Four Things to Know About How the U.S.’ Chip Controls Will Impact China

The latest U.S. crackdown on China's semiconductor industry by the Department of Commerce’s Bureau of Industry and Security (BIS) aims to curb China’s ability to produce advanced chips for military use by adding 136 Chinese companies to the Entity List, restricting access to U.S. technology. These include limits on high-bandwidth memory (HBM) critical to AI and integrated circuits, potentially accelerating China's tech independence.[para. 1][para. 2][para. 3]

These measures are an extension of prior controls from 2022, now targeting China's semiconductor supply chain and AI capabilities. While Beijing has criticized these moves, the restrictions might actually advance China's self-reliance efforts as domestic manufacturers turn to local technologies and processes, despite initial higher costs and performance challenges. Industry sources note that sanctions motivate China to develop its own technology paths, potentially preparing for long-term autonomy in chip production.[para. 4][para. 5][para. 6]

Key components of these controls include restrictions on U.S-origin HBM and semiconductor production equipment, closing export loopholes while focusing on advanced memory and chipmaking tools. This crackdown is seen as more intense than previous measures, affecting China's entire semiconductor chain and posing a "fatal blow" to its capabilities. U.S. Commerce Secretary Gina Raimondo highlighted the unprecedented nature of these strategic controls aimed at hindering China’s military modernization.[para. 7][para. 10][para. 13]

Additionally, the BIS has expanded its jurisdiction, now including any semiconductor equipment produced abroad using U.S. technology, affecting foreign suppliers. These efforts aim to dampen China's progress in advanced AI chips, with HBM controls adding to limits on graphics processing units crucial for AI models. Although this affects China's current reliance on HBM3 from companies like Samsung, existing inventory might cushion immediate impacts, though domestic production still faces challenges due to lack of mass production experience and patent barriers from early leaders like SK Hynix.[para. 18][para. 26][para. 28]

Chinese chipmakers, however, are increasingly utilizing domestic equipment, accounting for up to 40% in new production lines, a drastic shift towards localization. Despite short-term disruptions, industry experts believe these controls won't derail China's long-term growth. The Chinese government retaliated by banning exports of crucial minerals like gallium and germanium to the U.S., essential for semiconductor and LED production, targeting U.S. military suppliers specifically. This tit-for-tat measure could significantly impact the U.S. economy, with potential GDP reductions in response to a complete ban.[para. 30][para. 32][para. 34]

Chinese industry groups have advised caution in procuring American chips amid tightened U.S. controls, potentially influencing procurement decisions and affecting U.S. companies reliant on Chinese sales. Companies like Qualcomm and Nvidia could face significant losses as the Chinese market constitutes a large portion of their revenue. Despite this, foreign companies remain keen on the Chinese market, with American firms employing strategies to bypass export controls through foreign manufacturing, maintaining business with China. This divergence between export and revenue figures suggests that the current U.S. semiconductor export controls might not align with corporate interests, raising questions about their effectiveness in limiting China's technological development.[para. 36][para. 38][para. 39]