Analysis: Decoupling looms as US plans new China chip clampdown

The US is set to widen restrictions on Chinese access to its advanced technologies by instituting what will be in effect a blanket global ban on sales to its main geopolitical rival of advanced semiconductors and the tools needed to make them. The move could represent the most significant step yet towards full Sino-US technology ‘decoupling’.

Further China-focused action by President Joe Biden’s administration has been on the cards since early summer. The new measures will be administered by the Department of Commerce and have two main thrusts, with more details expected in the next few days.

They are expected to outlaw sales of any advanced devices that incorporate any relevant US technology, particularly those that can be used in artificial intelligence or supercomputing, if a US export licence has not been granted (pretty much impossible in practice). This will effectively extend the application of the new rules across Europe and the rest of Asia.

They will also ban the supply of any fab equipment and tools that incorporate US technology for chip design and manufacturing at the 14nm node and below.

So far, Washington has tended to target specific Chinese companies through the so-called Entity List, which effectively shuts any company on it out of the US market and access to US technology. The most notable listings have been telecommunications group Huawei and chip foundry SMIC. In the last month, there have been calls for another Chinese company, its leading memory maker YMTC, to receive similar treatment following reports that it has supplied devices to Huawei that used American technology in breach of that listing.

However, broader trends have now led Washington to spread the net more widely, even though those companies remain at the forefront of the expected measures.

First, there has been a growing belief that the federal government must take a more proactive role in guiding digital research and securing US technological pre-eminence as AI and related fields are increasingly seen as having dual civil-military use. It has been Washington’s preference to apply a light touch to Big Tech during the last few decades that have seen consumer electronics and communications be the main drivers of R&D and economic growth.

Second, there is an accompanying concern that while the issue has been recognised, Washington has moved too slowly with, for example, the flagship $52bn (£46bn) CHIPS and Science Act being finally signed into law in July to seed domestic semiconductor manufacturing and advanced research, but only after months of political haggling.

Third, there is clear evidence that China has already yoked the research work of its own technology giants far more tightly to what President Xi Jinping wants politically and militarily, especially the previously more freewheeling BAT triumvirate of Baidu, Alibaba and Tencent. All that has been happening in the context of Xi’s goal, stated five years ago, of seeing China achieve world leadership in AI by 2030 (by, of course, his administration’s definition).

Then measures are set to be enacted under Commerce’s Foreign Direct Product Rule, the mechanism that will extend their impact far beyond US borders because of the ubiquity of US content within today’s advanced technologies. Any company that does not comply will be threatened with its own addition to the Entity List alongside Huawei and SMIC.

As extreme as the measures sound – and the sense that they see the world’s largest free market economy applying constraint over competition – they are not unexpected. Signs that the Biden administration was considering steps like these first emerged as the CHIPS Act was signed. It already includes a requirement that any beneficiaries do not invest in Chinese semiconductor production.

Washington’s mood towards China has also darkened over Russia’s invasion of Ukraine and what US politicians see as Beijing’s at best ambivalent attitude towards it, as well as its increasingly threatening behaviour over Taiwan.

Also, the measures are not entirely unwelcome though they are likely to see the business climate for foreign investors in China worsen. US and other companies with joint ventures there have been expressing mounting concern over the impact of Beijing’s Zero-Covid policy and increasing demands for access to their intellectual property. Officially, China is still a strong market; unofficially, enthusiasm continues to cool.

By contrast in the US, CHIPS continues to stimulate manufacturing initiatives. In the latest, memory manufacturer Micron has just unveiled plans for a $100bn fab project in New York State, joining another one it announced last month in Idaho.

The government giveth, the government taketh away – although here there is, so far, more giving than taking.

But the administration still faces significant challenges. China is no longer just a copycat when it comes to advanced technologies, but increasingly an innovator. Two clear dual-use examples are drones and surveillance, and the country recently demonstrated its ability to build an exascale computer, OceanLight, using just 14nm chips – previously seen as a huge challenge. Its ability to ‘go it alone’ may already be greater than generally recognised in the US.

And there are other systemic factors that need to be addressed, particularly around AI and stimulating greater collaboration between the US and its allies. We’ll return to that theme next week.

For now, the big question is how exactly China will respond, once the new rules are released in detail. Anger is certain; its full degree is not.