Sullivan expected to lay groundwork for Biden-Xi meeting during China trip
White House national security adviser Jake Sullivan will travel next week to China, where he will discuss key global issues and look to set up another meeting between President Biden and Chinese leader Xi Jinping.
Sullivan will be in Beijing from Tuesday through Thursday, and he will be the first national security adviser to travel to China since 2016, according to a senior Biden administration official.
The official said Sullivan will address key topics, including tensions in the South China Sea, the war in the Middle East and China providing nonlethal technology to Russia for use in its war in Ukraine.
While the U.S.-China relationship is “intensely competitive,” the meeting will seek to responsibly manage those challenges, the official added.
“We are committed to making the investments, strengthening our alliances and taking the common sense steps on tech and national security that we need to take,” the official said. “We are committed to managing this competition responsibly [and prevent it] from veering into conflict.”
Sullivan will meet with Chinese Foreign Minister Wang Yi, director of the Communist Party foreign affairs commission office, during the trip.
In previous summits, Sullivan and Wang have laid the groundwork for Biden-Xi meetings. In this upcoming trip, Sullivan will seek to get a meeting between the two leaders later this year, according to Axios.
Biden last met Xi in November in California, a high-stakes meeting that led to the leaders agreeing to warm relations.
Following that meeting, the U.S. and China reopened military-to-military communication channels and Xi pledged to crack down harder on Chinese material used to make Fentanyl, a drug that has ravaged Americans.
Both of those topics are expected to be on the agenda for Sullivan’s trip, along with the safe development of AI technology.
“The purpose of this strategic level of communication is really to get into details on … intensive policy, how we see different situations,” the senior official said. “It really is about clearing up misperceptions and avoiding this competition from gearing into conflict, more than anything else.”
Another meeting with Xi could help advance more of those goals and would also cement Biden’s foreign policy efforts as he wraps up his final months in office following his decision to not seek reelection and back Vice President Harris as the Democrats’ presidential nominee.
Still, China and the U.S. remain at odds over major issues, including Beijing’s desire to reunify with the self-governing island nation of Taiwan, by force if necessary, and Chinese claims over the South China Sea that have led to clashes with the Philippines.
Looming over the trip is a collision this week between Chinese and Filipino boats. The incident comes after Beijing and Manila reached an agreement to allow the Philippines to resupply the crew of a beached ship on a disputed reef in the South China Sea.
The dispute over Taiwan, however, remains one of the most tense subjects. Xi has told his forces to be ready by 2027, though it is not strictly viewed as a deadline for invading.
The U.S. has unofficial relations with Taipei but remains committed to supporting the island nation, and the senior administration official described the issue as a “constant process” of dialogue.
“It requires constant conversations on both sides,” the official said. “Our view is still that direct and meaningful dialogue between Taipei and Beijing is the only way to address these issues head on.”
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US hits Chinese companies with new sanctions over Russia-Ukraine war
The U.S. on Friday sanctioned a long list of Chinese and Russian companies over their support for Moscow’s war in Ukraine, as the Biden administration looks to sharpen its tools aimed at crippling Moscow’s war machine.
The sanctions list, targeting nearly 400 entities and individuals, is among the most sweeping actions taken yet against Chinese companies for their support in the war against Ukraine.
Also hit with sanctions are companies from the United Arab Emirates, Turkey, Hong Kong, Belarus, Kyrgyzstan and Kazakhstan.
The U.S. sanctions are trying to disrupt the flow of microelectronics and computer numerical control items, or machine tools, to Russia — nonlethal technology that the Biden administration has said for months China is supplying to Moscow to use in the war in Ukraine.
“We remain concerned by the magnitude of dual-use goods exports from the PRC to Russia,” the State Department said in a Friday release, using the acronym for the People’s Republic of China. “Imports from the PRC are filling critical gaps in Russia’s defense production cycle, thereby enabling it to produce weapons, ramp up defense production, and bolster its military-industrial base.”
The sanctions come as White House national security adviser Jake Sullivan will travel to Beijing next week to meet with China’s Foreign Affairs minister. The two are expected to discuss the war in Ukraine.
Secretary of State Antony Blinken has increasingly warned that Chinese support for Russia’s war is posing a major problem. The western security alliance NATO for the first time called China a “decisive enabler” of the war in Ukraine during a July summit.
The companies on the list include two major Chinese machine tool suppliers and six Chinese electronic component suppliers.
Several Chinese or Hong Kong companies were also sanctioned for their support of the Russian company Special Technology Center, which makes surveillance and reconnaissance drones, along with businesses from Russia, the UAE and Turkey.
Hong Kong, Turkey and Russian business affiliates of Russian national Maxim Marchenko, who was arrested by the FBI in September 2023 for smuggling microelectronics out of the U.S., were also targeted in the Friday sanctions package.
And the U.S. announced sanctions against Turkish, Russian and UAE companies that supply microelectronic components and targeted mostly Russian companies in the sectors of energy production, air transport, heavy machinery, diamonds and titanium, bullet-proof glass and armor and Belarusian companies and individuals supplying armored vehicle components to Russia.
Washington also imposed sanctions on three leaders of the Russian organization Movement of the First, which is funded by the government of Russia, and which the U.S. accused of militarizing and pushing pro-Russian ideals on Ukrainian children.
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US crackdown on advanced chips gives China an opening on old technology
Since 2022, the US has been hyperfocused on restricting Chinese production of high-end semiconductors. The Commerce Department has imposed stifling export controls and allocated tens of billions of dollars to incentivize advanced chip production in the US.
In response, China has forged its own policy — and it has a heavy focus on less advanced but widely used “legacy” chips. New data shows that Beijing is gaining leverage in that market quickly.
China is now on track to install three times as much chipmaking capacity this year as all other countries plan to do over the next three years combined, according to Silverado Policy Accelerator, a nonprofit think tank. The country is poised to control roughly 40% of overall legacy chip production by 2027, according to a study by the Rhodium Group.
“What China's doing in that segment of the market is what it has done in many other industries,” Sarah Stewart, CEO of Silverado, told Yahoo Finance. “They are infusing that segment of the market with ... below-market loans [and] all sorts of subsidies that are not offered by anybody else. None of that is tethered to any true demand signal.”
China's efforts have raised fears that the semiconductor industry could be at risk of following in the path of the solar and steel industries, where overcapacity in China contributed to a collapse in global prices.
Price pressures are already building. Silverado’s report shows that Chinese firms offered prices that were 20% to 30% lower than their non-Chinese competitors in 2022 and 2023. Those discounts came despite strong industry pricing, particularly in 2022, when a broad semiconductor shortage led to record sales.
While Chinese-made chips are still largely used to supply the domestic market, steep discounts have helped firms like Semiconductor Manufacturing International Corporation (SMIC), Hua Hong (1347.HK), and Nexchip (688249.SS) wrestle market share away from non-Chinese competitors including GlobalFoundries (GFS) and Samsung, according to consulting firm JW Insights.
China accounted for roughly a third of global legacy chip production last year, nearly double that of 2015, according to the Rhodium Group. It's is expected to increase that capacity to 39% by 2027.
New vs. old
Although advanced chips represent the most cutting-edge technology, their usage is contingent on a foundation built by older semiconductors.
The Commerce Department defines these legacy chips as semiconductors built on nodes that are 28 nanometers or larger. They are considered foundational because they are critical to nearly every electrical device, from smartphones to household appliances, medical equipment, and military vehicles.
For example, a smartphone uses 160 to 170 chips, but just three of those are considered advanced, according to Silverado's research. GPS, Wi-Fi, battery life, and camera controls are just a few of the functions dependent on legacy chips.
“There’s virtually no application that requires an advanced chip that can work without a foundational set of chips,” Stewart said. “They go hand in hand.”
Yet Biden officials have focused their efforts on producing advanced chips over legacy ones, largely because China lags far behind in that technology.
The Commerce Department announced a combined $3.4 billion in investments to build on US capacity to produce legacy chips, according to official data. That's one-third of the incentives that have been allotted for leading-edge semiconductors.
National security is one reason for the emphasis on denying China advanced chips. Commerce Secretary Gina Raimondo has said the administration’s export controls are intended to thwart Chinese advancements in artificial intelligence, military systems, and mass surveillance.
“Supercomputing, AI technology, AI chips in the wrong hands is as deadly as any weapon that we could provide,” Raimondo said at the Reagan National Defense Forum last year.
China ramps up manufacturing
China has sought to build out its domestic semiconductor industry for years, pouring billions of dollars into homegrown players.
The current acceleration can be traced back to 2019, when the Commerce Department placed telecommunications giant Huawei on the entity list, cutting off access to critical suppliers including Google (GOOG), Qualcomm (QCOM), and Broadcom (AVGO) overnight.
The 2022 export controls, which all but banned American companies from supplying advanced chips and cutting-edge chipmaking equipment to China, only supercharged the country's efforts.
Stewart said China capitalized on Washington’s policy by ramping up production of legacy chips with the intention of expanding the country's global market share, gaining leverage over the US, and controlling prices.
Central to the effort is China's National Integrated Circuits Industry Development Investment Fund, which has raised $52 billion to develop semiconductor fabrication and design in 10 years with a focus on older chips, according to a report by Semiconductor Industry Association and BCG. It aims to raise $40 billion more by the end of the decade.
The industry has expanded on the backs of Western companies too. China was the largest global importer of semiconductor manufacturing equipment in 2023, importing $15 billion more than its closest competitor, Taiwan, according to Silverado.
Renewed fears over legacy chips
China's increased production capacity has raised alarm bells among policymakers and industry leaders.
This month, California lawmakers signed a letter urging the Commerce Department to pause unilateral export controls, saying further controls "could send longstanding US companies into a death spiral."
Some, including Intel CEO Pat Gelsinger, have warned about the repercussions of broad export controls, saying that too many restrictions risked accelerating China’s timeline for chip production.
"If that line is too restrictive, then China has to build its own chips," he said, speaking at Computex in Taiwan.
Earlier this year, the Commerce Department launched a review of the country’s supply chains to get a better grasp on how US companies are sourcing foundational chips.
And a few months ago, the Department of Defense imposed its own procurement restrictions on government agencies, banning them from using China-sourced chips starting in 2027. The National Defense Authorization Act also banned transactions with entities that use Chinese chips in critical defense and intelligence system products.
The European Commission has also taken note, surveying companies to better understand how Chinese firms are using older chips to undermine them, according to multiple reports.
According to Reva Goujon, a director at the Rhodium Group, countering China’s semiconductor ambitions will ultimately require additional policy support and cooperation among US allies.
"The US needs to effectively create an ex-China market for chips to guarantee demand among US and trusted partners,” said Goujon. “The sustainability of the AI boom is a major variable, as is the US election. Either a Harris administration carries through that plurilateral momentum or we see further fracturing and leaky controls from a Trump 2.0 polarization of partners.”
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