U.S. Tightens Semiconductor Export Controls on China, Beijing Responds with Countermeasures

On December 2, 2024, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced two major rules targeting China's semiconductor sector: the Interim Final Rule on Foreign Direct Product (FDP) and Advanced Computing and Semiconductor Manufacturing Controls and the Final Rule on Entity List Additions, Modifications, and Deletions.

The Interim Final Rule introduces stricter export controls over technologies critical to advanced computing, supercomputing, and semiconductor manufacturing. The Final Rule adds 140 new entities, including 136 Chinese companies, to the Entity List, modifies 14 existing entries, and applies stricter annotations under Footnote 5. These measures represent a significant expansion of U.S. export control policies, building on earlier restrictions issued in 2022 and 2023. Analysts predict these rules will further challenge China's ability to advance its semiconductor manufacturing, artificial intelligence, and high-performance computing industries.

The BIS regulations focus on multiple critical areas of the semiconductor supply chain, with major highlights including:

1. New Restrictions on Manufacturing Equipment: Controls targeting tools used for etching, deposition, lithography, ion implantation, annealing, metrology, inspection, and cleaning.

2. Software Controls: New rules for software that enhances equipment productivity or enables high-end chip production.

3. HBM Restrictions: High Bandwidth Memory (HBM), essential for AI training and inference, now falls under tighter U.S. control, requiring special licenses for production using U.S. technology.

4. Expanded Entity List: The addition of 140 entities, including semiconductor foundries, tool manufacturers, and investment firms.

5. Enhanced FDP Rules: Broader coverage of foreign-made items containing U.S. technology.

6. Design Software Controls: Restrictions on ECAD and TCAD software and related technologies.

7. Clarification on Software Keys: Export controls now apply to the transfer of software keys that enable specific hardware or software use.

The new measures target not only design firms but also equipment manufacturers, software developers, and other segments of China's semiconductor ecosystem, aiming to delay advancements in AI and undermine China's semiconductor self-sufficiency.

On December 3, China's Ministry of Commerce announced tighter export controls on dual-use items to the U.S., citing the U.S.'s “weaponization of trade and technology” under the pretext of national security. The measures ban the export of items such as gallium, germanium, antimony, superhard materials, and graphite for U.S. military applications, with strict oversight for civilian uses. Violations will be prosecuted under Chinese law.

In a joint statement, four major Chinese industry associations—the China Semiconductor Industry Association, the China Internet Association, the China Association of Automobile Manufacturers, and the China Communications Enterprise Association—urged domestic companies to reconsider procurement of U.S.-made chips and adopt measures to mitigate the impact of U.S. sanctions.

The U.S. sanctions may exacerbate challenges for Chinese firms, particularly in securing key equipment and advanced components. However, the restrictions are also expected to accelerate China's push for domestic innovation and self-reliance. Over the past few years, Chinese companies have been localizing critical components and materials, reducing reliance on U.S. suppliers.

From a global perspective, the U.S.'s “small yard, high fence” strategy could have broader implications. By restricting exports to one of the world's largest semiconductor markets, American firms risk losing market share, while China may realign its supply chain and drive rapid technological advancements domestically.

This latest round of restrictions underscores the escalating tech rivalry between the U.S. and China, as both nations aim to secure their positions in the semiconductor industry while redefining global trade dynamics.