Oh, the irony. Look, you're either for free trade, or you're not. Or, maybe restrictions where they benefit you.

Sino semis stimulate Stateside sweating.....well, that's not really the headline, but it makes for fun word play :)

From the LA Times:

China's Chip Designs Concern U.S.

Restrictive taxes and technical standards may elicit a formal protest of trade rule violations.
By Tyler Marshall and Evelyn Iritani
Times Staff Writers

March 11, 2004

SHANGHAI -- China's drive to become a leading global supplier of semiconductors within a decade is rapidly propelling that nation up the technology ladder -- and creating new trade tensions with the United States.

U.S. high-tech industry executives contend that China has an arsenal of unfair tactics at its disposal, including complicated, China-only technical standards that are in the works and a tax they say discriminates against foreign chip makers.

At the urging of U.S. producers, the Bush administration is considering filing its first complaint against China with the World Trade Organization, arguing that the tax violates world trade rules. Nicholas Lardy, a China specialist at the Institute for International Economics in Washington, called the tax "a fairly straightforward" WTO violation having "great economic significance" to the United States.

The unbalanced trade across the Pacific has been a thorn in the bilateral relationship. Expanding imports from China contributed to a record U.S. trade deficit of $43.1 billion in January, according to data released Wednesday by the Commerce Department. Overall U.S. imports were down slightly to $132.1 billion, but exports also declined to $89.05 billion despite the weaker dollar, which makes U.S. products cheaper overseas. The U.S. trade deficit with China widened to $11.5 billion in January, a 6.6% gain.

As further evidence of the growing tensions, Secretary of State Colin L. Powell, Commerce Secretary Don Evans and U.S. Trade Representative Robert B. Zoellick took the unusual step of sending a letter this month to Chinese Vice Premiers Wu Yi and Zeng Peiyan urging Beijing to repeal a proposed encryption standard for wireless communications products set to take effect June 1. The U.S. officials said the new security standard violated world trade rules.

Industry leader Intel Corp. said Wednesday that it had warned customers that it would quit shipping its wireless chips to China in May because it could not comply with the proposed new standard. Intel spokesman Chuck Mulloy said the Santa Clara, Calif.-based company had determined that it could not find a way to comply without compromising the quality of its products.

"These are both very serious issues that need to be resolved quickly," said Patrick Powers, director of China operations for the U.S.-China Business Council, referring to the tax and wireless standard. The stakes in the dispute are high.

Link to entire story

This is my area of expertise. As a gate-oxide process engineer, I feel that this is an area where I can assist the reader. First of all, this isn't really news. It's been discussed for a long time by lackeys in the field. Including your humble author. Intel is blowing some smoke here.

Sure there is a cost involved in making things, be it autos to (something clever starting with "Z") if you aren't already making them to that standard. I should note here that as noted in the article, these are technical standards, not quality issues.

If China wants to opt for a different standard for Wi-Fi (IEEE 802.11) then it's almost their sovereign right. China's Wired Authentication and Privacy Infrastructure (WAPI) specification was created by the government with several Chinese vendors. Non-Chinese companies must partner with one of these 24 vendors to make any Wi-Fi products used in the People's Republic. The WAPI intellectual property is controlled by these vendors.

This is admittedly, a stinky way of conducting business, but all the driver's are in China's favor. I bet that some U.S. companies are going to -- at least for the near term -- see this as an opportunity, rather than a barrier. If Intel's out, and China is adopting a new standard, then there will be firms likely moving in to fill the void.

Intel is of course screaming the loudest, because while they are, by far the largest global supplier of semis, China is doing two simultaneous things that are really quite rare in the field. Not only are they increasing the 'barriers to entry cost' by opting for a different standard, they are also ramping production at an alarming rate.

For a player like Intel, the largest supplier of semis to China, these are both serious issues. Intel has had a near monopoly on PC processors for over twenty years. When everything was built around Intel's standards', well, you heard nary a word.

Anything that the U.S. does to impede the Chinese ramp-up of semiconductor manufacturing is -- in the long run -- a likely negative for the U.S.

We can still sell China highly sophisticated lithography and tooling equipment. That situation won't last forever. In the U.S. it can cost in excess of several billion dollars to build a large die(now 300mm) wafer fab. Most of that is spent in capital equipment costs -- those very expensive tools I mentioned above.

One U.S. company, Applied Materials, is the largest semiconductor equipment manufacturer in the world. So, it's not an entirely gloom and doom story by any stretch.

The scariest part for the U.S. giants in the semi industry is the fact that China is not only the fasting growing consumer of semis, but is also the fastest growing manufacturing base. Admittedly, the Chinese started from a relatively small semi manufacturing base. But then, so did everyone else.

I think the trend is clear. Instead of a disruptive technology displacing the Intels of the West, at least over the intermediate term, it's going to be downward pricing pressure that is going to be troubling.

This is a very vexing issue. The U.S. and Chinese economies are inexorably linked. We need each other to make us both strong. Semis are one of the few things we ship to China en masse. That they wish to do things 'in-house' is no shock to anyone in the industry.

I suspect that after all the blustering is over, there won't be much of an issue. Unless Bush thinks he get some traction from this issue prior to the election. Then the dynamics of what transpires are anyone's guess.

I think that we need to view this is a watershed moment in the semicon industry. The tap is open, and there isn't likely anyone to shut it off.