US to tighten China chip squeeze with old Cold War rule

The United States plans to expand a Cold War-era rule to stop China from obtaining restricted chip-making tools and high-end chips from places including Israel, Singapore, Malaysia and Taiwan.

The Biden administration is set to expand the coverage of its Foreign Direct Product Rule (FDPR), which was first introduced in 1959 to control the trading of US technologies, by the end of this month, Reuters reported on Wednesday (July 31). 

However, the United States’ allies, including Japan, the Netherlands and South Korea, all key producers and suppliers of chip-manufacturing tools, will not be affected by the change, the same report said. 

The Biden administration may also use the FDPR to stop China from getting high-bandwidth memory (HBM) chips made by SK Hynix and Samsung Electronics and equipment capable of making those chips, Bloomberg reported, citing unnamed sources. 

The report said the new FDPR, if enacted, would block the shipment of the HBM2 and more advanced chips including the HBM3 and HBM3E, all of which can be used as artificial intelligence (AI) accelerators.

It said US-based Micron Technology also produces HBM chips but it will not be affected by the new rule as the company has refrained from selling its HBM products to China after its memory chips were banned from being used in the country’s critical infrastructure in 2023. 

“Containing and going after China will not stop China’s development, but will only make China even more determined and capable in boosting our own strength in technology and innovation,” Lin Jian, a Chinese foreign ministry spokesperson, said in a media briefing on Wednesday. 

“We hope relevant countries will firmly resist the coercion and jointly uphold a fair and open international trade order to protect their own long-term interests,” he said.

Reuters also reported that the US plans to add about 120 entities to its restricted trade list. These entities include six chip foundries and their hardware and software suppliers. 

In March this year, Bloomberg reported that Washington is considering blacklisting Hefei-based ChangXin Memory Technologies Inc (CXMT), which produces DRAM for use in computer servers and smart vehicles, as well as five other Chinese chip makers.

In June, Alan Estevez, chief of the US Commerce Department’s Bureau of Industry and Security (BIS), visited the Netherlands and Japan to press their governments to put more limits on the China shipments of ASML and Tokyo Electron Ltd, respectively.

Chinese self-sufficiency

Chinese commentators have mixed views on the intensifying chip war between China and the US. 

“The strengthening US curbs against China showed that the US is worried that it will lag behind China in technological development,” Chen Fei, an associate professor at the School of Politics and International Studies, Central China Normal University, says in an article published on Thursday.

Chen says many Chinese companies are quickly developing their own AI models and related supply chains and have already in certain areas surpassed the US. He asserts the US wants to use sanctions and export controls to slow the growth of China’s AI development but its plan won’t succeed. 

Wen Yizhai, a Henan-based columnist, says in an article that China must increase its efforts to achieve self-sufficiency in high-end chips as import channels can be blocked one day if the international situation suddenly changes. 

”Why does China still have to spend more than US$300 billion to import semiconductors every year? It is because Chinese chip makers can’t compete with global chip giants in terms of product quality and production scale,” he says. 

“Although Chinese firms keep improving, it’s unlikely that they can achieve significant breakthroughs in the short term.”  

He points out that Chinese memory chip makers, including Yangtze Memory Technologies Co (YMTC) and CXMT, only have a combined 5% market share domestically as the sector is dominated by South Korea’s Samsung and SK Hynix. 

In the first five months of this year, China’s imports of integrated circuits grew 13.2% year-on-year to $148.4 billion while imports of chip-making equipment rose 64.4% to $18.2 billion, according to China Customs data.

During the period, Japan’s exports of chip-making equipment to China increased 21.5% to $10.55 billion, representing 58% of the total amount of tools imported by China. 

South Korea’s exports of chips to China surged 46.5% to $44.8 billion, accounting for 30% of China’s total chip imports.  

Closing a loophole

Sources told Reuters that the BIS wants to close a FDPR loophole by lowering the amount of US content that determines when foreign items are subject to US control. 

Since 2019, the Netherlands has stopped issuing licenses for ASML to export its extreme ultraviolet (EUV) lithography tools to China.

At the beginning of this year, the country also banned the export of two immersion deep ultraviolet (DUV) lithography machines, known as the NXT:2050i and NXT:2100i, to China. 

In July 2023, Japan added 23 items of chip-making tools and materials to its export control list. 

Due to these restrictions, Chinese foundries can only produce chips up to 7 nanometers, not the smaller ones used in more advanced applications. 

The US also banned the exports of certain high-end AI chips, including Nvidia’s A100 chips, to China in two packages announced in October 2022 and 2023. 

Media reports said Chinese chip makers are seeking to set up fabs in Singapore and Malaysia so they can use immersion DUV or even EUV lithography machines there. Some American chip makers also plan to make chips in Southeast Asia and sell them to China. 

Now Washington is drafting a new chip export control package that could undercut those plans. With the FDPR, the BIS can regulate the re-export and transfer of foreign-made items if their production involves certain American technology, software or equipment. 

The BIS can strengthen the FDPR by defining certain technology, software and equipment as subject to the Export Administration Regulations (EAR). For some years, the BIS has been using the FDPR to stop Chinese tech giant Huawei from obtaining high-end chips overseas. 

Read: US targets Hong Kong chip transshipments to Russia  

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