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U.S. aims to hobble China's chip industry with sweeping new export rules

Published 10/07/2022, 11:19 AM
Updated 10/08/2022, 04:35 AM
© Reuters. FILE PHOTO: U.S. President Joe Biden delivers remarks during a signing event for the CHIPS and Science Act of 2022, on the South Lawn of the White House in Washington, U.S., August 9, 2022. REUTERS/Evelyn Hockstein/File Photo

By Stephen Nellis, Karen Freifeld and Alexandra Alper

(Reuters) -The Biden administration published a sweeping set of export controls on Friday, including a measure to cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment, vastly expanding its reach in its bid to slow Beijing's technological and military advances.

The rules, some of which take immediate effect, build on restrictions sent in letters this year to top toolmakers KLA Corp, Lam Research Corp (NASDAQ:LRCX) and Applied Materials Inc (NASDAQ:AMAT), effectively requiring them to halt shipments of equipment to wholly Chinese-owned factories producing advanced logic chips.

The raft of measures could amount to the biggest shift in U.S. policy toward shipping technology to China since the 1990s. If effective, they could hobble China's chip manufacturing industry by forcing American and foreign companies that use U.S. technology to cut off support for some of China's leading factories and chip designers.

"This will set the Chinese back years," said Jim Lewis, a technology and cybersecurity expert at the Center for Strategic and International Studies (CSIS), a Washington D.C.-based think tank, who said the policies harken back to the tough regulations of the height of the Cold War.

"China isn't going to give up on chipmaking ... but this will really slow them (down)."

In a briefing with reporters on Thursday previewing the rules, senior government officials said many of the measures were aimed at preventing foreign firms from selling advanced chips to China or supplying Chinese firms with tools to make their own advanced chips. They conceded, however, that they had not secured any promises that allied nations would implement similar measures and that discussions with those nations are ongoing.

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"We recognize that the unilateral controls we're putting into place will lose effectiveness over time if other countries don't join us," one official said. "And we risk harming U.S. technology leadership if foreign competitors are not subject to similar controls."

The expansion of U.S. powers to control exports to China of chips made with U.S. tools is based on a broadening of the so-called foreign direct product rule. It was previously expanded to give the U.S. government authority to control exports of chips made overseas to Chinese telecoms giant Huawei Technologies Co Ltd and later to stop the flow of semiconductors to Russia after its invasion of Ukraine.

On Friday, the Biden administration applied the expanded restrictions to China's IFLYTEK, Dahua Technology, and Megvii Technology, companies added to the entity list in 2019 over allegations they aided Beijing in the suppression of its Uyghur minority group.

The rules published on Friday also block shipments of a broad array of chips for use in Chinese supercomputing systems. The rules define a supercomputer as any system with more than 100 petaflops of computing power within a floor space of 6,400 square feet, a definition that two industry sources said could also hit some commercial data centers at Chinese tech giants.

Eric Sayers, a defense policy expert at the American Enterprise Institute, said the move reflects a new bid by the Biden administration to contain China's advances instead of simply seeking to level the playing field.

"The scope of the rule and potential impacts are quite stunning but the devil will of course be in the details of implementation," he added.

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Companies around the world began to wrestle with the latest U.S. action, with shares of semiconductor manufacturing equipment makers falling.

The Semiconductor Industry Association, which represents chipmakers, said it was studying the regulations and urged the United States to "implement the rules in a targeted way - and in collaboration with international partners - to help level the playing field."

Earlier on Friday, the United States added China's top memory chipmaker YMTC and 30 other Chinese entities to a list of companies that U.S. officials cannot inspect, ratcheting up tensions with Beijing and starting a 60 day-clock that could trigger much tougher penalties.

Companies are added to the unverified list when U.S. authorities cannot complete on-site visits to determine if they can be trusted to receive sensitive U.S. technology, forcing U.S. suppliers to take greater care when shipping to them.

Under a new policy announced on Friday, if a government prevents U.S. officials from conducting site checks at companies placed on the unverified list, U.S. authorities will start the process for adding them to the entity list after 60 days.

Entity listing YMTC would escalate already-rising tensions with Beijing and force its U.S. suppliers to seek difficult-to-obtain licenses from the U.S. government before shipping them even the most low-tech items.

The new regulations will also severely restrict export of U.S. equipment to Chinese memory chip makers and formalize letters sent to Nvidia (NASDAQ:NVDA) Corp and Advanced Micro Devices Inc (NASDAQ:AMD) restricting shipments to China of chips used in supercomputing systems that nations around the world rely on to develop nuclear weapons and other military technologies.

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Reuters was first to report key details of the new curbs on memory chip makers, including a reprieve for foreign companies operating in China and the moves to broaden restrictions on shipments to China of technologies from KLA, Lam, Applied Materials, Nvidia and AMD.

South Korea's industry ministry said in a statement on Saturday there would be no significant disruption to equipment supply for Samsung (KS:005930) and SK Hynix's existing chip production in China.

However, it was necessary to minimise uncertainty through consultation with U.S. export control authorities, it added.

On Saturday, China's foreign ministry spokesperson Mao Ning called the move an abuse of trade measures designed to reinforce the United States' "technological hegemony".

Latest comments

China made their decision to side with Russia. They could have probably forced an end to the war if they sided with us against Russia. They deserve to burn with Russia
Chinas gonna collapse soon anyways
The US is under no obligation to assist China in developing security threats. In fact, it is responsible leadership by Biden to take this step, no matter the whining from the America haters here.
The Republicans signaled the alarm on China long before Democrats and the Bidens. Remember the fact that Hunter and the "big guy" were "in bed" financially with China.
Zzzzzzzzz.
So the Orange t. a. r. d. Nation should be happy with the move then?
It is sad to see the insecure feeling of US. A country relies on war and conflicts to prosper since establishment in the slavery era. A world led by this country is full of chaos and disasters.
Using Tolkien's analogy, its basically Sauron's world vision. EU is basically Isengard with other puppet countries acting as the supporting factions. Obviously, nobody wants to take orders always.
Good to see western leaders strategize - long overdue!
This how American hitler behaves in a way.. well that's good least pressure force to other countries to develop own tech instead rely on US
You need to Google hilter.
because not selling chips to China correlates to committing genocide. what in logic. do you actually read what you post? I'm sure you were all for trumps trade war with China
finally a response to China's use of high tech to threaten it's neighbors...
I guess you mean US's use of weapon to threat the world. There are more Nordstream bombing to come.
last I checked every country has weapons
more scam and spam......
Plane and simple, this is the US getting tighter control over American technology in order to maintain military advantage. It is not in the US interests to help China achieve technological equality with the US. Any country in the same position would do the same.
and only 30 years too late.  the warnings in the mid-1990s were scoffed at.
Human rights and moral principles overtake economic principles.
Morality according to Brad. lol
Still trying to start WW3.
don't blame others if one day US is treated similarly!
This old men in 2 years have destroyed everything what Americans 200 years building
No. He's protecting it.
Pure delusion.
so what exports or imports china will restrict as retaliation?
Nothing important to US national security. China just recently developed the technology to manufacture a smooth writing ball point pen. Semiconductors are much more complicated…it will be decades before they reach the level of US technology…if they reach it at all.
Tyler, your assessment of China is 20 years old.
btc getting ready for major crash to12000.....stay away from crypto markets very high risk to inexperienced traders. China is planning a new crackdown on crypto trading.
The CCP should invade part of Taiwan now while weak handed Democrats are in charge, just like Russia did with Ukraine Crimea in 2014.
You underestimate China's economic power on the US, some Russia does not have.
something
That threat of China invading Taiwan is certainly a factor in motivating the US to increase domestic chip production and get tighter control over American technology. Such a move though would be devastating to both countries, at present.
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