Silicon Triangle: The United States, Taiwan, China, And Global Semiconductor Security

>> Speaker 1: The semiconductor shortage during the Covid-19 pandemic, showed how reliant we've become on chips that enable everything from iPhones to cars to medical equipment. Thankfully, we've rebounded from supply chain shortages, but there remains a massive looming threat. The world's supply of semiconductors, is bound up inside a complex relationship between the United States, Taiwan, and China.

Three points on a silicon triangle, and right now, national security, economic prosperity, and technological competitiveness for the US and the rest of the world are directly connected to the resiliency of this triad. The United States is currently investing to become more resilient through efforts like the Chips and Science act.

But it has fallen behind the technological leading edge, and our manufacturing strength is on the wrong path. Diplomatically isolated, Taiwan produces 40% of the world's computing power each year, and finds itself with an ever stronger monopoly on the most advanced and most sought after chips across the blow.

Meanwhile, China has long been dependent on western ship technologies to fuel its economic growth, but they have rapidly increased state sponsored production, with ambitions to decouple from the United States and master the entire global supply chain. Does this give Taiwan a silicon shield to protect its way of life?

Or do we need to do more to deter the risk of aggression by China and an ensuing global economic catastrophe? Over the past 18 months, a team of two dozen economists, military strategists, industry players, and regional policy experts have been studying this complex triangle. Their Silicon Triangle report, recommends policies to strengthen domestic resilience and technological competitiveness, deepen cooperation between the United States and its partners, and avoid future dependency on China.

Critically, it shows how a winning semiconductor strategy can also promote a stronger Taiwan, and deter Xi Jinping from the use of force or economic coercion to achieve its goals. Read the report and learn more today.

>> Larry Diamond: Thank you all for coming. I am Barry Diamond, a senior fellow at the Uber institution.

We asked three questions, the first is how the US can mitigate the risks of semiconductor supply chain disruptions. That's the resilience part of what you saw in the film. And related to that, how do we become more competitive again in this global game of not only doing the research and design that we have been doing but in actually producing and maybe even assembling and testing and packaging some portion of the world semiconductor, some rate of portion in the United States.

The second question has to do with that Taiwan angle. How do we do this, in a way that preserves Taiwan's democracy and autonomy? We emphasize here and will elaborate that this should not be viewed as any kind of zero sum game. As we said in our foreign affairs article released yesterday, or as foreign affairs put it in a subtitle of our article, we're stronger together, and we believe quite passionately that there is a positive sum relationship to be built, nurtured and deepened, both between the US and Taiwan and between the US and all of our more reliable semiconductor trading partners.

And that would include as well Japan, Korea, Singapore and our European partners. And so the third question is, how can we work with those partners to respond to the new vulnerabilities in this trade that stem from China's state driven global semiconductor ambitions? And we'll have a lot more to say about that.

We have asked Senator Sullivan of Alaska to come here and be with us to help introduce this report, in part because he is such an articulate and passionate advocate for Taiwan's right to exist as a free and vigorous democracy and for American assistance in that regard. And we look forward to having him here very shortly.

Our principles, I think, follow very naturally from what I've said already. We've got to build, secure and resilient supply chains, around reliable partners. I've mentioned several soon India will be coming on stream into that grouping as well. We need to diminish and disperse the risks of supply chain disruption, which might not only come from military conflict, there's also the potential for various natural disasters that could temporarily disrupt supply.

We propose to seek realistic, onshoring of semiconductor manufacturing to the United States. We once produced 37% of all the world's semiconductors, it's now 12%. We're not going to get up to 37% again, but we can do better than 12%. And we think that the Chips and Science act of last year, has some very positive elements in jump starting our way forward.

But as I'll say, we have to think carefully about what are the most sustainable and powerful policy initiatives that will bring us back in this game. And that, of course, involves partnering closely with Taiwan and as I'll explain momentarily, running faster and more vigorously in the near term, our domestic resilience will be served if we can avoid imposing additional regulatory burdens on manufacturing.

And this is something where environmental and social goals may meet uneasily with the economic and I do underscore national security imperatives of relocating some of this production, some greater proportion of it, to the United States. There's a lot we can do in information sharing as well, and in building up our inventories, of certain types of supplies.

Again, the resilience element, and in incentivizing companies with the tax structure to build up their inventories. A key insight that I want to stress in the next slide has to do with the business environment. And here I just want to say, we want to put a, the $39 billion in subsidies in the Chips and Science Act, which we look forward to flowing into companies that will be starting up manufacturing in the United States.

It's a lot of money, but it's $1 billion less than TSMC has already. Committed just to building their semiconductor fabs in Arizona alone. And so, for the long run, we can't rely on subsidies. We've got to harness and energize american capitalism the way it has traditionally been done, by creating a more cost competitive and business friendly environment for investment in the United States.

Some of the things we can do here that we recommend, you see on this slide would be to extend the 100% tax depreciation for short lived capital assets. That includes the extremely expensive equipment that goes into the semiconductor manufacturing plants, which can be up to the half the cost of the plant, so that they can get that full tax depreciation.

Secondly, to extend the 25% chip manufacturing tax credit beyond the 2027 sunset, which is now provided for in the Chips and Science Act. And third, to restore full tax depreciation for R and D expenses for these kinds of companies, not spread over five years, but to be able to be claimed by the company in the year that they were incurred.

We have heard, we have learned from the companies that these kinds of tax policies could make a big difference in affecting the cost calculations that businesses are going through that would enable them, or better induce them to make the gigantic awesome investment bets on semiconductor manufacturing in the US that they would have to make.

Now, it's a little bit awkward for me to say this as someone who's long considered himself an environmentalist, but we also have to think about the immense delays that are being imposed on construction by the multiple layers of environmental regulatory processes that often bear down upon these regulatory plans.

If a plant is taking federal subsidies, they have to comply with the National Environmental Policy act. They have to comply with state environmental regulations, and often local ones. If you're a plant trying to build a three, four nanometer semiconductor manufacturing facility, and it's gonna take you 18 months just to get your environmental permits, you're not gonna have a leading edge plant by the time you can stand that up after all that environmental permitting.

So we just want to expedite the process and mobilize whatever resources are necessary so that these plants can get their zoning permits, their environmental permits, much more rapidly than is often kind of the usual story of doing business. We have a very strong view about the human talent dimension of this.

In the long run, we all know we need to produce more STEM talent in the United States along the K-12 trajectory and into the universities, BS, MS, PhD, and so on. In the near term, we have a shortage. How are we gonna fill it? There is a simple way, and that simple way, I'm glad that Senator Sullivan arrived at exactly the moment when I wanted to share one of the points I am most passionate about, which is granting H-1B visas for all foreign graduates of US universities who are doing advanced degrees in science, technology, engineering and math.

As the late George Shultz, Secretary of State and our longtime colleague at the Hoover Institution, said, bring the best talent from all over the world to the United States, educate them in the best universities, which are our universities, and then staple a green card to their diploma. That is a powerful way to accelerate american competitiveness in the world.

We have a lot more to say, but I'm going to call on my colleagues to help us elucidate all of this after we have heard from one of the great United States senators, one of the great friends of Taiwan, and of american competitiveness. And I think still the chairman of the International Republican Institute, Senator Dan Sullivan.

Senator, thank you so much.

>> Senator Dan Sullivan: Okay, good afternoon, everybody. We're morning, I'm just off the airplane from Alaska, so I try to get home pretty much every weekend. And normally I've kind of been doing this for a little bit of time. So I usually quit taking the red eye, but when I heard that I got an invite to say a few words at a Hoover event, I said, hey, that's worth the red eye.

So I'm dragging a little bit. But I just want to begin by thanking Larry Orville, I think Admiral Ellis is here. I am the biggest fan in the world of the Hoover institution. You guys do such great work. Now, I will acknowledge your leader is someone I have known many, many years, my boss for almost five and a half years, Condoleezza Rice.

I was a NSC director under her when she was a national security advisor. Then when she was secretary of state, I was one of her assistant secretaries. And I still consider her not only my best boss I ever, don't tell George W Bush that, but just a mentor and someone who is world class in every way.

Same with George Schultz. I mean, you look at Hoover, it's just got the all stars, in my view, of american leaders, of Americans with character, of Americans with the intellectual depth. So thank you. Thank you. Thank you. Thank you. Like I said, not many groups I would take the red eye for, but I certainly would do it anytime for Hoover.

So, I just wanted to kinda frame a few remarks myself, as Larry just did, and I have a handout for each show. I'm going to explain this in a minute, but the one thing that. And I was just at the NATO summit about four days ago where there was a good codel.

Six Us senators, three Republicans, three Democrats. But I wanted to read something. Maybe I'm kind of, since I wrote it, maybe I'm kind of too in love with it. But right when the Ukraine war happened, I put it, they're asking for statements about a year and a half ago now from members of the Armed Services Committee.

And I put out a statement that when I looked at some of Larry's writings, The Hinge of History, and some of his works on democracy and national security. What you've done with this study, to me, reflects this broader challenge that we have right now, and I think it's very relevant for our country for what you're doing.

I stated right when the russian invasion of Ukraine happened. We need to fully understand the broader implications of this invasion of Ukraine. We have entered a new era of authoritarian aggression led by Russia and China's dictators, who are increasingly isolated and dangerous, driven by historical grievances. Paranoid about their democratic neighbors, and willing to use military force and other aggressive actions to crush the citizens of such neighboring democracies.

These dangerous dictators, Vladimir Putin and Xi Jinping, are increasingly working together to achieve their aggressive goals. We must wake up to the fact that this new era of authoritarian aggression will likely be with us for decades. Most people don't wannna hear that. My view, it's true. We need to face it with strategic resolve and confidence.

The United States has extraordinary advantages relative to the dictatorships of Russia and China if we are wise enough to utilize and strengthen them. Our global network of allies, our lethal military, our world class supplies of energy and other natural resources, our dynamic high tech economy, which is what this is all about.

And most important, our democratic values and commitment to liberty. Xi Jinping and Putin's biggest weakness and vulnerability is that they fear their own people. We should remember and exploit this in the months, years, and decades ahead. So I mention that because we always talk about all instruments of American power.

This report is very focused on that. And I wanna thank you again. I had the opportunity to get through the executive summary, not the whole book, sorry. And then finally, what I just wanted to do, and I'm gonna be very quick with this. But I just wanted to kind of just briefly walk you through this handout that I gave you, and I'm gonna be quick.

But what I did about a year ago is there's a lot of talk about Taiwan, of course, and how important it is, and I think it's incredibly important. But what occurred to me, not just as a senator, some of you know, I still serve in the US Marine Corps.

I'm a senior colonel out at Marine Forces Pacific Command. And serving in the military, one thing, particularly out at INDOPACOM, where the issue of Taiwan is very front and center. But there's this notion, kind of a sense, right, you got all, in my view, America's best and brightest out there, right?

Incredible leadership, incredible young men and women dedicating their lives to issues of American security focused on Taiwan and other issues. And there's a little bit of a sense, I think, that, hey, does the rest of America know what's going on? Do they care what we're doing? Do they care what we're working on?

And there's talk about Taiwan, but does anyone understand why this matters and the history of it? So I took it upon myself to work with a bunch of different groups, particularly our intel agencies and INDOPACOM and MARFORPAC leadership, and I kinda put this together. And what I've done, I've given this speech to dozens of people and ad boards and anyone who will listen on the Senate floor.

All my colleagues in the Senate have gotten this several times. And again, the point is just a little primer in terms of education, which most of you know, and then a really, really, I would say deep dive. So you say you could do it, I obviously weeded out all the confidential info, on why Taiwan matters.

And what I did was I asked different agencies and think tanks, and the INDOPACOM command structure. Look at this question. Look at this question. What does the world look like in terms of American strategic interests in the aftermath of a successful PLA invasion of Taiwan? Now, believe it or not, there was not a lot of work done in this area.

And I think there was not a lot of work done because it's a distasteful assignment, right? You don't really wanna think about, all right, and I don't say how it happens. But you don't wanna think about, hey, the PLA launches a military invasion, we either don't do anything, America, or we get there too late, or there's a battle and we lose.

You don't wanna think about that. But we got to think about that as leaders. So what this does, this looks at, what does that world look like? Is that a good world for America's national security interests, for those of our allies? And, of course, the answer is no.

So just very quickly, I'll just kinda walk through this super fast, like I said. If you look at page four, the one thing I like to do because some people say, well, wait a minute, Dan. You got this giant behemoth Chinese Communist party very focused on Taiwan. How could we, like, really bring all our power and forces and allies to bear to prevent that eventual takeover?

Well, we have a historical analogy. It's a pretty good one, in my view. It's a period last century where America had a very similar dilemma, little enclave of democracy called West Berlin, literally in the middle of a soviet aggressive authoritarian empire. And we, as Americans, with our allies, stood strong and said, we're gonna keep this little enclave of democracy alive and thriving.

It's called Berlin. And most Americans now look back on what we did with regard to Berlin, whether Berlin airlift or, and it came very close to conflict with the Soviet Union. And I think people, regardless of party, look back on that period of American history and view it with pride.

And we stood with a small, what, 300,000 people? And the reason we did is it wasn't just 300,000 people. It was a symbol of authoritarian aggression versus a democracy that had implications for the whole world. We knew it. Americans knew it. Well, what I've been saying is Taiwan is the 21st century West Berlin, and I think we need to think about it that way.

But it's not as if we haven't thought about it before. If you look at page six here, the history of the Taiwan policy, certainly read Eisenhower's memoirs. The issue of Taiwan is weaved in and out of that dozens and dozens of pages. And then, of. Of course, there's the Taiwan Relations Act, one of the most remarkable foreign policy pieces of legislation in US history, when you think about it.

One president was Jimmy Carter saying, hey, we're gonna recognize Beijing. This is the way it was moving for a decade, bipartisan, by the way. And we're gonna kind of let the Taiwanese fend for themselves. The Senate, primarily the US Senate came back, said, no, we're nothing. No, we're not in our constitutional structure, the US Senate has a lot of power.

And I think the final number I'm trying to always, 84 senators, including a young senator named Joe Biden, by the way, voted for the Taiwan Relations act. It lists, you guys know what's in it. But it's very important, a number of us, if you look, because of this decades, we have our own personal involvement, I mentioned mine.

My first deployment as a US Marine was the Taiwan Strait, 95, 96, what's now referred to as the third Taiwan Strait Crisis. PLA aggressively moved their military up to the Taiwan Strait. They're shooting missiles over Taiwan on the eve of the first presidential election. And President Clinton to his credit, sent two carrier strike groups in a Marine amphibious ready group.

I was a young first lieutenant, infantry officer on that. We call it MUR, and that was the ship I was on. I think that ships down the fleet anymore. That's the USS Bella Wood but that was into Taiwan Strait at this. It showed American commitment and resolved 1200 US marines ready to do our country's national security duty.

And I was part of that. I'm proud of that. I later led a CODEL bipartisan, that's a picture there with that C17. That was our plane on page eight to bring the Taiwanese American Western vaccines when they were being choked off by the Chinese Communist Party, you might remember that.

But let me get to the meat of this, and I'm just keep it, gonna wrap up here. There's a whole host of reasons. You look at page 10, 11, 12, 13, 14 on why I think Taiwan matters. Because in the aftermath of a successful military invasion, there are a number of things.

A geostrategic loss in a vital area of the world, a boost to Xi Jinping's model, a likely breakout. One thing's not talked about. The Chinese are building up a huge military. If you look at page 14 in that slide, that's just cross straight overmatch. But if they successfully take Taiwan, trust me, they're going to use that military for the next country.

Authoritarians on the march, their appetite rarely diminishes after each meal. It actually normally increases. If you look at page 16, that's an unclassified slide from the Indo Pacom J2 that summarizes a lot of what's at stake in the Taiwan Strait. And one of the most important things that you're focused on, that my speech focuses on as well.

If you look at page 10 and 11, is the blow to the global economy, particularly as it relates to Hi-Tech Fabrication of chips, which are so important. State Department has put out numbers 2.5 trillion dollars that would make the impact on the global economy and the US economy and our economy of our allies with regard to the Ukraine invasion seem like nothing.

And this is why your report is so, so important. A final point I'll just make because I mention it a lot when people try to conceptualize. So we don't wanna war to Taiwan Strait. If it happens, it'll be launched by the Chinese Communist Party. It's not gonna be launched by US, I mean launched by China.

So what do we do to deter that? I like to talk about that in terms of three levels of deterrence. If you look at page 18, which is Taiwan's ability to defend itself, the porcupine strategy, which I think we haven't done enough. On the next level, which has been the critical one, the US showing up again, you look at the history, 50s,60s, 90s.

When there's been crises in the Taiwan Strait and the United States military power that's shown up and kept the waters there calm. The third level though, which I think could be the most important, is actually, and again, it relates to your report, economic, financial, energy sanctions that would be triggered by any military invasion.

Massive, not with just the United States, but with our allies. I've taken this pitch all over the world to our allies in Germany, EU, Japan, Korea, the UK. Saying, hey, if all of us work together, just say Xi Jinping, if you do this, here's the massive economic sanctions we, 70% of the global economy will put on your economy.

That's deterrence and that could keep the peace. So that's why I've been pushing for legislation. But with regard to the chips, which is what you are all focused on, I think one final thing that we have to have as part of the conversation. I think it's important to stay committed to Taiwan even if there's diversification of chip production away from the island.

And we wanna make sure that's smart, right? We should diversify bring it back home. We can't bring all of it back home, but we also can't send the message that if we do bring it all back home, or a lot of it. And we dramatically diversify, that we're not gonna do what a lot of people thought President Carter did was that we're not gonna say, ok, now it's fine.

We're gonna abandon Taiwan because a key strategic interest is lessened. And again, I think what you guys are doing with regard to this report does the deep dive on this critically important issue that I wanna commend Hoover. The team here once again for just the exceptional work you're doing on literally every topic there is, in my view.

And it's much appreciated. And that's why I was honored to be asked to say a few words at the opening of this important discussion and the launch of this very important study by Hoover. So, Larry, thank you again for the opportunity to say a few words and keep up the great work now.

 

>> Larry Diamond: Thank you, Senator Sullivan again and now I'd like to call on my colleagues to come up here. How about we begin by each of you introducing Losellus.

>> James O. Ellis Jr.: Well, I'm Jim Ellis, I'm a distinguished fellow at the Hoover Institution. I've been there about ten years, and as was hinted at by the senator, did 39 years in the United States Navy.

 

>> Orville Schell: I'm Orme Shell and I direct the center in US China relations at the Asian Society, and we're partnering with Groover on this.

>> Glenn Tiffert: I'm Glenn Tifford, I'm a distinguished research fellow at the Hoover Institution and I co-chair our project on China's global sharp power along with Larry.

 

>> Philip Wong: I'm Philip Wang, professor of Stanford Electrical Engineering. I work on semiconductors all my career. I currently serve on the Department of Commerce Industry Advisory board on microelectronics.

>> Matthew Turpin: I'm Matt Turpin, I'm a visiting fellow at the Uber Institution and also a senior advisor at Palindro Technologies.

>> Larry Diamond: Great, well, Arun, so I think we'll begin on the technology front if If we may, and ask one of the world's leading technological experts on the research and design of semiconductors, our professor of electrical engineering at Stanford, Philip Wong, to offer some perspective on the technological challenge that we're facing here, in terms of building the vision we have of a more resilient supply chain.

Could you speak to that, Philip, from the technological perspective?

>> Philip Wong: Certainly, Larry. Well, first of all, I just want to, for the audience who may not be familiar with semiconductors, some of you probably know that chips are everywhere. Anything that requires electricity requires, or a chip that behind the scene.

And so it's really foundational for everything that we do from the. If you think about advanced technologies, such as the visual intelligence or AI, quantum computing, 5G, 6G, communications, and so on, they all run on chips. So it's really foundational for everything that we wanted to do going, today and also going forward.

With that in mind, there are a lot of times we draw an analogy between chips or semiconductors with oil, like a commodity. But I would like to say that chips are not like oil, because oil is never changed. It's in the ground. Just take it up. It's been here for millions of years.

Chips, you have to constantly advance the technology in order to show its value. Take an example, nobody's gonna use a computer that's ten years old, every upgrade to another phone every three years. So chips have to be constantly reinvented, technology constantly disobeyed in order to show its value to society.

So with that in mind, a lot of discussions we have currently has been on manufacturing, bringing manufacturing to us, soil reshoring, French shoring, diversified supply chain, and so on, especially in the US we want to have chips manufacturing in here. What I like to draw an analogy is, building manufacturing sites in the US is similar to building a kitchen.

We have a kitchen, but we don't have the recipe, we don't have the ships. And having the recipe to build the chips, having the people who knows how to build the chips, is terribly important for us, not only today, but going forward as well. Because, having the people who can develop the recipe and develop those types of recipes that is manufacturable, will lead us to a place where we will be leaders in the world in terms of semiconductors.

With that in mind, the R and D part of the Chips Act is terribly important, because that will guarantee, if we don't do it right, it will guarantee that we will have these technological technical leaders, who will develop those recipes, who can be manufactured in large volume. So with that in mind, I'll just stop here, and just basically emphasizing the need for having R and D, and R and D is really a global effort.

No one country or region has all the techniques of all the people, all the knowledge required to develop the next generation of technology. So, partnering with our like-minded countries to advance technology is clearly an important part. And Taiwan, being the technology leader and Sama get up to today, has a clear role to play in our quest to become a technology leader.

 

>> Larry Diamond: Well, thank you, Philip. Senator Sullivan made clear how important Taiwan is morally, symbolically, geopolitically, strategically, in every way to the kind of world we want to live in, to the credibility of the United States, in trying to ensure that we continue to live in a free world.

A lot of our recommendations involve two things. Number one, how do we help in a practical way to secure Taiwan? I see Jim, Admiral Ellis's co-author, Jim Timby here. They've written in seminal fashion on this. And number two, how do we build a positive-sum relationship in the semiconductor cooperation area between the United States and Taiwan?

So, Admiral Ellis, maybe you could share some of our recommendations and perspective.

>> James O. Ellis Jr.: With regard to Taiwan. Well, thanks, Larry. And we've got a lot of technologists up here, I am not one of them. My specialty is aerospace and nuclear engineering, not EE. But like the senator, I've got a long-term relationship with Taiwan.

What he may or may not know, is that as a lowly one-star, I was the commander of those two battle groups that deployed off Taiwan in 1996. And as a result of that, when we visited Taiwan in August, Larry and I co-chaired a delegation that visited, I was invited to have dinner with President Tsai ing Wang, perhaps a head nod to my checkered past and my long-ago service, I don't know.

But we had a conversation over dinner, and it brought together to me the human element of Taiwan. And one of the things that the senator mentioned in his last remarks and one that I think is absolutely pivotal, as we address the issues that we're confronting, and how to make more robust and more importantly, more resilient this ecosystem, is the importance to do it in collaboration and collectively with Taiwan.

The PRC's narrative these days, the Chinese Communist Party narrative and media that they have some influence over on Taiwan, is that this is a purely transactional relationship for the United States. That once we offshore, once we bring that stuff, that capability home, once we diversify that around the world, that we're going to abandon Taiwan, the Chinese say, like we did Afghanistan and so many other places.

And so the idea that we can do this in collaboration, I think is hugely important. That's one of the things we talk about, not just collaboration with allies and partners around the world, but collaborations with Taiwan. And there are things that we can bring to that relationship that they don't currently have, just as they bring so much that we don't currently have the ability replicate in this country.

So, we think there's a real opportunity there, and we think it's important that we think of this in broader economic terms. I'm really on thin ice now, and a retired admiral talking on economics. But clearly, this has to be done in a way that supports a global ecosystem, if not de-globalized, at least reglobalized without China, that has an economic underpinning that makes sense.

We can't subsidize our way out of this challenge. We have to create an opportunity for everyone to make a profit, as I said in my nuclear engineering days, and now apply to the microchip technology. This is a business, it's not a religion. And we have to find a way to have people make money to have it benefit all of the participants and players.

And this, make sure that the profits and the margins, high or low, are evenly distributed and create that vibrant economy going forward. So, to Larry's point, we define national security much more broadly than the purely military piece, because it is that, it's economic security, there's political security in the region, and the like.

The senator has done an excellent job of detailing, why Taiwan matters. I would argue that we need to have that conversation more energetically. And more robustly with the American people as the senator has begun. So thank you, Larry.

>> Larry Diamond: Great, and I can just add that we can get into the defense details later, but on the security side, thank you again so much and enjoy our report.

We really think that there needs to be a deepening of the technological relationship between Taiwan and the United States. And one way, Philip, I think you would agree that there would be great value in bringing the leading technology companies from Taiwan, TSMC, of course, MediaTek, UMC, and so on.

As well as from Korea and Japan, into the new Semiconductor Science and Technology Center. National Semiconductor Technology center. Why would that make a difference, Philip?

>> Philip Wong: Well, yeah, pointed out chips out calls for the formation of the National Semiconductor Technology Center, NSTC. And in that research enterprise, as I mentioned earlier, this is pretty important for us to become a technological leader in semiconductors.

Why is it important to engage with Taiwan and Japan and Europe and so on? Is because we want that R&D activity to be the best in the world so that we can be technology leader. And bringing basically all star players around the world into an R&D activity is the only way that we could make progress in making and advancing technology.

So, in other words, if you have a R&D activity that have all star player, that would guarantee your success.

>> Larry Diamond: Great, let's talk a bit about the China angle. Start with you, Glenn. What's China up to in this field? How much should we fear its capacity?

>> Glenn Tiffert: So China-

 

>> Larry Diamond: And its ambitions.

>> Glenn Tiffert: China has identified semiconductors as one of a handful of technologies that it seeks to master as key to the future. Others involve, for example, hypersonics and biomedicine areas and industries that it sees that the jobs of tomorrow arriving in economic security, the industries of tomorrow deriving from, but also regime security.

Many of you are aware that China is an increasingly tight surveillance state, and much of that surveillance derives from products that rely on semiconductors. The AI and cloud technologies that China uses to surveil its population again rely on semiconductors. So China is driven by a mixture of ambition and insecurity.

The insecurity is that it sees a world closing in around it, a world largely of its own making in the last several years under Xi Jinping, which has alienated a great number of countries. And so the adoption of us export controls, our response to China's wolf warrior diplomacy and its activity in the Taiwan Strait makes China feel insecure.

Feels like it needs to derive more self sufficiency and pursue self sufficiency in semiconductors, that's a dead end. There's no country in the world that has self sufficiency in semiconductors. Semiconductors are probably the foster child for the globalized hyper specialized economy. For example, even TSMC, the world leader in semiconductor technology, relies on lithography machines from the Netherlands, chemicals from Japan, and design software from the United States.

It's just the nature of this product. So China, by alienating the world, is pursuing a dead end, but it's throwing hundreds of billions of dollars at the problem. It's wasting a tremendous amount of it, a lot of it is going up in corruption, mismanagement, projects that fail. But enough of it is sticking that China has developed some capability in this area.

The US allied response with respect to export controls that were adopted in October has probably largely cut off China's ability to leap into the advanced nodes of semiconductor technology, at least for the foreseeable future. So China's redirecting its investment towards more mature technologies, more mature nodes. And that's something we need to think about very carefully, because China, we've seen, has used whatever economic leverage it's able to obtain over other countries in really coercive ways.

Whether it's rare earths with regard to Japan, whether it's cutting off 90% of trade to Lithuania or sanctions against Australia, sanctions against Korea. So allowing China to dominate the mature node semiconductor technology would be of great concern to the United States. I think it's very much in our interests to work with other nations to ensure that doesn't happen, to work with nations that not themselves to rise up the value chain.

India, Malaysia, Mexico, Brazil. There can be a convergence of interests here between the United States and those nations in order to ensure that China's attempts to obtain leverage over all of us fail. China absolutely has the right to develop its economy, but not our expense of our jobs, our industry and our security.

 

>> Larry Diamond: Mayor, you have authored with Robert Daley a chapter that addresses this challenge of China's ambitions and the danger of them essentially gaining a controlling market position over a broad swath of legacy chips. And therefore being in a position to hold the world and the United States hostage and the essential supply of those chips.

So what do you recommend we do about it? Yes, thanks Larry.

>> Matthew Turpin: And my colleague Robert Daley at the Wilson center, and I sort of sat down and sort of did some imagining of kind of what we would expect would be the likely countermeasures and sort of counter strategy that Beijing would employ.

Given that really the broad based efforts that the United States and other countries have taken to address sort of the challenges that Beijing is posing in this sector. And I think we should keep in mind that this has been a point of competition going on quite a few years now.

It isn't as if this began last October with decisions by the Biden administration to strengthen export controls around advanced semiconductors and the tools and manufacturing processes, but that this has been going on for quite some time. And so I think what we predicted was that Beijing would follow really a number of different strategies.

One, continuing to make significant investments in the sector, but to push those investments towards more mature legacy chips to build out capacity there. We also saw that they would continue to sort of try and influence third countries to keep them from taking combined actions with the United States.

And that they would seek to paint a broader narrative of really the United States seeking to move towards autarky. And I think what we saw was that within that strategy, the likely area that would emerge is that we would see China produce or build out overcapacity and legacy chips.

Which would begin to To be dumped onto our markets and to begin to rob our current semiconductor companies, not only in the United States, but in Taiwan, in Korea, in Japan and Europe, from the revenues that they would use to continue to make advancements and drive innovation in these sectors.

And that danger of what lies in the future as overcapacity comes online of legacy chips. Those legacy chips still drive much of the value that companies get from in terms of the revenues that they make, and those revenues go back into R&D in a large amount. And as those companies lose that R&D, what we see is our colleague, Bob Atkinson at ITIF, described as an innovation drag.

But what you see is really a pulling back of the ability to continue to make investments in the cutting edge. And that's a scenario that we should be thinking about and guarding against now and thinking about preemptively, as opposed to waiting for that to materialize sometime in the future.

 

>> Larry Diamond: What does preemptive mean? Does it mean thinking about countervailing duties or?

>> Matthew Turpin: Well, you're leading the witness here but

>> Matthew Turpin: Exactly, I think one of the things that we look at is that this harmful train behavior of anti dumping certainly has recourses that we in other countries can take.

And that's thinking about what this pattern looks like, right? So we've seen this pattern play out in other industry sectors in which overcapacity to gain market share, pushes out other competitors around the world. We should be very confident that that's the kind of thing that will likely happen in this, and then we can take preemptive actions to impose what the commerce department employs, the acronym is ADC, CBD anti dumping countervailing duties.

But we can also look at those other things that look at blocking imports of these chips and encouraging the shifting of manufacturing of electronics to third countries, where we won't have this kind of challenge.

>> Larry Diamond: And finally, Orville, if you could just help us stand back and ask again why it's so important that we get this right and not fail to meet this challenge.

 

>> Orville Schell: Well, thanks all of you for coming, perhaps just a quick final thought, step back a little and try to remind ourselves of what's happened that's led us to this very discussion. And I think we all would conclude after having spent a year and a half, and it's been a wonderful exercise for us to be with policy people, engineers, admirals and generals, secretaries of defense, China people, policy people, to actually look at a problem like microchips full spectrum angle.

And I think the startling thing for me is the degree to which this problem that we are talking about is simply one aspect of the overall fact that China has now changed the terms of the game in myriad ways. This is one snarl, a particularly important one, because microchips are so fundamental in every aspect of human life now, including our defense.

So the other thing that startles me, as I've gone through this year and a half, and maybe this helps us understand a little about how we got here, the degree to which China eschews any notion of agency in this dilemma, it could mean the cause of what's happening.

And I think we would all probably conclude that what we are doing here now and what our report is seeking to address is how to respond to things that have changed on the Chinese side, engagement ended. The whole halcyon dream of globalization has ended, it's not completely separated, and we're left to deal with the question of how do we divide up?

How do we reorganize ourselves to do the fundamental things in life that have to be done? And so there are many questions that arise here on the policy side about why is China doing this? Is it in the interest of China, when they had a good thing going, called engagement with nine US presidential administrations, all supporting it, to blow it to smithereens.

And put people like us here in this room trying to figure out how to do some surgery on the global commons of microchips and so many other things as well. Now, these are things worth contemplating, I think, because it helps us understand what is the nature of what is at stake and what other elements that we once blithely assumed were in the commons now must be separated in some way.

Because it is no longer possible to imagine that the US and China are converging, and that global markets, it doesn't matter where you get things, doesn't matter, just cheaper, faster, low inventories, that was the issue just a few years ago, but no longer. I think now we can open it up to your questions and comments, so if you'd like to do that, can you please raise your hand?

Jimmy Goodrich, the Semiconductor Industry Association of the US, as we have heard with Orville.

>> Jimmy Goodrich,: Thank you, everyone, and a great report, still working through parts of it. But one question you mentioned early on is the difficult media environment in Taiwan, I was there recently as well, and you mentioned that the narrative from mainland Chinese media is creeping into Taiwan as well.

Is that somehow US efforts are hollowing out Taiwan, how can the US government, industry, etc, work to try and counter that narrative? What suggestions would you have?

>> James O. Ellis Jr.: Well, Jimmy, I think Larry was just there as well, and that's the sense he got, he has great friends there of long-standing, and it's easily detectable and discernible.

It's much more visible and much more active, and unfortunately, to some small degree, it's getting some traction. And it has the potential to even impact the elections that are coming in Taiwan, as you know, in the early part of next year, so it's a real concern. But I do believe that doing the right thing by Taiwan collaboratively and collectively, as I alluded to earlier, is important.

And specifically that includes helping them become a part of the entities that we've created, perhaps under the Chips Act, where they're now a part of this process. I once worked for a very difficult commanding officer who used to tell me, when I want your opinion, I will give it to you.

Well, that's not the situation we wanna be in with Taiwan or for that matter, any trusted allies and partners. George Shultz, our mentor at Hoover of many decades, used to say, if you want them aboard at the landing, you've gotta have them aboard at the takeoff. And so as we formulate these policies as we look to the future, let's bring collaboration in from outside, we don't give them the The golden share or the 51% of the vote.

But we need to have them participants in this and let them understand that they are involved and that they can build on what they can already discern for themselves. As you know, there are production capacity limits, like a limit function that they're reaching in Taiwan. The number of technological graduates from colleges is declining.

The number of universities is declining because they don't have enough student population. So there are some realities that they're already confronting on their own. The ability to give them an idea that not in symbolic terms, but in real terms, that this is a partnership. And that we're working with them, we're exchanging students, we're allowing them to be a part of the policy conversations can help us build that global ecosystem.

I didn't conclude with what President Tsai Ing-wen whispered in my ear that night. We had a dinner at her house, but what she wanted from the US more than anything else was commitment. Not strategic ambiguity, kind of up and lights commitment, but the reality that we really do care.

So that she can take a message to her people that this is really about you. And about the importance of Taiwan and its pivotal relationship with the United States and indeed, the symbolism that it has in the region. It's the old aphorism about the breakfast where the chicken is a participant, but the pig is committed kind of thing.

Well, Taiwan's committed to this in very real and personal terms, and we need to understand and appreciate that. And it's equally true of other partners and allies in the region as well. Because they want to know that we're not just using them, that it's not a transactional relationship, that we are gonna build a system with rising tide, that hopefully can lift all boats.

And produce that viable, economically affordable ecosystem that can, without China or without Chinese ability to exert malign influence, can proceed and support us with this critical technology that's gonna be so essential for our continued future.

>> Dean Ball: My name is Dean Ball. I'm with the Hoover institution. State and local policy, totally separate from this.

 

>> Dean Ball: But I'm just curious. We talked a little bit about trailing edge faps, and it occurs to me that the cost of having a facility like that, combined with the margins that those types of products usually sell at. Wouldn't such a facility require if it were to be built in the United States, which it seems like might be a logical idea if China's gonna dump a bunch of supply?

Do you think that's a logical idea? I think first of all. And second of all, do you think that a facility like that would require not just an initial subsidy for construction, but maybe an ongoing subsidy just on the products themselves? I'm not sure who on the panel this should be addressed to, but just curious.

 

>> Philip Wong: Well, yes, on the mature node technology, I think there are two aspects of mature node technologies we have to be clearly distinguished from a technical point of view. One is mature node technology refers to all the generations of the logic technology that is larger in size and so on and so forth.

That is, this first part is simply an older generation of the Avas node. The other part of what we would oftentimes conflate it also is that of the foundries and semiconductor manufacturers would take those older technology generations and build special, what they call specialty technologies on top of it to give them special abilities.

For example, abilities to handle higher voltages, higher power, more reliable radiation, hard. Or one example, your cell phone don't have cameras. Those cameras use mature node technologies, but those are not old technology in the sense that it is easy to make, is very difficult to make. It require a special research and development efforts to develop those special technology.

So there are two kinds of mature node technologies that we need to distinguish. Now as far as the question, going back to your question, whether it is possible to build on US soil those facilities, that would make business sense. Going back to Admiral Adams point about it is a business, not a religion.

Looking at the economics of the fabs, it is quite difficult to make those fabs in the US profitable. And that's why today you will find a lot of fabs in the US that profitably produce these technologies. And these technologies are generally found in fabs outside of the US today.

And that economic reality remains. And as Jim has mentioned earlier, you cannot continue to provide subsidy to prop up these kinds of nonprofitable business going forward.

>> Speaker 12: Thanks so much Harry Thompson with a semiconductor company actually. Questions to Matt on the anti dumping countervailing duties. So looking at the mature node technologies, China indigenous does not really have kind of indigenous trailing edge companies.

They have foundries that are decently strong, but they are not designing their chips. So I guess my question is, what's the target that you're really trying to go after? Do you want anti dumping countervailing duties on the outputs from the downstream suppliers? Because a big reason semiconductor industry sells a lot into China is not because the end demand is there and Sia has this data.

It's because the end assembly is there and a lot of technologies that's then exported. So, is the idea that you're calling for to try and force that de risking of that supply chain, pulling that out using subsidies? Or is there kind of specific manufacturers on the trailing edge that you're really saying we've got a target with that?

 

>> Matthew Turpin: Yeah, so I think looking at the way in which the commercial transactions will play out over time. So obviously there are still legacy chip fabs here in the United States. They still exist. Those are capital expenditures that have already been built. They produce products that in the United States still.

I don't know what he's sitting at now, 15,17 or 13%. So, I mean, so there is obviously still that existence here in the United States. And then of course there are a variety of places that US design companies have their chips designed and have their chips manufactured. Many of those are on Taiwan, also in South Korea and Japan.

As we see Beijing sort of move to consolidate, to move that bad manufacturing to the PRC. But pressure on those other places, the United States and our partners, that's the consolidation we would look to be able to prevent. And so obviously what we would need to begin to sink through is, what does it look like over time to make that consolidation more difficult?

And putting in place an expectation of higher cost to offset the subsidies that we likely will see them continue to impose on this is the idea of how we be able to do that.

>> Larry Diamond: Thank you very much.

>> Speaker 13: Steve Pincos with Intel Corporation, another semiconductor company. Great report, great work.

Great for what I've seen so far. As Jimmy said, It's a lot to get through, but a lot of the suggestions, particularly the tax side, seem really productive. But along those lines. And by the way, Mister Wang, I would disagree somewhat in the sense that. I think we do have an American company that has the recipe here in the United States that design capabilities, processing technology, etc.

But yes, we fell behind and are working very, very hard to get it back up and are investing now billions of dollars in new fabs in the United States, in Arizona, New Mexico, Ohio, Oregon. I think everybody knows that story by now. But in terms of, even with the incentives, the tax incentives that you've outlined, even with the Chips Act.

I think you've just hit on the point that chips in the United States, especially leading in chips, are still going to be more expensive. If you're Apple, if you're Qualcomm, you're AMD, you're an Nvidia. You didn't just go to TSMC for technological reasons. Although again, stipulate that they've gotten ahead in recent years.

The price differential was significant on the tax side are there incentives there to incentivize American chip designers to make in the United States?

>> Assuming there's still gonna be a cost differential, intel is going to have that capability. Intel is gonna have the capability with our ifs to make chips for others.

So are there incentives there that could impact the demand side there of customers tax incentives? And then secondly, a question just for the group, because it was discussed that China with potentially dumping with legacy nodes, etc, and that could affect the innovation cycle in the United States. Are we starting to see some of that already?

Is the United States doing that to itself through export controls, etc? Because we all know that that's impacting the sales, Intel, Nvidia, others, that money comes back to the United States. It's pretty public that Intel's between 15 and $20 billion a year in R and D and then the tens of billions of dollars for the fabs.

Well beyond what we even hope to get through chips, that line there are we already kind of doing it to ourselves. And that's coming from companies that are very publicly support national security aims.

>> Matthew Turpin: What's the balance there? And have we hit the sweet spot?

>> Larry Diamond: You take the second one first and then we take text.

 

>> Matthew Turpin: Yeah, I think undersecretary Estevez has made quite kind of quite clear that the administration. Has made some very definitive actions based on national security on what it is that we're going to deny to the PRC. Given the very high likelihood of very significant flows in the national security and military programs.

And that it's really almost impossible for us to control end users inside that jurisdiction. And so, yes, national security costs. And I think as we start to think through, what does this look like over time, given those costs. What are the other things that as Beijing responds to that in a competitive aspect and seeks to impose more costs on us.

What are the other kinds of things that we can be doing to counteract that? And I think that's that sort of back and forth. The reality is that unfortunately, we don't live in the world that we kind of thought we would be in of convergence. And it doesn't matter where you do manufacturing borders don't matter.

Blue capital can go everywhere. Actually, these things, geopolitical things do matter, and that's what's imposing our costs on this. And I think really what we'll likely see is a rejiggering of business models for what this looks like as this plays out over time.

>> Larry Diamond: So here's a question back to you in 60 seconds or less because we're going to get a couple more questions.

And what kind of incentives do you want to see beyond the tax incentives that we've articulated here, less onerous regulatory burdens?

>> Speaker 13: I think those are all good suggestions and some of it's coming to fruition. Some of it needs is still being debated in this congress on the tax side.

And again, not having studied it, I don't know. A lot of that goes for us, thankfully, on the fabrication side, which will bring costs down. Is there an incentive made in America incentive again for an apple, etc? I don't know if that was in there or not. I think the Hoover institution, any conservatives in the room get a little uncomfortable expanding economic policy into mandating making certain things in America.

Certainly the DoD aspect of it we're involved with, and that will do that. That is important for national security and that also can have an impact on revenue in the United States as well. So that was really more of a question because I don't know, I don't know what the right mix is that incentivizes companies to do that, extend the cost curve in every conceivable way.

 

>> Larry Diamond: And also we could potentially subsidize some of the labor that's going to go into this, particularly at the high end because labor is a big part of the cost as well. But I think if we could get all of the tax incentives that we're recommending here, that'd be pretty significant.

 

>> Speaker 14: Yeah, don't dispute that. It'd be quite significant.

>> Larry Diamond: Okay, let's go to the back corner there.

>> Dway Clark: Thank you. Dway Clark, House Foreign Affairs Committee majority question on the export control side, kind of adding on to some of the dialogue here. So we look at the October 7 rule.

We talk about how we take these major steps to take action, curtailing what we're sending to China, what they're getting. We still see them trying to work around different loopholes. We talk about expansions, different ways to strengthen it in. We hear feedback saying, hey, you're going too far.

What do we do? I guess from Congress side, how do we look and navigate on managing between national security and economic gain and such? Both are important. Both are viable in the United States. But when you look at an adversary that is not changing exactly what they're doing based upon the acts in which we're taking, I guess, what's the line in which we decide, hey, do we go further?

Do we yank back? I guess, how should we look and decide how to navigate that and all the different kind of things that our country has to offer in this area of great power competition. Thank you.

>> Glenn Tiffert: So the export controls, there are various ways to look at them, but one way that I look at them very often is they're static.

They're set to absolute thresholds, right. Whether it's nanometer size or whether it's the throughput of the chip, right? Those are hard numbers, absolute numbers. They matter now and they set a certain ceiling five years from now. If that ceiling doesn't change, it really imposes some serious constraints on what China would be able to achieve.

And so I think that over time, actually, the impact of those export controls grows because the rest of the world will gallop ahead further and further and the gap will widen. So it's just really a question of time. And then perhaps always following the data, keeping your eyes on the ball and seeing, first of all, is China's approach to the world, the United States, Taiwan, the other countries in the region, changing.

Because, as I think Orbel said, so much of this conversation is predicated on the. Collapse of trust between not just the United States, but also a whole series of other nations that are part of the semiconductor sort of ecosystem, and China. If for some reason, and we can all hope that that trust begins to get repaired over time because there are policy changes or leadership changes we can evaluate.

This is not a one and done issue, but I think that the export controls, my own personal opinion, were very well crafted and conceived and they made very defensible choices.

>> Matthew Turpin: Yeah, I think Glenn's point about a dynamic system is critical here, that there is going to be this continuous reevaluation, and of course there are going to be arguments that folks will make to take other decisions.

But I think if we sort of look at how industry should be thinking about the business models it should be putting together for the future, how do I set up and create partnerships with those who I think will have a long term viability of trust and we could actually have a stable business relationship.

If design firms are partnering with Chinese fabs, I am highly doubtful that that is going to be a long term stable business setup. We should then think about what are the long term costs of that? While of course Beijing will highly incentivize to make those short-term decisions, investors boards and c suites should be thinking about what does this look like over the long term?

Now we could certainly find ourselves in a situation where this would be a better situation, where Beijing comes back and wants to rejoin that system, and then we could reevaluate that. I think that, I'm very skeptical that that's going to happen anytime soon.

>> Orville Schell: If I could add a footnote, I see the gentleman from intel has evacuated, but let me remind him in his risk analysis of whether to stay in, get out or reinvest or whatever.

Have a good look at the Ukraine, I mean, what about the South China Sea? Never mind the Taiwan Straits, how about the Singapore islands? There are a lot of flashpoints and a lot of potential areas where we could have a military conflict which is unattended that could lead to larger things.

So I think it's really important not to imagine that we're just in this kind of rational world where we have time to make rational judgments and decide is this just, is that wrong, we modulated. We have to get ready also for some pretty unwelcome prospects. Well, I think it's a sign of something that the sirens started sending just I hope I didn't precipitate.

I.

>> Larry Diamond: Let's take this.

>> Sanders: Hello, thank you all very much, I'm Sanders Eta I'm working, at CSIS on the hidden reach program. This morning we put out a report on China's near monopoly over Gallium. I was just wondering if the panel would like to comment at all on China's export restrictions, that and future instances of coercion and the impacts on the us or Taiwanese chip industry.

 

>> Matthew Turpin: I'd be happy to, but I'd love to hear any sort of feedback like top lines of what you reveal to this report. I think you, all of us would be very interested in hearing that.

>> Sanders: Well, we were talking a lot about how China has within a very short period of time through industrial policies managed to control virtually the entire world's supply of gallium, which has very important dual use, and that potentially China could use this to coerce of potential that would undermine us national security.

 

>> Larry Diamond: Philip, you may have a different view on that on Galen.

>> Philip Wong: Well, first of all, in terms of dual use everything is fuel use these days, so the term has lost relevance in today's environment. Everything is still used, the computers that you use to play your games, that can be used for calculating missile trajectory.

So in many ways anything has to do with Samgarc do use. With regard to the export controls, I'm not terribly worried about the Gallium or Germania export controls, in fact I just see them as a sort of performative tit for Tatinous against the United States, and in fact they might actually set China back to the extent that they raise the spot prices on those metals.

 

>> Glenn Tiffert: They make it more economical for people to source supplies elsewhere, anywhere, and fortunately neither of those occupy such an important share of the global market in semiconductors they're largely used for specialty applications. We can route around those export controls fairly effectively, yes, it's an inconvenience, but I think it just exemplifies really how China has a much weaker and in the semiconductor space than the United States.

That doesn't mean that China won't, for example, retaliate against US export controls and semiconductors in some other space in which it holds a stronger hand. But these particular export controls I think are more bark than bight and of course they're just licensing, right? They haven't shut down any supplies yet.

 

>> Larry Diamond: Well, with that we're going to close, we hope we have persuaded you at least that this report is worth reading and that it can make a contribution both to our economic security and to our national security and to the security of Taiwan in the Indo Pacific region as well.

And we hope you will join us now for the reception that is going to unfold, and we invite you to help us spread the news about this report and the important issues underlying it, thank you so much for coming.

>> Glenn Tiffert: I doubt it's downloadable for those who are not in the room, and yeah, from the hoover.org web page.

>> Larry Diamond: Yeah.