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U.S. Commerce chief warns against China semiconductor investment binge

[November 03, 2016] By David Lawder

WASHINGTON (Reuters) - Massive government investment in China's semiconductor industry risks distorting the global market for integrated circuits, leading to damaging overcapacity and stifling innovation, U.S. Commerce Secretary Penny Pritzker has warned.

The comments come at a time of growing trade tension between the Asian giant and the United States over accusations of dumping, industrial overcapacity and a souring business climate for foreign firms doing business in China.

Republican presidential candidate Donald Trump has threatened to levy punitive tariffs of 45 percent on imports of Chinese goods if he is elected.

In a speech on Wednesday, Pritzker sharply criticized a $150-billion plan by the Chinese government to expand the share of Chinese-made integrated circuits in the domestic market to 70 percent by 2025, from 9 percent now.

"Let me state the obvious: this unprecedented state-driven interference would distort the market and undermine the innovation ecosystem," Pritzker said at the Center for Strategic Studies think-tank in Washington.

That level of investment would be equivalent to half of worldwide semiconductor sales last year and result in market distortions similar to those plaguing the steel, aluminum and green technology industries, Pritzker added.

"The world has seen the effects of this type of targeted, government-led interference before," she said.

"The result has been overcapacity in the global marketplace that has artificially reduced prices, cost jobs in both the United States and around the world, and caused significant damage to those industries globally," Pritzker said.

It was "imperative we take steps to prevent a similar situation from developing in the semiconductor industry," she added.

Such steps include a Commerce Department study of the global semiconductor supply chain now underway, besides engaging with China, and other governments, to persuade them to avoid policies that distort markets or spur technology transfers.

"The U.S. government will make clear to China's leaders at every opportunity that we will not accept a $150-billion industrial policy designed to appropriate this industry," Pritzker added.

Chinese Foreign Ministry spokeswoman Hua Chunying said that China advocates for all countries to provide a fair and transparent investment environment.

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U.S. Commerce Secretary Penny Pritzker speaks during an interview with Reuters in Bogota, Colombia, October 20, 2016. REUTERS/Felipe Caicedo

"We hope everyone can rationally view relevant trade and investment cooperation and work together to create a positive atmosphere," she told reporters at a regular briefing when asked about Pritzker's remarks.

China's Ministry of Commerce did respond immediately to a request for comment.

Earlier on Thursday, 12 U.S. senators urged that Zhongweng International's $2.3-billion purchase of Cleveland, Ohio-based Aleris Corp. be rejected by a national security review panel.

"In addition, we are seeing new attempts by China to acquire companies and technology based on their government’s interests – not commercial objectives. And we have witnessed attempts to restrict access to China’s domestic market," Pritzker said.

The technology industry depends on a global supply chain, open and fair trade and innovation, she said, warning against government behavior that disrupts the system and distorts markets.

"China's effort to move up the value chain should be the result of healthy competition and free and fair trade, not state-directed investments aimed at distorting global markets," Pritzker said.

"In addition, no government should require technology transfer, joint-venture, or localization as a quid pro quo for market access."

(Reporting by David Lawder; Additional reporting by Michael Martina in Beijing; Editing by Clarence Fernandez and Simon Cameron-Moore)

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