New U.S. Export Controls Hamper China’s Chip Plans—and Could Include a Ripple Effect
China’s need to feed its massive tech-making industry has made it the largest importer of semiconductors in the world.
And when it comes to revenue, data published by the Semiconductor Industry Association (SIA) on January 10, 2022 indicated that the country’s share of global chip sales had surpassed the chip-making hub of Taiwan—and was “closing in” on sales in Europe and Japan.
“Global chip sales from Chinese companies are on the rise, largely due to increasing U.S.-China tensions and a whole-of-nation effort to advance China’s chip sector, including government subsidies, procurement preferences, and other preferential policies,” SIA said then.
The organization also noted that “If China’s semiconductor development continues its strong momentum – maintaining 30% CAGR over the next three years – and assuming growth rates of industries in other countries stay the same, the Chinese semiconductor industry could generate $116 billion in annual revenue by 2024, capturing upwards of 17.4% of global market share.”
SIA added that such momentum would “place China behind only the United States and South Korea in global market share.”
China hasn’t been shy about touting its ambitions for technology dominance—including advanced semiconductors and the technological capabilities they enable.
“Equally startling is the number of new firms in China rushing into the semiconductor industry,” SIA said in its January post. “Nearly 15,000 Chinese firms registered as semiconductor enterprises in 2020. A large number of these new firms are fabless start-ups specializing in GPU, EDA, FPGA, AI computing, and other higher-end chip design. Many of these firms are developing advanced chips, designing and taping out devices on bleeding-edge process nodes. …”
But then came an October announcement from an agency within the U.S. Department of Commerce that is putting a major damper on China’s plans—and will likely have a ripple effect across the global supply chain.
New Chip Export Restrictions
On October 7, the Department of Commerce’s Bureau of Industry and Security (BIS) announced it was implementing “a series of targeted updates to its export controls” as part of its “ongoing efforts to protect U.S. national security and foreign policy interests.”
According to the statement, “These updates will restrict the People’s Republic of China’s (PRC’s) ability to both purchase and manufacture certain high-end chips used in military applications and build on prior policies, company-specific actions, and less public regulatory, legal, and enforcement actions taken by BIS.”
“The export controls announced in the two rules today restrict the PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors,” BIS said. “These items and capabilities are used by the PRC to produce advanced military systems including weapons of mass destruction; improve the speed and accuracy of its military decision making, planning, and logistics, as well as of its autonomous military systems; and commit human rights abuses. Finally, these rules make clear that foreign government actions that prevent BIS from making compliance determinations will impact a company’s access to U.S. technology through addition to the Entity List.”
“As I told Congress in July, my north star at BIS is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence, and security services,” said Under Secretary of Commerce for Industry and Security Alan Estevez in the statement. “The threat environment is always changing, and we are updating our policies today to make sure we’re addressing the challenges posed by the PRC while we continue our outreach and coordination with allies and partners.”
“The PRC has poured resources into developing supercomputing capabilities and seeks to become a world leader in artificial intelligence by 2030. It is using these capabilities to monitor, track, and surveil their own citizens, and fuel its military modernization,” said Assistant Secretary of Commerce for Export Administration Thea D. Rozman Kendler. “Our actions will protect U.S. national security and foreign policy interests while also sending a clear message that U.S. technological leadership is about values as well as innovation.”
“BIS’s ability to determine whether a party is in compliance with our export control rules is a core tenet of our enforcement program,” said Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod. “Where BIS is prevented by a host government from conducting our end-use checks in a timely manner, we will add parties to the Unverified List, and if the delay is extreme enough, the Entity List, to prevent the risk of diversion of any U.S. technology that could undermine our national security interests.”
The statement also noted that the Department of Commerce “briefed and consulted with close allies and partners on these controls.”
“The Department will work closely with industry as we implement all elements of the Administration’s semiconductor agenda, to include ensuring compliance with these measures,” BIS said.
Implementing Controls Related to Advanced Computing and Semiconductor Manufacturing
“BIS’s rule on advanced computing and semiconductor manufacturing addresses U.S. national security and foreign policy concerns in two key areas,” the statement said. “First, the rule imposes restrictive export controls on certain advanced computing semiconductor chips, transactions for supercomputer end-uses, and transactions involving certain entities on the Entity List. Second, the rule imposes new controls on certain semiconductor manufacturing items and on transactions for certain integrated circuit (IC) end uses.”
Specifically, the rule:
“Adds certain advanced and high-performance computing chips and computer commodities that contain such chips to the Commerce Control List (CCL);
Adds new license requirements for items destined for a supercomputer or semiconductor development or production end use in the PRC;
Expands the scope of the Export Administration Regulations (EAR) over certain foreign-produced advanced computing items and foreign produced items for supercomputer end uses;
Expands the scope of foreign-produced items subject to license requirements to twenty-eight existing entities on the Entity List that are located in the PRC;
Adds certain semiconductor manufacturing equipment and related items to the CCL;
Adds new license requirements for items destined to a semiconductor fabrication ‘facility’ in the PRC that fabricates ICs meeting specified. Licenses for facilities owned by PRC entities will face a ‘presumption of denial,’ and facilities owned by multinationals will be decided on a case-by-case basis. The relevant thresholds are as follows:
Logic chips with non-planar transistor architectures (I.e., FinFET or GAAFET) of 16nm or 14nm, or below;
DRAM memory chips of 18nm half-pitch or less;
NAND flash memory chips with 128 layers or more.
Restricts the ability of U.S. persons to support the development, or production, of ICs at certain PRC-located semiconductor fabrication ‘facilities’ without a license;
Adds new license requirements to export items to develop or produce semiconductor manufacturing equipment and related items; and
Establishes a Temporary General License (TGL) to minimize the short-term impact on the semiconductor supply chain by allowing specific, limited manufacturing activities related to items destined for use outside the PRC.”
For additional details, please see the BIS announcement.
A Likely Ripple Effect
Some experts appear a bit stunned by the scope of the new export controls—which will impact suppliers outside of China (including U.S. companies) that fall within the details of the restrictions and Americans who work for Chinese companies that are involved in making advanced chips.
“The US Department of Commerce's Bureau of Industry and Security (BIS) now requires Americans participating in advanced chip production in China to apply for permits to do so,” reported CAIXIN GLOBAL. “…As much as China companies anticipated expanded export controls, the restrictions on talent caught the industry by surprise. Years of global integration resulted in an open market for semiconductor talent. Many scientists and engineers with US citizenship or permanent residency work in the Chinese industry. Now they face what one semiconductor investor called an ‘inhuman’ choice-either giving up their US citizenship or quitting their jobs.”
But the silver lining in that cloud may be an influx of semiconductor talent for the U.S.—as global consulting firm Kearney noted.
“With new regulations forcing US citizens, green card holders, and permanent residents to choose between working at the cutting-edge of their field for Chinese companies and their citizenship/visa status in the US, there is likely to be a flood of talent returning home,” Kearney said. “This will help encourage innovation in the US—right as the US CHIPS Act has been passed. This combination of domestic funding and inflow of talent will boost US design for the foreseeable future.”
Reuters described the new measures as potentially amounting to “the biggest shift in U.S. policy toward shipping technology to China since the 1990s.”
Citing a briefing with reporters by senior government officials about the new restrictions, Reuters described the officials as saying that many of the measures aimed to prevent “foreign firms from selling advanced chips to China or supplying Chinese firms with tools to make their own advanced chips.”
Reuters also said the officials admitted that they hadn’t secured agreements from allied nations to follow suit, though such discussions were “ongoing.”
"We recognize that the unilateral controls we're putting into place will lose effectiveness over time if other countries don't join us," Reuters reported one official as saying. "And we risk harming U.S. technology leadership if foreign competitors are not subject to similar controls."
The outlet also cited Eric Sayers, a defense policy expert at the American Enterprise Institute, as saying that this new move by the Biden administration moves beyond “seeking to level the playing field” with China to “containing its advances.”
"The scope of the rule and potential impacts are quite stunning but the devil will of course be in the details of implementation," Sayers reportedly said.
Writing for Protocol, Max A. Cherney noted that China implemented a “civil-military fusion doctrine” years ago that “effectively enables the transfer of just about any tech in China to military uses.”
In that context, he quoted Mathieu Duchâtel, director of the Asia Program at the Institut Montaigne as saying, “I think the whole policy of the administration can be justified by the fact that if you sell an AI chip to any entity in China for cloud server activities and that’s the alleged end use, it can also be used elsewhere and there's no way around that problem.”
After the new restrictions were published, SIA—which “represents 99% of the U.S. semiconductor industry by revenue and nearly two-thirds of non-U.S. chip firms”—issued the following statement in response: “We are assessing the impact of the new export controls on the U.S. semiconductor industry and working with our member companies and the U.S. government to ensure compliance. We understand the goal of ensuring national security and urge the U.S. government to implement the rules in a targeted way—and in collaboration with international partners—to help level the playing field and mitigate unintended harm to U.S. innovation.”
In the following video, Chris Miller, assistant professor of international history at Tufts University's Fletcher School and author of “Chip War: The Fight for the World’s Most Critical Technology," joins Yahoo Finance Live anchor Seana Smith to discuss “Biden's restrictions on chip tech sales to China and how it could affect the country.”
China Initiates Dispute Complaint with the WTO
On December 15, China initiated a dispute complaint with the World Trade Organization (WTO) about the recent U.S. semiconductor chip measures.
“China has requested WTO dispute consultations with the United States, challenging US export control and related measures with respect to certain advanced computing semiconductor chips and manufacturing products, supercomputer items, as well as related technologies and services, destined for or otherwise related to China,” WTO said.
It also provided a summary of the complaint: “China claims that measures at issue are inconsistent with multiple provisions of the WTO's General Agreement on Tariffs and Trade 1994, the Agreement on Trade-Related Investment Measures, the Agreement on Trade-Related Intellectual Property Rights, and the General Agreement on Trade in Services.”
“The request for consultations formally initiates a dispute in the WTO,” WTO said.
“Consultations give the parties an opportunity to discuss the matter and to find a satisfactory solution without proceeding further with litigation. After 60 days, if consultations have failed to resolve the dispute, the complainant may request adjudication by a panel.”
Updates to the Entity List
On December 16, BIS added 36 entities to the Entity List “which applies stringent license requirements that will severely restrict these entities’ access to commodities, software, and technologies subject to the Export Administration Regulations (EAR). These entities are primarily located in the People’s Republic of China (PRC) with one entity, which is a subsidiary to a PRC entity being added in this rule, located in Japan.”
In addition to adding 9 “Russian parties” to the Entity List from the Unverified List (UVL) “due to the inability to complete End-Use Checks (EUCs),” it also removed 25 “Chinese parties” from the UVL due to “satisfactory completion” of EUCs and “verification of those entities’ bona fides in cooperation with the PRC government.”
“Today we are building on the actions we took in October to protect U.S. national security by severely restricting the PRC’s ability to leverage artificial intelligence, advanced computing, and other powerful, commercially available technologies for military modernization and human rights abuses,” said Under Secretary of Commerce for Industry and Security Alan Estevez in a statement. “This work will continue, as will our efforts to detect and disrupt Russia’s efforts to obtain necessary items and technologies and other items for its brutal war against Ukraine, including from Iran.”
“Our new end-use check policy requiring the timely completion of end-use checks by host governments to avoid placement on our Unverified and Entity Lists is yielding results,” said Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod. “When a host government facilitates a check that results in our ability to confirm a company’s bona fides, the company comes off the Unverified List, as demonstrated by today’s 25 removals of Chinese companies from our restricted party lists. But when a host government persists in preventing a check, there are real consequences, as demonstrated by today’s addition of 9 Russian parties to the Entity List.”
Please see the announcement for further details.