The U.S. on Wednesday blocked the Chinese government’s attempt to buy Lattice Semiconductor Corp. , a manufacturer of advanced computer chips with military applications. Beijing’s American proxy, Canyon Bridge Capital Partners, refused to withdraw its bid even after the Committee on Foreign Investment in the United States, or Cfius, ruled against the deal.
Beijing wants to use the case as an example of Trump Administration protectionism, but that would be a mistake. The decision on Lattice is warranted, and evidence suggests tighter restrictions are needed on the sale of technology to China.
First the big picture. In January the Obama Administration issued a useful report on China’s plan to dominate the global semiconductor industry. The effort relies in part on forcing foreign chip makers to move operations to China or transfer technology to joint-venture partners in return for access to the Chinese market.
Last month the Trump Administration opened an investigation of this abuse of international trade law under Section 301 of the Trade Act of 1974, which allows the U.S. to retaliate unilaterally. The World Trade Organization would be a better venue for this dispute, but there is no doubt that Beijing is extorting U.S. intellectual property. China also obtains trade secrets through computer hacking and old-school spying. An FBI survey in 2015 found that China was responsible for 95% of economic-espionage cases, with its caseload growing 56% in a year.
Cfius oversees a third avenue by which Beijing seeks semiconductor technology: buying U.S. firms. Though it is only empowered to restrict deals on national-security grounds, the number of cases is increasing. In December the Obama Administration blocked a Chinese fund’s purchase of Aixtron SE , a German semiconductor-equipment supplier with assets in the U.S. State-owned Tsinghua Unigroup’s bid for U.S. memory-chip maker Micron Technology Inc. foundered in 2015 on doubts over Cfius clearance.
Lattice’s technology has been in Beijing’s cross-hairs for years. In 2004 the company paid a $560,000 civil fine for illegal exports to China, and in 2012 the FBI caught two Chinese nationals trying to smuggle Lattice chips. Tsinghua Unigroup bought a minority stake in Lattice last year before the Canyon Bridge bid. The American private-equity firm did not initially disclose that the investors in its fund were Chinese government entities.
Beijing wants Lattice’s field programmable gate array technology that goes into chips used in missile guidance and radar systems. The U.S. military has bought chips from the firm, and 22 Members of Congress warned Cfius in December that a Lattice sale could give China critical military technology.
This week’s rejection of the Lattice deal shows Cfius working as intended. But the scale of China’s efforts to acquire sensitive technology, as well as its military ambitions, suggests more scrutiny is needed. A recent Pentagon report warned that Chinese companies have invested in sensitive technology in the U.S. in ways designed to dodge Cfius oversight. For instance, Chinese firms have invested in startups that have conducted research with Pentagon grants.
Rep. Robert Pittenger (R., N.C.) and Senate Majority Whip John Cornyn (R., Texas) are drafting legislation to overhaul Cfius, and Treasury Secretary Steven Mnuchin has backed their idea to require added scrutiny of deals involving sensitive countries including China. Joint ventures and technology licensing could also be added to the Cfius purview.
The risk is that Cfius, which is secretive by necessity, will be abused for protectionist ends. The classic case is Senate Minority Leader Chuck Schumer’s partisan demagoguery in 2006 over Dubai Ports World buying some U.S. ports. The U.S. benefits from Chinese investment in nonsensitive areas, and Cfius revisions should not define national security too broadly.
But the scope and stealth of China’s industrial policy and IP theft require special attention. Beijing should consider the Lattice rejection a warning that predatory behavior will have political consequences.https://www.wsj.com/articles/the-lattice-warning-to-china-1505431750
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