USTR Initiates Section 301 Investigation into the Chinese Semiconductor Industry

Legal authority and strategic objectives

The investigation, announced on 23 December 2024, is being conducted under Section 301(b) of the Trade Act of 1974 (Section 301), which authorizes the Office of the United States Trade Representative (USTR) to address foreign acts, policies, or practices that are “unreasonable or discriminatory and burden or restrict United States commerce.” If the USTR finds China’s practices actionable, it may recommend remedies, including tariff measures, to address such burdens on U.S. trade. Notably, a 2018 Section 301 investigation under the first Trump Administration into China’s practices regarding “technology transfer, intellectual property, and innovation” led to tariffs on Chinese imports of up to 25%, most of which remain in effect. The Biden Administration raised the tariffs on approximately $18 billion of Chinese goods as part of its Four-Year Review under Section 307 of the Act. In previous investigations, companies affected by these tariffs could apply for product exclusions, although it is unclear whether such a process would be put in place if the new investigation results in similar tariffs. See our previous client alert here.

The Biden Administration has framed the Investigation as a response to China’s “non-market policies and practices” that “significantly harm competition and create dangerous supply chain dependencies,” particularly in light of semiconductors’ essential role in various industrial sectors. 

The Commerce Department and an inter-agency team have been examining potential Chinese excess capacity in the legacy semiconductor sector for some time. As part of the inquiry, Commerce’s BIS sent detailed questionnaires to U.S. producers and U.S. and 3rd country industrial users under the Defense Production Act. BIS compiled the data into a report, a public version of which was released on 6 December. Commerce found that the use of Chinese foundational chips was “pervasive,” but they “represent a limited share of the total number of chips used.” The report was part of the Biden Administration’s decision to initiate a Section 301 investigation.

Investigation scope

The Notice of Initiation (NOI) for the investigation outlines its focus on China’s “manufacturing of foundational semiconductors (also known as legacy or mature node semiconductors), including to the extent that they are incorporated as components into downstream products for critical industries like defense, automotive, medical devices, aerospace, telecommunications, and power generation and the electrical grid.” This means that the Investigation could have a substantial impact on these sectors, including tariffs on goods that contain Chinese foundational semiconductors.

Under Section 301, tariffs are not necessarily limited to the product under investigation, i.e., foundational semiconductors. Instead, products are typically selected for their political or economic sensitivity in an effort to pressure the foreign government into eliminating unfair acts. To the extent the Trump Administration’s goal is further de-coupling U.S. dependence on Chinese technology, one risk is that USTR could impose a “component tariff” on goods containing Chinese foundational semiconductors, including imported goods from U.S. companies and from other U.S. trading partners. This option reportedly was discussed as part of the Biden Administration’s inter-agency review of potential Chinese over-capacity.

The USTR will also examine whether China’s acts, policies, and practices relating to the production of silicon carbide substrates (or other wafers used in semiconductor fabrication) contribute to any “unreasonableness or discrimination or burden or restriction on U.S. commerce.”

Additionally, the investigation will also consider “the relationship between China’s practices and the development of existing or threatened non-market excess capacity or overconcentration of semiconductor production within China.” 

Basis for the investigation

In its NOI, USTR states that “evidence indicates [. . .] China apparently seeks to dominate domestic and global markets in the semiconductor industry and undertakes extensive anticompetitive and non-market means, including setting and pursuing market share targets, to achieve indigenization and self-sufficiency.” China’s practices also “appear to have and to threaten detrimental impacts on the United States and other economies, undermining the competitiveness of American industry and workers, critical U.S. supply chains, and U.S. economic security.”

Specifically, the NOI points to China’s industrial policy frameworks, including the Made in China 2025 initiative, which reportedly establishes specific numerical targets for domestic semiconductor production and capacity. The USTR identifies a range of potentially anticompetitive practices supporting these objectives, including directives from the Chinese Communist Party, activities of state-owned or state-controlled enterprises, market access restrictions, opaque regulatory practices, wage suppression, and substantial state financial support through government guidance funds. The USTR further suspects that China has engaged in forced technology transfers, cyber intrusions, and intellectual property theft to advance its position in the global semiconductor market. According to the NOI, these practices have resulted in significant overcapacity within China’s semiconductor sector, resulting in “artificially and unsustainably lower” global prices, a protected domestic market, and an increasing concentration of production capacity within China. Over the past six years, China has reportedly doubled its share of foundational logic semiconductor production capacity globally, and projections in the NOI indicate that this share could rise to approximately 50% by 2029. 

Authored by Yue-Zhen Li, Ben Kostrzewa, Warren Maruyama, Jonathan Stoel, Andrea Fraser-Reid