US finalizes rules to prevent China from benefiting from $52 billion in chips funding

© Reuters. FILE PHOTO: Flags of China and U.S. are displayed on a printed circuit board with semiconductor chips, in this illustration picture taken February 17, 2023. REUTERS/Florence Lo/Illustration/File Photo

By David Shepardson

WASHINGTON (Reuters) - The U.S. Commerce Department on Friday is issuing final rules to prevent semiconductor manufacturing subsidies from being used by China and other countries deemed to pose American national security concerns.

The regulation is the final hurdle before the Biden administration can begin awarding $39 billion in subsidies for semiconductor production. The landmark "Chips and Science" law provides $52.7 billion for U.S. semiconductor production, research and workforce development.

The regulation, first proposed in March, sets "guardrails" by limiting recipients of U.S. funding from investing in expanding semiconductor manufacturing in foreign countries of concern like China and Russia, and limits recipients of incentive funds from engaging in joint research or technology licensing efforts with foreign entities of concern.

In October 2022, the department issued new export controls to cut China off from certain semiconductor chips made with U.S. equipment in its bid to slow Beijing's technological and military advances.

"We have to be absolutely vigilant that not a penny of this helps China to get ahead of us," Commerce Secretary Gina Raimondo told Congress Tuesday.

If funding recipients violate restrictions, Commerce Department can claw back federal awards.

Raimondo told Congress she is working as fast as possible to get awards approved.

"I feel the pressure," Raimondo said. "We are behind but it is more important that we get it right. And if we take another month or a few more weeks to get it right, I will defend that because it's necessary."

The regulation prohibits funding recipients from significantly expanding semiconductor manufacturing capacity in foreign countries of concern for 10 years. It also restricts recipients from some joint research or technology licensing efforts with foreign entities of concern but allows for international standards, patent licensing, and utilizing foundry and packaging services.

The final rules prohibit material expansion of semiconductor manufacturing capacity for leading-edge and advanced facilities in foreign countries of concern for 10 years. It also clarifies wafer production is included within semiconductor manufacturing.

The final rule ties expanded semiconductor manufacturing capacity to adding cleanroom or other physical space, defining material expansions as increasing production capacity by more than 5%.

The rule prohibits recipients from adding new cleanroom space or production lines that result in expanding a facility’s production capacity beyond 10%.

The rule also classifies some semiconductors as critical to national security, triggering tighter restrictions, including quantum computing current-generation and mature-node chips, in radiation-intensive environments, and for other specialized military capabilities.