Biden Turns a Few More Screws on China’s Chip Industry

For the second year running, the United States has marked the onset of autumn with a salvo against China’s technology sector.

For the second year running, the United States has marked the onset of autumn with a salvo against China’s technology sector.

The Biden administration on Tuesday announced additional curbs on the export to China of advanced semiconductors and the equipment used to make them, honing in further on Chinese artificial intelligence capabilities that have potential military applications and closing loopholes that Beijing could exploit to get what it needs from third countries. The updated export controls came almost exactly a year after the administration’s first restrictions on semiconductor sales to Chinese companies, which altered the trajectory of U.S.-China tech competition significantly enough that they have come to be known in trade policy circles simply as “October 7.”

The new rules—which aim to iron out kinks in the original Oct. 7 armor—include a wider range of AI-capable semiconductors, making it harder for Chinese firms to game the system by bunching together several chips that aren’t subject to the restrictions. Put simply, according to the 295-page regulatory filing, it “prevents the workaround of simply purchasing a larger number of smaller datacenter AI chips which, if combined, would be equally powerful as restricted chips.”

In a statement announcing the curbs, the Commerce Department’s Bureau of Industry and Security detailed what it’s worried China will use the technology for, including “electronic warfare, radar, signals intelligence, and jamming,” as well as “facial recognition surveillance systems for human rights violations and abuses.”

The main target of the new restrictions is processing power, specifically the processing power that large language models like ChatGPT need to operate. More advanced chips mean better and faster AI models, which Washington is concerned China could use to power autonomous weapons, crunch battlefield data, and supercharge its cyberattacks.

“You basically limit the overall ‘compute’ in the economy and therefore the number of AI model copies being run and how fast they’re run,” said Lennart Heim, a research fellow at the U.K.-based Center for the Governance of AI. China’s ability to roll with the punches, Heim added, will depend on its ability to either jury-rig AI systems using chips it can legally (or illegally) procure or make advanced chips of its own.

Washington is making life harder on both fronts. The new rules expand the types of semiconductor manufacturing equipment subject to export restrictions and also extend those restrictions beyond China to 21 other countries with which the United States has an arms embargo, including Russia, Cuba, Iran, and North Korea. Those countries will also be subject to restrictions on the chips themselves, with companies now needing to apply for a license to sell there “with a presumption of denial.” Nearly two dozen other countries that the United States designates as national security or missile technology export risks will also face additional licensing requirements.

“Essentially, that represents the Kyrgyzstans or the Georgias of the world, who have demonstrated pretty anomalous trade data in the past year—all of a sudden, they’re showing huge upticks in imports and exports of goods that contain chips,” said Emily Benson, director of the project on trade and technology at the Center for Strategic and International Studies in Washington. “I think the one surprising aspect is the geographic expansion of these licensing requirements,” she added.

And while last year’s export controls came as a bolt from the blue, this week’s have been more of a slow burn. The Biden administration has incrementally added obstacles to China’s path since its initial curbs, placing restrictions on outbound investment and targeting sectors such as quantum computing that have potential national security implications, in an approach that National Security Advisor Jake Sullivan has repeatedly described as “small yard, high fence.” The new rules are more about patching holes than tearing China new ones.

“I don’t think that they shift the landscape as significantly” as last year’s, said Emily Kilcrease, director of the energy, economics, and security program at the Center for a New American Security. “Those rules really were kind of a fundamental shift in policy, which the administration seems to have backed off of a little, at least in terms of rhetoric,” she added.

The U.S. semiconductor players likely to be most impacted by the new controls don’t appear to be pressing the panic button, at least publicly.

“We recognize the need to protect national security and believe maintaining a healthy U.S. semiconductor industry is an essential component to achieving that goal,” the Semiconductor Industry Association said in a statement, though it warned against unilateral controls that might end up hurting American companies by encouraging customers to buy elsewhere. “We urge the administration to strengthen coordination with allies to ensure a level playing field for all companies,” the association added.

ASML, the leading manufacturer of cutting-edge chipmaking equipment, said the new controls would apply to “a limited number of [factories] in China” without expecting a “material impact on our financial outlook.” Nvidia, the dominant player in advanced AI chips, acknowledged that many of its new products aimed at circumventing earlier restrictions would be subject to the new ones, but it anticipates that the global AI boom will ensure it can manage the churn. “Given the strength of demand for our products worldwide, we do not anticipate that the additional restrictions will have a near-term meaningful impact on our financial results.”

China has played both offense and defense in response to previous curbs, banning exports of two key minerals used in chipmaking earlier this year and quietly launching a new Huawei smartphone last month powered by an advanced chip seemingly made entirely in China. “The U.S. needs to stop politicizing and weaponizing trade and tech issues and stop destabilizing global industrial and supply chains,” China’s Foreign Ministry spokesperson, Mao Ning, said in a press briefing this week.

China’s continued economic slump will make like-for-like retaliation a challenge, however. “China, because of its economic situation, is not really in a position to pursue policies that would deter future investment in the country,” Benson said.

The U.S. government has also given itself wiggle room to do more, establishing a “gray zone” that would subject chips just below even the new computing threshold to a 25-day additional export review and outlining a plan to review and update export restrictions annually. At the same time, it is seeking to continue its de-risking over decoupling approach by exempting chips used in commercial applications such as smartphones and cars from the rules.

“As we implement these restrictions, we will keep working to protect our national security by restricting access to critical technologies, vigilantly enforcing our rules, while minimizing any unintended impact on trade flows,” said Commerce Secretary Gina Raimondo.

A meeting on the horizon between U.S. President Joe Biden and his Chinese counterpart, Xi Jinping, at the Asia-Pacific Economic Cooperation Forum in San Francisco later this year, after months of bilateral tensions, may also be one reason Washington is turning its sledgehammer into a scalpel.

“If for some reason that [meeting] fails to materialize, then I think we should be looking more seriously at likely retaliatory responses, but at the end of the day, it’s not as expansive as it could have been,” Benson said.

Read More

Rishi Iyengar