US to tighten chip export restrictions on China

• The US aims to refine and close loopholes from curbs announced last October against China.
• South Korea’s Samsung and SK Hynix have received the US green light to continue sending equipment to their factories in China.
• TSMC is expecting a similar ‘permanent’ permit.

Last October, the United States Bureau of Industry and Security issued its most unprecedented export controls against China. The intent of the US government was clear — to impede China’s ability to produce, or even purchase, the highest-end chips. The logic of the measure was straightforward: advanced chips and the supercomputers and AI systems they power enable the production of new weapons and surveillance apparatuses.

Since it was elected, the Biden administration has taken a much more adversarial approach to ward off China’s access to advanced chips than was common before. Before announcing the export controls on October 7, 2022, the US unveiled the CHIPS and Science Act of 2022. It came with guardrails designed to limit the extent to which companies receiving CHIPS Act incentives could expand semiconductor investments in “countries of concern”— China included.

Those guardrails inevitably augment the stringent export controls on semiconductor equipment to China, and the January 2023 US-Japan-Netherlands pact limiting chipmaking tool exports. Commerce Secretary Gina Raimondo said the guardrails will “help ensure that malign actors do not have access to cutting-edge technology that can be used against America and our allies.” 

US-China tech war played out with regulations – for now.

But the US is not yet satisfied because, reportedly, there are loopholes in the export controls, which the Biden administration plans to address as the ruling passes its one-year mark. “The Biden administration is seeking to strengthen controls on selling graphics chips for AI applications and advanced chipmaking equipment to Chinese firms, the people said, asking not to be named because the rules aren’t yet public,” a recent Bloomberg report read.

The updated rule, said to be in the final stages of review, will include enhanced scrutiny for Chinese companies attempting to bypass export restrictions by rerouting shipments through other countries. Additionally, Chinese chip design companies will be included in a trade restriction list, requiring foreign manufacturers to obtain a US license before fulfilling orders for these firms.

The US officials warned China recently to expect rules restricting shipments of semiconductor equipment and advanced AI chips to be updated this month. Further confirming the reports was a regulation titled Export Controls to Semiconductor Manufacturing Items, Entity List Modifications, posted on the Office of Management and Budget (OMB) website last week.

“Export control rules are generally not posted by OMB until an agreement between the Departments of State, Defense, Commerce and Energy on their content. An anticipated companion rule updating restrictions on exports of high-end chips used for artificial intelligence has yet to be posted by the government,” Reuters’ report indicated.

According to Reuters, the Biden administration is aiming to publish both rules simultaneously, possibly this week. What has been irking the US is that since the October 2022 ruling was announced, China has expedited its investments in developing its domestic capabilities.

For example, despite ongoing US sanctions, Huawei subtly introduced a new 5G-capable smartphone last month. What surprised industry observers was that the phone’s 5G processor was manufactured by the domestic company Semiconductor Manufacturing International Corporation (SMIC). This component exceeded the expectations of many experts regarding the company’s production capabilities.

In short, the efforts to close the loophole show how the Biden administration is struggling to cut China off from top AI technology, and how difficult it is to plug every gap in export controls. Although shipping AI chips to mainland China would violate US law, experts have pointed out the significant challenges the US faces in regulating these transactions. 

They highlight the fact that employees based in China could access chips held at foreign subsidiaries remotely and still comply with legal requirements.

Samsung SK Hynix granted indefinite waivers, with TSMC expecting the same

Last week, South Korea’s Yonhap News Agency reported that its local chip giants Samsung and SK Hynix will be allowed to ship US semiconductor manufacturing equipment to their China factories indefinitely without separate approvals. Choi Sang-mok, Seoul’s senior presidential secretary for economic affairs, told reporters the US government has already notified the two companies of its decision, which takes effect immediately.

Previously, Samsung and SK Hynix, alongside Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest contract producer of computer chips, received waivers when Washington imposed sweeping export restrictions to prevent China from getting advanced semiconductor technology. The one-year waivers from the US would have expired this month.

This recent development alleviates the worries of Samsung and SK Hynix regarding their chip manufacturing operations in China, which depend to some extent on equipment from the US. Moreover, according to a Fitch report, China is a key manufacturing hub, accounting for 40% of Samsung’s total flash memory chips (NAND) production capability. 

It also accounts for 40%-50% of SK Hynix’s dynamic random access memory (DRAM) chips and 20% of its NAND capacity. TSMC has also applied for–and expects to receive–permanent authorization from Washington to export US chipmaking equipment to its China-based factory. 

“TSMC has been authorized to continue (to) operate in Nanjing, and we are currently in the process of applying for a permanent authorization for our operations in China,” it told AFP in an email Friday. 

According to the Taiwanese chip giant, the Bureau of Industry and Security advised the firm to apply for a “Validated End-User (VEU)” authorization. This “would serve as a permanent authorization,” TSMC said, adding that it has not had to apply for it in the past. “We expect to receive a permanent authorization through the VEU process.”

Biden turns the screw on China still further.

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