Commentary: Why U.S.’ Chip Curbs on China Could Backfire

The U.S. Department of Commerce recently announced the addition of about 140 Chinese chip companies to its Entity List, which marks the third major semiconductor-related sanction under Biden's administration. This round primarily targets semiconductor manufacturing equipment and high-bandwidth memory (HBM) [para. 1]. The expanded export control list now includes 24 new types of semiconductor manufacturing equipment, alongside three software tools. The Foreign Direct Product Rule (FDPR) has been updated, preventing chip companies from the U.S., Japan, and the Netherlands from exporting advanced manufacturing equipment to China through third countries [para. 2]. While the restrictions are less severe than anticipated, the FDPR's overhaul could significantly impact the global chip supply chain. This rule now applies regardless of U.S. component content in foreign-made equipment [para. 3].

The timing of these expanded restrictions aligns with Biden's "lame duck" period, focusing on cementing his political legacy by imposing challenges on China. This comes after China-U.S. negotiations led to a prisoner swap and China extending tariff exemptions on some U.S. products until 2025 [para. 4][para. 5]. Biden's approach in this matter contrasts with previous U.S. strategies, such as the U.S.-Japan semiconductor trade war of the 1980s, where the government and industry aligned closely [para. 7]. Back then, U.S. companies were proactive and unified in protecting their interests, creating organizations like the Semiconductor Industry Association (SIA), which remains active [para. 8].

The semiconductor export controls against China have generated skepticism within the U.S. industry, similar to past instances where firms pushed back against overly strict restrictions. Despite the constraints, the U.S. semiconductor industry remains engaged with China. Nvidia, for example, continues to see China as a crucial market [para. 12]. In contrast to previous times, Japan and the Netherlands, while initially supportive allies of Washington's stance against China, have resisted some limitations [para. 14]. They agreed to restrict exports, but were reluctant to completely ban personnel from providing services to Chinese companies [para. 14].

Furthermore, the Biden administration faces challenges in broadening technological restrictions against China. While the recent export controls might disrupt Chinese semiconductor supply chains in the short term, they are unlikely to obstruct long-term growth [para. 16]. Despite ongoing U.S. export controls, China's role in the global semiconductor supply chain continues to expand, from 1.3% in 2020 to 3.2% by 2023, accounting for 34.4% of the worldwide semiconductor demand by 2023 [para. 18]. Additionally, Chinese companies are amplifying their research and development efforts significantly since 2017, with year-on-year spending increases surpassing 40% [para. 19].

Despite export controls, major semiconductor equipment companies from the U.S., Japan, and the Netherlands continue to experience revenue growth in China [para. 20]. Attempts to bypass these controls are evidenced by increased exports through other countries, rising from 1.6 in 2021 to 3.1 in early 2024 [para. 22]. U.S. semiconductor firms are also expanding their operations outside the U.S., highlighting a divergence from Biden's localization efforts [para. 23]. Companies like KLA Corp., Applied Materials Inc., and Lam Research Corp. are establishing new facilities in Singapore and Malaysia, countering the administration’s efforts to reshore manufacturing [para. 24]. This divergence reflects a broader struggle between corporate strategies and national policies.