight upper hand in trade negotiations. We saw it yet again in the “chips for rare earths” deal Trump signed with Xi Jinping during his recent South Korea trip.
The Netherlands is the latest example of a country succumbing to China’s leadership position in critical supply chains.
On Sept. 30, The Netherlands invoked their Goods Availability Act for a subsidiary of a Chinese chip maker called Nexperia. They removed the CEO and replaced him with a state administrator. The government says it acted because the semiconductor products and capabilities of Nexperia were “crucial” to Dutch/European economic and security interests and they were apparently worried that China would close that factory down and move to China. So the government did what was allowed by law to “take control” of the company even though Nexperia’s China parent, Wingtech, still had legal rights to the company—they just couldn’t manage the company.
The problem was that the semiconductor products Nexperia was making then got exported to China to be turned into finished goods. The Netherlands plant handled front-end wafer fabrication—the early stages of semiconductor production. The back-end (packaging, assembly, testing) and much of the high-volume output happened in Dongguan, China. They made things like transistors that power cell phones, computers, and EVs. Wingtech stopped exporting to The Netherlands on Oct. 6. Two weeks later, German and French auto makers started complaining. No one in the EU or anywhere else could deliver these items? Apparently not. And so on Monday, Nov. 10, The Netherlands suspended its takeover of Nexperia in exchange for chips.
Weak manufacturing output, and Asia-centric supply chains in the West, make it easier for China to exact concessions against countries that go against Beijing’s interest. If the U.S. wants to avoid being stuck in the same boat, it needs more than the ‘CHIPS Act’ to entice companies to build a deeper supply chain here.
One Way Forward: Protecting and Expanding Domestic Chip Production
The U.S. produces only 10% of the world’s chips. This number includes the most advanced chips, too. We may invent them, but they are contracted out and made in Asia.
China has captured the majority of global capacity for legacy chips, the mature semiconductors essential to cars, medical devices, and industrial equipment.
As a result, and as The Netherlands reminds us, the U.S. is dependent on foreign supply chains for this critical technology.
CPA released a report last month titled “The Urgent Fight to Reclaim Industrial Independence Before It’s Too Late,” suggesting an actual deficit in semiconductors. Our trade data fails to count the chips imported indirectly inside finished products like laptops. When those hidden chip imports are included, U.S. import dependence likely rises from 69% to 83%, underscoring how deeply America’s chip demand is met through imports.
The Trump administration is expected to announce the results of its Section 232 investigation into chips this month, as well as its broader Chip-for-Chip tariff strategy.
“China is showing both a penchant for dominating chokepoints in critical industrial supply chains and for weaponising them,” said Mihir Torsekar, CPA’s Senior Economist. “They have done it with rare earth elements and magnets, and now with semiconductors.”
The chips-for-rare earths deal already has some cracks in it. Beijing said this week that they would expedite sales of these special metals to the U.S., and Europe, but only for civilian use items. Boeing contractors are not going to get them to make parts for Eagle II F-15 fighter jets. In China’s view, the U.S. is doing the same with advanced chips in restricting sales to defense contractors there.
These tit-for-tat disputes hamper Washington trade negotiators because we are still in the early innings in writing the rules needed to reshore supply chains. Now is not the time to change the starting lineup, pull the starting pitcher, and revise the strategy. Instead, it’s time to double down on what got President Trump re-elected: a promise to create complete U.S. independence in critical sectors.
EU Trade Commissioner Maros Sefcovic said China agreed to “the further simplification of export procedures for Nexperia chips” for consumer goods. He added that discussions between Dutch and Chinese officials continue “as we work towards a lasting stable predictable framework that ensures the full restoration of semiconductor flows.”
The EU has its own CHIPS Act, but it is slower moving by comparison, and stuck in bureaucracy. In the meantime, judging by Sefcovic’s comments, the EU is beholden to China.
Washington should look at Nexperia as yet another “lesson learned” moment.
During COVID, the U.S. auto industry was forced to furlough workers not because people were sick, but because of lockdowns in Asia that resulted in supply chain bottlenecks from Taiwanese and Chinese ports.
The Netherlands’ concern about Wingtech closing Nexperia one day, and moving to China the next, was never addressed by the Chinese to turn down the volume. If so, The Netherlands has nothing to replace it without bold, immediate action. The U.S. would be wise not to put itself in a similar position.
“Most of the world’s advanced semiconductors are manufactured in Taiwan, which Beijing has repeatedly threatened to invade,” added Torsekar. “If China ever acted on that threat, we would lose access to the technological lifeblood of our economy and military overnight. That is an intolerable risk for a superpower.”
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