Biden administration to restrict China with new rules in chip industry

• The measures could cripple China’s chip manufacturing industry.
• The measures harken back to the strict regulations during the height of the Cold War.
• Shares of semiconductor manufacturing equipment manufacturers began to decline as a result of the recent actions taken against them.

The Biden administration published a wide list of export regulations on Friday, including a plan to shut China off from certain semiconductor chips created anywhere with U.S. technology.

The measures, some of which take effect immediately, rely on restrictions sent to major toolmakers KLA Corp (KLAC.O), Lam Research Corp (LRCX.O), and Applied Materials Inc (AMAT.O) earlier this year, requiring them to cease sales of equipment to wholly Chinese-owned plants building advanced logic circuits.

The package of measures could represent the most significant shift in U.S. technology export policy to China since the 1990s. If effective, they might cripple China’s chip manufacturing industry by compelling U.S. and international businesses that employ U.S. technology to sever ties with some of China’s biggest factories and chip designers.

Jim Lewis, a technology and cybersecurity expert at the Center for Strategic and International Studies (CSIS) in Washington, D.C., said the measures harken back to the strict regulations during the height of the Cold War: “This will set the Chinese back years.”

“China isn’t going to give up on chipmaking … but this will really slow them (down).”

Senior government officials told reporters Thursday that several of the measures aim to prevent foreign corporations from exporting advanced chips to China or provide Chinese enterprises with equipment to create their own. They noted, however, that allied states have not promised to enact equivalent steps and that conversations are underway.

“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 enlargement of U.S. control over shipments to China of chips manufactured with U.S. equipment is based on the so-called foreign direct product regulation. It was broadened to oversee exports of overseas chips to Chinese telecoms giant Huawei Technologies Co Ltd (HWT.UL) and to ban semiconductors to Russia after its invasion of Ukraine.

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Friday, the Biden administration expanded restrictions on Chinese companies IFLYTEK, Dahua Technology, and Megvii Technology, which were put to the entity list in 2019 on the basis of claims that they assisted Beijing in the repression of its Uyghur minority group.

The regulations released on Friday prohibit the shipment of a wide variety of processors for use in Chinese supercomputers. The guidelines define a supercomputer as any system with more than 100 petaflops of computing power in 6,400 square feet. Two industry sources say this definition might strike certain commercial data centers at Chinese tech companies.

Eric Sayers, a defense policy expert at the American Enterprise Institute, stated that the action represents a fresh effort by the Biden administration to curb China’s advancements, as opposed to merely leveling 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.

The shares of semiconductor manufacturing equipment manufacturers began to decline as a result of the recent U.S. action taken against them.

The Semiconductor Industry Association, which represents chipmakers, stated that it was analyzing the restrictions and encouraged 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 put China’s leading memory chipmaker YMTC and 30 other Chinese firms on a list of corporations that U.S. authorities cannot inspect, escalating tensions with Beijing and targeting a company that has long been a source of contention for the Biden administration.

The “unverified list” may be a precursor to more stringent economic blacklists, but corporations that comply with U.S. inspection regulations can be removed. On Friday, U.S. officials eliminated nine such companies, including a company of China’s Wuxi Biologics that manufactures components for AstraZeneca Plc’s (AZN.L) COVID-19 vaccine.

The new measures will also prohibit exports of U.S. equipment to Chinese memory chip producers and codify letters addressed to Nvidia Corp (NVDA.O) and Advanced Micro Devices Inc (AMD) (AMD.O) restricting shipments of chips used in supercomputing systems used to develop nuclear weapons and other military technologies.

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