CUTTING OFF OUR NOSE TO SPITE OUR FACE: US Policy toward Huawei and China in Key Semiconductor Industry Inputs, Capital Equipment, and Electronic Design Automation Tools

Semiconductors are core components in telecommunications, artificial intelligence computing, and many other high-tech goods. It is not surprising, accordingly, that the United States has placed semiconductors front and center in its policies designed to crush Huawei. By placing Huawei and its affiliates on the Entity List in May 2019, the American government has tried to cut Huawei off from the American semiconductor technology. On May 15, 2020, the US government doubled down on this gambit by restricting Huawei’s access to two areas of particular American strength in the semiconductor value chain: capital equipment for chip production and electronic design automation (EDA) for chip design. The US government further tightened those restrictions on August 17, 2020.

This paper has four major findings. First, over the next five years, even substantial Chinese efforts to replace American capital equipment and EDA tools with homegrown alternatives are very unlikely to succeed. Second, the severity of constraints on Huawei will depend more on the availability of international alternatives to American technology than on the availability of Chinese products. The lack of suitable legal alternatives to American EDA tools globally will severely challenge Huawei’s ability to design chips. In contrast, for chip manufacturing, alternatives to American capital equipment might be obtained within a comparatively short time, so manufacturing firms might still be able to produce Huawei’s chips relatively quickly if they choose to eschew American technology to do so. Third, these constraints will most likely knock Huawei down but will not knock it out of the telecommunications industry. Finally, the longer-term costs for American capital equipment and EDA tool vendors could loom large if foreign customers perceive American-made or -designed products as carrying significant political risk and strive to develop alternative sources.

To illuminate these points, this paper first presents a brief introduction of the evolution of the semiconductor industry’s value chain since the 1980s with an emphasis on how the reorganization of the global semiconductor industry helped to revive the American industry in the face of Japanese competition. This point provides important context for considering current calls for decoupling and deglobalization. The paper’s next section examines the EDA industry in the United States and China and Huawei’s EDA options if the export controls are fully implemented. This is followed by an examination of the fabrication capital equipment industries in the United States and China. This illuminates Huawei’s integrated circuit manufacturing options if US export controls are fully implemented. The concluding section of this paper considers whether even the most stringent implementation of the current controls actually will impact Huawei as envisioned. The conclusion recommends an alternative American approach to technological competition with China that is focused on reinforcing our semiconductor capabilities instead of trying to tear down China’s.