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U.S. considers cutting trade with China’s biggest semiconductor manufacturer

Pentagon says the Trump administration is weighing possible trade sanction on SMIC

Chinese Vice Premier Liu He and President Trump signed a trade agreement on Jan. 15. (Kevin Lamarque/Reuters)

The Trump administration is considering adding China’s largest semiconductor manufacturer to a trade blacklist, in another sign of heightening U.S.-China technology tensions.

The Defense Department said it is working with other agencies to determine whether the “actions” of Semiconductor Manufacturing International Corp., or SMIC, warrant adding the company to the government’s Entity List, which would block U.S. companies from selling SMIC technology without a license.

“Such an action would ensure that all exports to SMIC would undergo a more comprehensive review,” Pentagon spokeswoman Sue Gough said by email Saturday, confirming an earlier report by Reuters.

Gough declined to comment on the reasons for the review. The Pentagon in the past has warned that China’s efforts to develop corporate strength in technologies including semiconductors would be likely to benefit the People’s Liberation Army.

A report last month by SOS International, a defense contractor in Reston, Va., said that SMIC has a variety of ties to China’s defense sector, including an ongoing relationship with CETC, a state-owned developer of military electronics.

SMIC has helped CETC test new manufacturing technologies, and has used CETC technologies in its own manufacturing, according to the report, details of which were earlier reported by The Wall Street Journal.

SOS also said Chinese military researchers have disclosed in research papers using SMIC technology to manufacture chips.

SMIC officials didn’t respond immediately to a request for comment.

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The Entity List, overseen by the Commerce Department, has become a favorite Trump administration tool to crack down on China and now includes more than 300 Chinese entities.

The Trump administration has previously used it against Chinese telecom company Huawei, against entities engaged in alleged human rights violations in China’s Xinjiang region, and most recently against Chinese companies allegedly involved in building controversial islands in the South China Sea.

Founded in 2000 in Shanghai, SMIC ranks among the top five semiconductor manufacturers in the world, according to a report from the United States International Trade Commission, or USITC.

Industry experts say that SMIC’s technology lags behind that of chip manufacturers in Taiwan and the United States but that Beijing is pouring billions into the industry to help SMIC and other Chinese companies catch up.

SMIC has enjoyed generous government financial support, including low-interest loans, tax breaks and investments to help build manufacturing facilities, the Organization for Economic Cooperation and Development in Paris said in a report last year.

Western industry experts say that China’s semiconductor companies, while growing, are still reliant on some U.S. technology, including software and manufacturing equipment needed to make chips.

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SMIC started as a private company, but state ownership has steadily grown over time, to more than 45 percent of SMIC stock as of 2018, according to the OECD report.

SMIC’s shares used to trade on the New York Stock Exchange, but the company removed its stock from the NYSE last year. The shares now trade on the Shanghai and Hong Kong exchanges.

In 2018, the United States added a different Chinese chip maker, Fujian Jinhua Integrated Circuit Co., to the Entity List, saying it posed a “significant risk of becoming involved in activities that are contrary to the national security interests of the United States.”

Around the same time, the United States accused state-owned Fujian Jinhua of stealing commercial secrets from U.S. semiconductor company Micron.

A federal indictment alleged that Fujian Jinhua was part of a conspiracy to use Micron employees in Taiwan to steal sensitive data related to the design and production of what are known as DRAM chips, which are used by the defense industry. The Chinese company denied the allegations.

In blacklisting the company, the Commerce Department said Fujian Jinhua’s plans to manufacture DRAM chips threatened “the long term economic viability of U.S. suppliers of these essential components of U.S. military systems.”