United States New Export Controls on Advanced Computing and Semiconductors to China

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Effective October 7, 2022, the United States of America implemented new export controls targeting the People's Republic of China's (PRC) ability to access and develop advanced computing and semiconductor manufacturing items. [1] The new export controls reflect the United States' ambition to counter the accelerating advancement of China's high-tech capabilities in these spaces to address foreign policy and national security concerns. [2]

Contents

Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC)
2022.10.07 BIS Press Release Advanced Computing and Semiconductor Manufacturing Controls FINAL.pdf

Background of New Export Controls

Huawei and ZTE Equipment Ban

In August 2018, President Trump signed the National Defense Authorization Act for Fiscal Year 2019 (NDAA 2019). The act prohibited the use and procurement of Huawei and ZTE equipment from being used by all U.S. federal government executive agencies, citing security concerns. [3] In June 2020 the U.S. federal government officially designated Huawei and ZTE as threats to national security due to their close ties to the Chinese Communist Party and China's military. As for the reasoning for this classification, spokesman for the United States Federal Communications Commission (FCC) Ajit Pai quoted the fact that both companies are broadly subjected to Chinese law, therefore, obligating them to comply with Chinese intelligence services. [4]

The Chinese technology company ban spurred Chinese home-grown chip demand to skyrocket. According to Bloomberg in 2021, nineteen of the world's twenty fastest-growing chip industry firms originate in China. That is up from just eight Chinese companies in 2020. [5] Additionally, according to the World Semiconductor Trade Statistics (WSTS) and the Semiconductor Industry Association (SIA) estimates, China accounted for 35 percent of the global semiconductor market in 2021, taking the spot for the largest single-country market. [6]

Covid-19 Induced Global Chip Shortage

Since early 2020 when COVID-19 lockdowns began globally, the demand for semiconductors has skyrocketed. As of April 2021, over 169 different industries were impacted by the lack of supply of semiconductors according to an analysis by Goldman Sachs. [7] The lack of supply of semiconductors in these industries could impact U.S. GDP by up to 1%. [7] Withholding exports of modern semiconductors could enable local prices to drop in the United States and put the U.S. consumer first.

Export Control Rulings

The official document, "Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC)", issued for immediate release on October 7, 2022, by the Department of Commerce's Bureau of Industry and Security details the new export control rulings. [1] Specifically, the rules can be seen below.

  1. Adds certain advanced and high-performance computing chips and computer commodities that contain such chips to the Commerce Control List (CCL); [1]
  2. Adds new license requirements for items destined for a supercomputer or semiconductor development or production end use in the PRC; [1]
  3. Expands the scope of the Export Administration Regulations (EAR) over certain foreign-produced advanced computing items and foreign produced items for supercomputer end uses; [1]
  4. 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; [1]
  5. Adds certain semiconductor manufacturing equipment and related items to the CCL; [1]
  6. 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: [1]
    • Logic chips with non-planar transistor architectures (I.e., FinFET or GAAFET) of 16 nm or 14 nm, or below;
    • DRAM memory chips of 18 nm half-pitch or less;
    • NAND flash memory chips with 128 layers or more.
  7. 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; [1]
  8. Adds new license requirements to export items to develop or produce semiconductor manufacturing equipment and related items; [1] and
  9. 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. [1]

Rulings affecting the ability of U.S. people to assist in the development and/or manufacturing of semiconductors without a license come into effect on October 12, 2022. All other rulings begin taking effect on October 21, 2022. [1]

United States Objective

The United States Department of Commerce's Bureau of Industry and Security stated that the new export controls were a part of a series of targeted updates to its export controls as part of BIS's ongoing efforts to protect U.S. national security and foreign policy interests. [1] The export controls directly restrict the PRC's ability to obtain, develop, and manufacture advanced semiconductor technology.

“This is an effort that is going to take hundreds of billions of dollars and an incredible amount of engineering talent and energy to recreate a semiconductor supply chain that doesn’t involve U.S. technology,” said Jordan Schneider, a senior analyst at the Rhodium Group. The cutting edge of the semiconductor supply chain is both "globalized, but also so specialized, that at any step in it there’s only a handful of firms in the world that can do it, and if you’re sort of locked out of any one of these steps, then you can’t make chips.” [8] The United States' new export controls have fully leveraged the fragile nature of the industry. This announcement, the most expansive export control action in decades, represents a fundamental shift in the traditional strategy underlying the U.S. and allied export control regime. [9]

Intended restrictions of the export controls include limiting AI chip access, limiting Chinese design capability, stifling advanced chip manufacturing, and limiting access to chip manufacturing technology. [9] These objectives are met by limiting both semiconductor design and manufacturing hardware, computer-aided design (CAD) tools, and human capital.

PRC Semiconductor Applications in the Military

The BIS cited China's use of advanced semiconductors used in their military as a main reason for the new export bans. Specifically, the United States claims China's access to advanced semiconductors enables their military to produce advanced military systems including weapons of mass destruction, improve the speed and accuracy of military decision-making, planning, and logistics, autonomous systems, and finally to commit human rights abuses. [1]

Maintaining a Global Lead in Artificial Intelligence

Assistant Secretary of Commerce for Export Administration Thea D. Rozman Kendler stated “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 its citizens, and fuel its military modernization,”. [10]

According to the 2021 final report from the U.S. Department of National Security Commission on Artificial Intelligence, if China does manage to leapfrog the United States and its allies in chip technology, it will gain the upper hand militarily “in every domain of warfare”. [11] This initiative is key to the U.S.'s ambitions in preventing China's access to advanced computing and semiconductors along with limiting its ability to develop and manufacture its own to maintain a global edge in Artificial intelligence capabilities.

Restricting Human Capital to PRC

Rule #7, restricting the ability of U.S. persons to work at PRC-located semiconductor facilities, will force U.S. citizens as well as green card holders to leave and stay out of China's semiconductor industry. This will disrupt the current semiconductor facilities operating in China as active U.S. employees will be forced to leave, effective October 12, 2022. This export control will also result in extended pain for PRC as less human expertise will be available to help accelerate the growth in China's advanced semiconductor industry from the United States.

Industry Implications

Financial Impact

In the immediate wake of the export controls the semiconductor sector, critically Asian chipmakers, had stock prices significantly negatively impacted as investors revise economic projections for the industry. Days after the BIS announcement, the head of a leading Taiwanese supplier to Apple warned the tech world to get ready for “casualties and consequences” from the U.S. measures, likening them to “earthquakes.” [12]

Due to the sweeping impact and scope of the export controls the industry recognizes that the global semiconductor ecosystem will necessitate a rewiring requiring firms to adapt. [9] For example, it is likely firms will recalculate business models, update roadmaps, and forge new, more resilient partnerships up and down the supply chain. In the world's most globalized industry, changes of this magnitude are bound to be expensive. An expense that is likely to be passed to the consumer.

Reduced Research

According to some U.S. semiconductor firms, the new export controls will have "negative ripple effects" on future investment in research. They cite a decrease in sales to China and a congested supply chain which in turn reduces revenues, thereby reducing capital previously allocated to fund research for the next generation of chips or equipment. This is especially significant since China consistently accounts for around 50 percent of global chip sales by revenue, being by far the largest single market. [9]

Legacy Chips

The new export controls focus primarily on the cutting-edge of the semiconductor manufacturing and design process. Where these export controls are effective in slowing the PRC's growing advantage in the most advanced semiconductor technology, it does not significantly impact China's ability to continue manufacturing older, "legacy", chips which are still widely used and in demand for a plethora of applications such as automobiles, renewable technology, consumer electronics, telecommunication systems, and many weapon systems. [9] Older chip technology is and will be, significant economically to China despite the U.S. export controls. However, due to the United States' codependent reliance on imported Chinese-manufactured legacy chips, this was likely considered in the export control scope. [12]

Related Research Articles

<span class="mw-page-title-main">Bureau of Industry and Security</span>

The Bureau of Industry and Security (BIS) is an agency of the United States Department of Commerce that deals with issues involving national security and high technology. A principal goal for the bureau is helping stop the proliferation of weapons of mass destruction, while furthering the growth of United States exports. The Bureau is led by the Under Secretary of Commerce for Industry and Security.

<span class="mw-page-title-main">TSMC</span> Taiwanese semiconductor foundry company

Taiwan Semiconductor Manufacturing Company Limited is a Taiwanese multinational semiconductor contract manufacturing and design company. It is the world's most valuable semiconductor company, the world's largest dedicated independent (pure-play) semiconductor foundry, and one of Taiwan's largest companies, with its headquarters and main operations located in the Hsinchu Science Park in Hsinchu. It is majority owned by foreign investors.

<span class="mw-page-title-main">Arms industry</span> Industrial sector which manufactures weapons and military technology and equipment

The arms industry, also known as the defence industry, the defense industry, the military industry, or the arms trade, is a global industry which manufactures and sells weapons and military technology. Public sector and private sector firms conduct research and development, engineering, production, and servicing of military material, equipment, and facilities. Customers are the armed forces of states, and civilians. An arsenal is a place where arms and ammunition – whether privately or publicly owned – are made, maintained and repaired, stored, or issued, in any combination. Products of the arms industry include weapons, munitions, weapons platforms, military communications and other electronics, and more. The arms industry also provides other logistical and operational support.

International Traffic in Arms Regulations (ITAR) is a United States regulatory regime to restrict and control the export of defense and military related technologies to safeguard U.S. national security and further U.S. foreign policy objectives.

<span class="mw-page-title-main">Export of cryptography from the United States</span> Transfer from the United States to another country of technology related to cryptography

The export of cryptography from the United States to other countries has experienced various levels of restrictions over time. World War II illustrated that code-breaking and cryptography can play an integral part in national security and the ability to prosecute war. Changes in technology and the preservation of free speech have been competing factors in the regulation and constraint of cryptographic technologies for export.

<span class="mw-page-title-main">Dual-use technology</span> Technology that can be used for both peaceful and military purposes

In politics, diplomacy and export control, dual-use items refers to goods, software and technology that can be used for both civilian and military applications.

<span class="mw-page-title-main">Semiconductor Manufacturing International Corporation</span> Chinese semiconductor foundry

Semiconductor Manufacturing International Corporation (SMIC) is a partially state-owned publicly listed Chinese pure-play semiconductor foundry company. It is the largest contract chip maker in mainland China.

<span class="mw-page-title-main">Semiconductor Industry Association</span> Trade association

The Semiconductor Industry Association (SIA) is a trade association and lobbying group founded in 1977 that represents the United States semiconductor industry. It is located in Washington, D.C.

GlobalFoundries Inc. is a multinational semiconductor contract manufacturing and design company incorporated in the Cayman Islands and headquartered in Malta, New York. Created by the divestiture of the manufacturing arm of AMD, the company was privately owned by Mubadala Investment Company, the sovereign wealth fund of the United Arab Emirates, until an initial public offering (IPO) in October 2021.

<span class="mw-page-title-main">Made in China 2025</span> Chinese industrial policy

Made in China 2025 is a national strategic plan and industrial policy of the Chinese Communist Party (CCP) to further develop the manufacturing sector of China, issued by CCP general secretary Xi Jinping and Chinese Premier Li Keqiang's cabinet in May 2015. As part of the Thirteenth and Fourteenth Five-year Plans, China aims to move away from being the "world's factory"—a producer of cheap low-tech goods facilitated by lower labour costs and supply chain advantages. The industrial policy aims to upgrade the manufacturing capabilities of Chinese industries, growing from labor-intensive workshops into a more technology-intensive powerhouse.

The Indian electronics industry saw growth in the early years of the 21st century, encouraged both by government policies and incentives and by international investment. Its key and most resource-intensive segment, the semiconductor industry benefitted from domestic demand growing briskly. Semiconductors were required by a large number of industries, including telecommunications, information technology, industrial machinery and automation, medical electronics, automobile, engineering, power and solar photovoltaic, defense and aerospace, consumer electronics, and appliances. As of 2015, however, the skill gap in the Indian industry threatened progress, with 65 to 70 percent of the market relying on imports.

The AMD–Chinese joint venture is the agreement between the American semiconductor company Advanced Micro Devices (AMD) and China-based partners to license and build x86-compatible CPUs for the Chinese-based market. China has been unable to produce a CPU on based its own technology; This is significant because the joint venture was negotiated and agreed to well before the 2018 trade war between the US and China and the international chip shortage of the early 2020's. Unlike Taiwan, China does not have an established or lucrative microchip industry or even capabilities for that matter. It is similar to the Zhaoxin joint venture supported by VIA Technologies. Unlike other industries in which China naturally excel at, the microchip industry requires significant research and development.

The United States government applies sanctions against certain institutions and key members of the Chinese government and its ruling Chinese Communist Party (CCP), certain companies linked to the People's Liberation Army (PLA), and other affiliates that the US government has accused of aiding in human rights abuses. The US maintained embargoes against China from the inception of the People's Republic of China in 1949 until 1972. An embargo was reimposed by the US following the 1989 Tiananmen Square protests and massacre. From 2020 onward, the US imposed sanctions and visa restrictions against several Chinese government officials and companies, in response to allegations of a genocide against the Uyghur population in Xinjiang and human rights abuses in Hong Kong and Tibet.

The Entity List is a trade restriction list published by the United States Department of Commerce's Bureau of Industry and Security (BIS), consisting of certain foreign persons, entities, or governments. Entities on the Entity List are subject to U.S. license requirements for the export or transfer of specified items, such as some U.S. technologies. However, U.S. persons or companies are not prohibited from purchasing items from a company on the Entity List. Being included on the Entities List is less severe than being designated a "Denied Person" and more severe than being placed on the Unverified List (UVL).

The Taiwanese semiconductor industry, including IC manufacturing, design, and packing, forms a major part of Taiwan's IT industry. Due to its strong capabilities in OEM wafer manufacturing and a complete industry supply chain, Taiwan has been able to distinguish itself from its competitors and dominate the global marketplace. Taiwan semiconductor sector accounted for US$115 billion, which is ca. 20% of global semiconductor industry. In selected sectors like foundry operations, Taiwanese companies account for 50% of world market, with Taiwan Semiconductor Manufacturing Company (TSMC) being the biggest player in the foundry market.

<span class="mw-page-title-main">2020–present global chip shortage</span> Economic shortage caused by demand for semiconductor chips exceeding supply

The 2020–present global chip shortage is an ongoing global crisis in which the demand for integrated circuits exceeds the supply, affecting more than 169 industries. The crisis has led to major price increases, shortages queues and reselling among consumers and manufacturers for automobiles, graphics cards, video game consoles, computers, household appliances, and other electronic products that require semiconductors.

<span class="mw-page-title-main">Artificial Intelligence Cold War</span> Geopolitical narrative

The Artificial Intelligence Cold War is a narrative in which tensions between the US and China lead to a second Cold War waged in the area of AI technology rather than in the areas of nuclear capabilities or ideology. The context of the AI Cold War narrative is the AI Arms Race, which involves a build-up of military capabilities using AI technology by the US and China. A key area of concern in the tensions between China and the US are semiconductors because of their key role of semiconductors for the competitiveness of the AI industry.

The Chinese semiconductor industry, including IC design and manufacturing, forms a major part of mainland China's IT industry.

<span class="mw-page-title-main">CHIPS and Science Act</span> United States legislation promoting the semiconductor industry

The CHIPS and Science Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 9, 2022. The act provides roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States. The act channels more than $52 billion into researching semiconductors and other scientific research, with the primary aim of countering China. Chip suppliers have committed or made announcements totally over $300 billion in investments and jobs in anticipation of the passing of the act.

Shanghai Biren Intelligent Technology Co. is a Chinese fabless semiconductor design company. The company was founded in 2019 by Lingjie Xu and others, all of whom were previously employed at NVIDIA or Alibaba. Biren has advertised two general-purpose graphics processing units (GPGPUs), the BR100 and BR104. Both cards are aimed at artificial intelligence and high-performance computing.

References

  1. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Bureau of Industry and Security (October 7, 2022). "Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People's Republic of China (PRC)". U.S. Department of Commerce Bureau of Industry and Security. Retrieved October 29, 2022.
  2. ↑ "New US Semiconductor Export Controls Signify Dramatic Shift in Tech Relations With China". Just Security. 2022-10-24. Retrieved 2022-10-29.
  3. ↑ 115th Congress (August 13, 2018). "John S. McCain National Defense Authorization Act for Fiscal Year 2019" (PDF). govinfo. Retrieved October 29, 2022.{{cite web}}: CS1 maint: url-status (link)
  4. ↑ internationalbanker (2022-09-07). "Have the Huawei Bans Achieved the US' Intended Goals?". International Banker. Retrieved 2022-10-29.
  5. ↑ "U.S. Sanctions Are Supercharging China's Chipmaking Industry". Time. Retrieved 2022-10-29.
  6. ↑ Semiconductor Industry Association (SIA) (May 2022). "Semiconductor Industry Association (SIA) 2022 Factbook" (PDF). Semiconductor Industry Association (SIA). Retrieved November 4, 2022.
  7. 1 2 "These 169 industries are being hit by the global chip shortage". finance.yahoo.com. Retrieved 2022-10-29.
  8. ↑ Iyengar, Rishi. "Biden Short-Circuits China". Foreign Policy. Retrieved 2022-11-04.
  9. 1 2 3 4 5 "A Seismic Shift". www.csis.org. Retrieved 2022-12-02.
  10. ↑ "US hits China with sweeping tech export controls". Financial Times. 2022-10-07. Retrieved 2022-10-29.
  11. ↑ Chair, Eric; Catz, Safra; Chien, Steve; Clyburn, Mignon; Darby, Chris; Ford, Kenneth; Kenneth, José-Marie; Moore, Andrew; Work, Robert (October 1, 2021). "National Security Commission on Artificial Intelligence" (PDF). National Security Commission on Artificial Intelligence (NSCAI). Retrieved December 1, 2022.
  12. 1 2 "Taiwanese exec warns of tech 'casualties' from U.S.-China row". Nikkei Asia. Retrieved 2022-12-02.
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