With sweeping chip export rules, U.S. moves to choke off China’s tech rise

By imposing sweeping restrictions on semiconductor exports to Beijing, Washington has brought the hammer down on Chinese leader Xi Jinping’s ambition to transform his country into a technological powerhouse.

The unprecedented controls, intended to prevent China from getting and producing leading-edge chips, may have far-reaching implications as Washington seeks to slow Beijing’s technological and military rise and weighs imposing even more onerous restrictions.

Referred to by some as one of the most consequential U.S. policy decisions since the end of the Cold War, the latest round of U.S. semiconductor export restrictions on China is by far the most punitive yet.

Announced in early October by the U.S. Department of Commerce, the new measures require vendors to obtain an export license to sell to China cutting-edge semiconductors, components, chip-design software and manufacturing equipment made with U.S. technology.

They also bar U.S. citizens and entities from working with Chinese chipmakers without explicit approval. The new controls are also extraterritorial, meaning they extend to items produced outside the U.S. but using American inputs, including design, a mechanism meant to compel foreign firms to abide by American export control policy.

Citing U.S. national security and foreign policy interests, the Department of Commerce said the new rules are meant to restrict Beijing’s ability to “both purchase and manufacture certain high-end chips used in military applications.”

U.S. officials have justified the move by saying these items and capabilities are being used by China to produce advanced military systems, enhance its defense capabilities and commit human rights abuses.

Emily Benson, an international trade expert at the Washington-based Center for Strategic and International Studies, said the decision is a direct reaction to China’s civil-military fusion policy, which promotes dual-use technology, as Washington casts doubt on the ability to separate between Chinese civil and military end-users.

It is important to note that, although far-reaching, the new rules do not amount to a total chip embargo, as Beijing may continue importing less-advanced semiconductors for use in items such as TVs or cars that do not have applications in supercomputing or advanced artificial intelligence capabilities.

Creating chokepoints

Given that high-end semiconductors are also used in civilian applications, the recently imposed controls are expected to affect sectors of the Chinese economy with no direct ties to the country’s military.

This has prompted experts to say that the broader aim of the administration of U.S. President Joe Biden is to curb China’s development and deployment of applications requiring AI or high-performance computing while ensuring U.S. and Western leadership in this vital sector.

“Washington has signaled that keeping a strategic competitor a generation or two behind in terms of technological capabilities is no longer a viable strategy and that it must shift from a policy of ‘delaying’ to one of ‘degrading’ a competitor’s capabilities,” Benson said. “We are currently experiencing that shift.”

Gregory Allen, director of the AI Governance Project at CSIS, said Washington is “firmly focused” on retaining control over “chokepoint technologies” in the global semiconductor supply chain, including AI chip designs and electronic design automation software.

“These actions demonstrate an unprecedented degree of U.S. government intervention to not only preserve chokepoint control but also begin a new U.S. policy of actively strangling large segments of the Chinese technology industry — strangling with an intent to kill,” he wrote.

The new restrictions will, among other consequences, “hinder Chinese progress in e-commerce, autonomous vehicles, cybersecurity, medical imaging, drug discovery, climate modeling, and much else,” said Jon Bateman from the Carnegie Endowment for International Peace.

Beijing’s chip dependence

“China’s own semiconductor sector is incapable of producing the leading-edge chips used in AI applications” Bateman wrote, adding that Washington aims to keep things that way. “Its controls will block Chinese purchases of even years-old chip-making equipment and prevent American personnel from providing support or know-how.”

According to the U.S. Semiconductor Industry Association, the United States has 46% of the world’s market share in semiconductors — compared to China’s 7% — as U.S. firms have maintained their competitive edge in microprocessors and other leading-edge devices over the years.

This means that while China can produce several types of computer chips, including many of the less sophisticated ones, it depends on U.S-based companies and U.S. allies for the cutting-edge chips that power smartphones, supercomputers and AI-based systems.

“China’s chip dependence allows the United States and its allies to cut off the supply of chips to Chinese state or private actors that threaten human rights or international security,” the Center for Security and Emerging Technology said in an analysis earlier this year.

Beijing has been spending tens of billions of dollars annually to subsidize its chip industry to try and catch up, while Chinese government-linked or government-controlled investment funds have purchased foreign chip firms.

But while China's chip industry is growing fast, it is still focused mostly on what the industry calls "lagging-edge" technologies — that is, chips that were pioneered a long time ago, said Chris Miller, an associate professor of International History at Tufts University.

How will Beijing react?

There are differing views on how China might react to the export curbs. The Foreign Ministry has accused Washington of seeking to “maintain its sci-tech hegemony” and of “dealing a blow” to global supply chains at a time when the world is already experiencing a chip shortage.

Beijing, however, has yet to announce any retaliatory measures.

Professor Johanna Weaver, director of the Tech Policy Design Center at Australian National University, believes China, which controls about 80% of the global supply chain for the rare earth elements that are critical to most high-tech components, could retaliate by interrupting the supply of these elements.

However, the authors of a report by the Rhodium Group argue that Beijing actually has few retaliatory options, as restrictions on critical inputs like rare earths would only accelerate diversification efforts and hurt exports at a time when China’s economy is already struggling.

Still, American firms in China could be targeted as Beijing intensifies efforts to replace U.S. inputs. China could also use anti-monopoly tools to disrupt cross-border mergers and acquisitions in strategic tech areas.

Whether China retaliates or not, Beijing understands the importance of semiconductors for the country’s technological rise and its goal of achieving “great self-reliance and strength in science and technology” within five years, as Xi said during the recent party congress.

As a result, the Communist Party is likely to double down on domestic efforts and spend more money on research and development, said Brad Glosserman of Tama University, where he serves as deputy director and visiting professor at the Center for Rule-Making Strategies.

“It will similarly accelerate efforts to court foreign partners and will do more to acquire tech via illegal means, if possible,” he said. “The nationalism that will be spurred by the U.S. action will provide considerable ‘oomph’ to those efforts.”

Risks for high-end chipmakers

What is significant about these new restrictions is that they are being imposed unilaterally. “The Biden administration attempted to persuade allies, such as the European Union, Japan and South Korea, to join the controls, but all ultimately declined,” Benson said.

The reason for this, explained John Lee, Director of the East West Futures consultancy, is that semiconductor industry leaders from the U.S., Japan, Germany, the Netherlands and South Korea have all continued to expand business with China in recent years.

But for Washington’s plan to work, both U.S. and foreign manufacturers would have to comply with the new rules.

To accommodate some of these companies, the U.S. Department of Commerce has been granting them temporary waivers, as noncompliance with the new rules would put them at risk of losing critical U.S. technology.

However, Washington has also made clear it will not wait long for cooperation from allied governments or companies to take what it considers necessary action, Lee said.

But how much would compliance cost?

The Rhodium Group estimated in its report that the immediate costs to U.S. semiconductor manufacturing equipment firms arising from a narrow implementation of the controls would be fairly limited, at between $1.4 billion to $3 billion in annualized sales.

However, if these controls were to be applied more broadly, for example to target foreign facilities in China, costs could rise quickly to $4.6 billion to $5.2 billion in annualized sales.

There are also risks for foreign companies.

“The memory chip industry could be the most affected in the long-term, with the risk of collateral damage to firms based in US partner countries,” wrote the Rhodium Group, noting that South Korean chipmakers SK Hynix and Samsung, now at the mercy of U.S. licensing decisions, are likely to face “significant costs linked to the restructuring of their supply chains.”

Both companies, along with the Taiwan Semiconductor Manufacturing Company — the world’s largest chipmaker — have obtained a one-year waiver but are under growing pressure to find a solution, with SK Hynix recently announcing that it might be forced to sell its manufacturing operations in China should American export controls intensify.

Japanese chipmakers, meanwhile, will not be directly impacted as they don't have facilities in China that face such restrictions, nor do they sell advanced chips to China.

“Some Japanese chipmakers, like Kioxia, may actually benefit, because potential Chinese competitors in the market for NAND chips, such as China's YMTC, will face new limits that will reduce the likelihood of Chinese-government-subsidized NAND chips flooding global markets,” said Tufts’ Miller.

How foreign semiconductor firms will react in the long run will be closely watched. Some component suppliers have indicated they would create parallel supply chains while others have said that a demand backlog in non-Chinese markets would sufficiently sustain company revenue.

Meanwhile, there are concerns about a greater decoupling in the supply chains, as more controls remain in the pipeline.

“The White House is advancing plans to create an outbound investment screening regime to prevent U.S. capital from contributing to the development of force-multiplying technologies in China, including advanced semiconductors, high-performance computing, and possibly bio-manufacturing and high-capacity batteries,” wrote the Rhodium Group.

But arguably one of the most important aspects of these measures is the signal they send about the nature of the U.S.-China relationship.

“Washington has made it clear that it now sees itself in an elemental competition with China,” Glosserman said. “With these steps, the U.S. is doing its very best to ensure it remains superior to China in key technologies and thus in the global economy.”