China has a large and growing semiconductor industry that is active in all stages of the value chain. The United States and allies have targeted export control measures at stopping China from acquiring leading edge semiconductor technology, including by working with Japan and the Netherlands to block sales to China of the equipment needed to make these chips. With an emphasis on leading edge, the CCP is using a suite of non-market policies to double down on dominating the largely uncontrolled foundational segment (also known as “legacy” chips) of the semiconductor supply chain, which accounts for about three-quarters of global foundry capacity.

As a result of these government subsidies and other accommodations, Chinese firms are able to offer prices that are over 30 percent lower than non-Chinese competitors for some products, allowing Chinese firms to capture market share. With foundational semiconductors central to nearly all applications - including aerospace and defense - these trends portend further pricing pressure and market share losses for U.S. and allied competitors, similar to what the solar and steel sectors have experienced.

There are actions the United States and allies can take now to ensure a competitive and resilient supply chain for foundational semiconductors.