Amidst the current US restrictions that prohibit Chinese firms from buying advanced chip-making equipment from US companies, there seems to be a shift to other markets. China’s imports of lithography systems from the Netherlands increased tenfold year-on-year last month. China imported 16 units of the machine with a total value of $762.7 million. The bulk of imports of lithography systems in November came from the Netherlands and Japan.

China’s semiconductor manufacturers are getting alternative critical fabrication equipment from markets outside the US in an increasing manner. It also indicates that Chinese firms are not yet completely cut off from buying certain advanced equipment for chip-making. In October, China imported 21 lithography systems valued at $672.5 million, while 16 systems were imported in November at a higher sum of $762.7 million. This means that Chinese firms are getting their hands on more advanced and expensive projection systems. The US has been unrelenting in trying to restrict other countries from also selling advanced equipment to Chinese firms but it is yet to fully stop the inflow.

The Netherlands is home to ASML a leading manufacturer of lithography machines. The country is the biggest exporter of lithography equipment used to make the most advanced chips, followed by Japan. The Netherlands and Japan accounted for the bulk of imports by China for lithography equipment in November 2023. China is still far off the top in terms of technology for advanced lithography systems. It has failed to narrow the gap even with massive investments by the government. It is estimated that less than 5% of lithography systems used in Chinese fabs were made in China as of 2021.

There might be more restrictions ahead, however. Both the Netherlands and Japan have released new guidelines and export controls on chip-making equipment. The two countries acceded to the US request in January. There are new restrictions activated by the US Commerce Department targeting China. The US abolished the so-called de minimis rule which applied to certain deep ultraviolet (DUV) equipment. The new rule kicked in last month and restricts ASML from shipping advanced immersion DUV lithography systems to a few fabs involved in advanced semiconductor manufacturing in China. The spike in imports may be unconnected with the new restrictions, as the equipment shipped in November received their licenses in 2022 or early 2023.

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US President Joe Biden is poised to sign an executive order aimed at curbing critical U.S. technology investments in China, according to reliable sources familiar with internal deliberations.

The forthcoming executive order, scheduled for the second week of August, focuses on three key areas: semiconductors, artificial intelligence, and quantum computing. Bloomberg News reports that it will not impact existing investments and will only target specific transactions. However, other technology deals will be subject to mandatory government disclosure.

The decision comes amid heightened concerns over China’s growing influence in the technology sector and potential national security risks. By limiting crucial technology investments in China, the Biden administration aims to safeguard sensitive American technologies from being exploited or used against U.S. interests.

While the exact details of the order are yet to be released, the focus on semiconductors, artificial intelligence, and quantum computing underscores the strategic significance of these sectors in the global tech landscape. The move is likely to have significant implications for tech companies and investors involved in cross-border collaborations between the two economic giants.

Beijing has already warned of retaliation should the U.S. impose new limits on technology or capital flows. The Chinese envoy in Washington made this clear earlier this month, signaling potential tensions between the two nations over technology and economic policy.

The internal discussions within the Biden administration have reportedly shifted from defining the measures’ substance to planning the order’s rollout and accompanying regulations. The complexity of the matter has led to several delays in finalizing the order, with the timing slipping numerous times.

As the global tech competition intensifies, this executive order could mark a pivotal moment in U.S.-China relations, impacting technology trade, investment, and research collaborations. Observers will closely monitor how China responds to the order and its potential repercussions on the global tech supply chain and market dynamics.

The Biden administration’s move comes in the context of broader efforts to maintain U.S. technological leadership and national security in a rapidly evolving global technology landscape. The extent and implementation of the order will be crucial in determining its overall impact on U.S. businesses, China’s tech sector, and the delicate balance of technology cooperation and competition between the two superpowers.

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On Wednesday, a US treasury officer announced that there are discussions to implement new regulations to limit the transfer of U.S. investments and expertise to Chinese companies involved in cutting-edge sectors such as advanced semiconductors, artificial intelligence, and quantum computing. These new rules aim to exert greater control over the flow of critical technologies and knowledge to China.

During a Senate Banking Committee hearing, Paul Rosen, the Treasury official responsible for investment security, addressed the issue of restricting U.S. investments that involve valuable know-how and expertise in specific sectors. These sectors include advanced semiconductors, artificial intelligence, and quantum computing. 

Rosen emphasized that officials are actively working on implementing measures to curb investment from the United States in order to safeguard sensitive knowledge and expertise. The focus is primarily on sectors and subsectors such as advanced semiconductors, artificial intelligence, and quantum computing. The concern lies in China’s military and the potential implications of allowing unrestricted access to these advanced technologies.

However, even amidst the growing sanctions and uncertainties, the CEO of American Tech giant Nvidia is planning a trip to China to meet top-level executives. According to undisclosed sources, Jensen Huang, CEO of Nvidia s reportedly intends to visit China in June for the first time in several years. 

Nvidia has emerged as a key player in the field of AI globally. However, the geopolitical landscape has presented complexities for the company’s operations in China. The US sanctions have restricted Nvidia from selling its advanced AI chipsets to Chinese customers, which includes major companies like Tencent and ByteDance.

In the upcoming visit, Huang is planning to visit executives from prominent companies such as Tencent Holdings, one of the world’s top gaming companies, and ByteDance, the parent company of TikTok.

The ongoing US-China trade war has global repercussions as countries like Japan, South Korea, and Taiwan have also joined the US in adding sanctions. Recently Chinese Commerce Minister Wang Wentao, called upon Japan to cease its export restrictions on chip manufacturing in China, emphasizing the need for a change in policy. 

Shu Jueting, a spokesperson at China’s commerce ministry said that China firmly expresses its objection and determination to respond if the United States imposes restrictions on Chinese firms’ investments in the semiconductor industry.

During a news briefing, Shu stated that the actions taken by the United States to curb tech exports to China, would not only disrupt the normal operations of companies but also undermine the integrity of the international economic and trade order.

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US sanctions on semiconductor exports to China have minimal effect on the industry as companies are creating different variants of microchips, especially for the Chinese market. 

As part of a deliberate effort to stifle China’s domestic semiconductor industry, the US has been gradually limiting the access of Chinese companies to advanced chipmaking technologies. The sanctions bar US companies like Nvidia Corp and Advanced Micro Devices Inc from exporting the latest chips to China.

However, Nvidia Corp and other technology giants facing strict US sanctions have managed to overcome the restrictions by producing customized versions of their chips exclusively for the Chinese market. 

According to a Reuters report, these chips are not cutting-edge and may take 10% to 30% longer to perform certain AI tasks, potentially doubling the costs compared to Nvidia’s top-performing chips in the US. Despite the reduced speed of Nvidia’s chips designed for the Chinese market, they still provide a significant upgrade for Chinese companies. 

Nvidia is currently providing its H800 chips to some of the biggest technology companies in China, such as Tencent, Alibaba Group Holding Ltd, and Baidu Inc, for their use. Nvidia has stated that the U.S. government’s intention is not to damage competition or American industry and that U.S. firms are permitted to offer products for commercial purposes, such as providing cloud services to consumers.

What are the major US Sanctions?

The US has implemented two types of sanctions on semiconductors. Firstly, they have imposed a limit on a chip’s ability to perform exceptionally accurate calculations, with the intention of curbing the creation of military-focused supercomputers. Secondly, there is a constraint on chip-to-chip transfer speeds, which has an impact on artificial intelligence. For instance, technologies like ChatGPT rely on models that are too vast to be contained on a single chip, necessitating distribution across thousands of chips that need to intercommunicate.

The US announced controls on technologies for making advanced chips, including 14-nanometer, 16-nanometer, and even shorter-length chips, in an effort to limit China’s progress in fields such as artificial intelligence, quantum computing, and ballistic missile development. Despite these efforts, there are indications that China may have already made significant strides in producing chips smaller than 14 nm. For instance, Semiconductor Manufacturing International Corp. (SMIC), China’s biggest contract chip manufacturer, claimed to have successfully produced 7 nm chips last year, though questions remain about the sustainability of this production.

China’s Semiconductor Industry

China’s current semiconductor capabilities are not on par with those of countries like Taiwan, the Netherlands, or the US. However, since the launch of the Made in China 2025 initiative Chinese companies have made progress in different aspects of the semiconductor industry

China’s semiconductor industry comprises a diverse range of companies, including fabless semiconductor firms such as ZhaoXin, UNISOC, and HiSilicon, as well as integrated device manufacturers like Yangtze Memory Technology Corp and ChangXin Memory Technologies.

With almost one-third of the global sales, China currently holds the position of the world’s largest semiconductor market. The semiconductor industry is a significant contributor to China’s technology sector, which comprises around 30% of its GDP. 

According to Cade Daniel, a software engineer at San Francisco-based start-up Anyscale, the industry had anticipated that AI models would continue to grow in size two years ago. If that were still the case, the current export restrictions would have had a much greater effect. However today, while the restrictions are noticeable, they are not as catastrophic as they could have been.

Moreover, the process of chipmaking involves the synchronization of numerous disparate resources and sophisticated technologies, including raw silicon ingots, rare earth metals, and more which cannot be easily achieved by any country. 

However, China has a three-decade headstart in developing its collection of skilled chip engineers, rare earth metals, and numerous domestic suppliers. Thus despite being behind the global leaders in semiconductor technology, China has the ability to bounce back from the restrictions and compete with global leaders in the near future. 

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China saw a sharp fall in its semiconductor imports in the first two months of 2023. According to the data published by the Chinese customs department, the country’s chip imports fell by 27% in January and February 2023. It is unsurprising that imports have declined, considering that China experienced a 15% decrease in semiconductor imports last year, the first drop of this magnitude in two decades.

According to data published by the General Administration of customs, China imported 67.6 billion Integrated Circuits (IC) in the last two months which is 26.5% less than the imports for the same period in the previous year.  The total value of imports also fell from $68.8 billion to $47.8 billion, which is a 30.5 % fall. Even though the global chip prices are falling, China is not able to take the advantage of the competitive pricing as it is facing major restrictions on trade from the US.

The ongoing US-China Trade War:

Last year the US banned the sale of advanced chips used for artificial intelligence and cloud computing to China. The Biden administration not only banned the sale of chips but also the sale of semiconductor technology, manufacturing equipment, and personnel. The US has not only banned its companies from exporting semiconductors and related technology to China but also roped in allies like Japan, Netherlands, Taiwan, and South Korea to stop their companies from exporting semiconductors to China. 

The sanctions and curbs have limited China’s options for import as major semiconductor companies like Nvidia, ASML, Tokyo Electronics, and more are now barred from selling their advanced technology and products to China. To make matters worse, Washington is now planning to limit the use of semiconductors manufactured within China by foreign companies that use US technology. This means companies like Samsung and SK Hynix which have their fabrication units in China may not be allowed to manufacture and sell chips made in China. 

Effects of US sanctions on the Chinese Semiconductor Industry:

The US-China trade war started in 2018 when then-president Donald Trump imposed sanctions and tariffs on exports to China in order to stop alleged unfair trade practices and intellectual property thefts.

The US has already added Chinese tech giants Huawei and ZTE to the infamous entity list.  The list has more than 639 Chinese or China-related businesses and individuals on the trade blacklist. Companies on the entity list are banned from receiving  US-origin goods, services, and technology.

China’s biggest chipmaker SMIC is also on the entity list. This has hindered the expansion plans of SMIC as the mass production at SMIC Jingcheng is postponed by a couple of quarters due to a delay in getting bottleneck equipment from foreign companies. 

China is the world’s largest semiconductor market and accounts for almost one-third of global sales. The semiconductor industry plays a vital role in the country’s technology sector and accounts for almost 30% of the GDP.  However, the country is not self-sufficient in this field, as it is heavily dependent on foreign nations for advanced technology and equipment.

Though the semiconductor imports have declined in 2023, other manufacturing industries have revived and grown in the last two months after China withdrew its zero-covid policy in December 2023.  

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US Commerce Department and other regulatory authorities approved around 70% of licenses for export to China in 2022. This is despite the ongoing US-China tech war and the extreme sanctions on semiconductor export to China. 

Alan Estevez, the Under Secretary of Commerce for Industry and Security said that in 2022 the US government approved around 69.9% of export applications involving China. This means only 30.1% of applications were rejected or returned without action. 

He further added that even though the approval rate is high, there are no loopholes when it comes to approvals for China.  The average processing time for approvals was 40 days but for applications related to China, the average time for approval was 77 days or more. 

According to Reuters, Eztevez who is going to attend the US Foreign Affairs Committee hearing on “Combating the Generational Challenge of CCP Aggression”, is going to present his case and reassure the government that China remains the main focus of the enforcement bureau and he and his team will continue to work towards this goal in 2023. The Combating the Generational Challenge of CCP Aggression hearing is happening today before the House of Representatives at the US Capitol Building. 

US-China Trade War:

The US-China trade war started in 2018 when then-president Donald Trump imposed sanctions and tariffs on exports to China in order to stop alleged unfair trade practices and intellectual property thefts. China plans to become the global leader in artificial intelligence, military weapons system, and quantum computing and the US wants to limit this progress in order to safeguard its economic and military interests. The current Biden administration also continues to impose sanctions and restrictions on exports to China, to control and crush the Asian economy. 

The US has already added Chinese tech giants Huawei and ZTE to the infamous entity list.  The list has more than 639 Chinese or China-related businesses and individuals on the trade blacklist. Companies on the entity list are banned from receiving  US-origin goods, services, and technology. 

The US has mainly banned the export of semiconductor machinery, technology, personnel, and technical know-how to China, which is the largest consumer of semiconductors in the world. The Biden administration also successfully roped in allies like the Netherlands, Japan, and South Korea to impose restrictions on their semiconductor exports to China. 

Eztevez justified these restrictions by saying that the sanctions were imposed to address concerns related to the production of advanced semiconductors. He further added that these controls are not intended to stop the production of legacy semiconductors, and are neither tools of economic protectionism instead they are national security and foreign policy tools. 

US-China Record Trade Despite Ongoing Sanctions:

Despite the ongoing trade war, US and China set a record high trade figure in 2022.  The total import and export increased by 2.5% YoY reaching a whopping $690 billion. The previous record was set in 2018 for $658.8 billion. 

The US trade deficit with China also increased to $382.9 billion reaching 8.3% YoY. In 2022, China was the third largest trading partner of the US after Canada and Mexico and the largest source of imports for the country. On the other hand for China, the US was the largest single-country trade partner and the third largest trading partner after ASEAN and EU. 

The record trade figures show that the US and Chinese economies, heavily rely on each other and despite the ongoing tech war and diplomatic stand-offs decoupling both economies does not seem viable.

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After months of speculation and dialogue, it seems that Japan and Netherlands are going to join hands with the US, to stop the export of semiconductor technology to China. Japan and Netherlands are the major suppliers of semiconductor manufacturing equipment. 

Though the US has the biggest group of Integrated Device Manufacturers (IDM) for semiconductors, Japan’s Advantest (a leading manufacturer of automatic test equipment (ATE) for the semiconductor industry), Tokyo Electron, Haribo, Hitachi, Kokusai, and Netherlands ASML (a leading supplier to the semiconductor industry that provides chipmakers with hardware, software, and services to mass produce the patterns of integrated circuits) are also major players in this sector. 

To establish the most advanced semiconductor production lines, China needs support from top US firms like Applied Materials Inc., Lam Research Corp., and KLA Corp. However, with the current US sanctions, which not only limit exports of American-made machinery but also restrict US citizens from working with Chinese chipmakers, it is difficult for the country to produce top quality semiconductors.  If Japan and Netherlands also add sanctions on China, then it will break the countries’ hope to achieve global domination in technology. 

Akira Amari, a Japanese Politician of the LDP and the man behind the rise of the Japanese semiconductor industry, said to Bloomberg News that his country must join the US in containing China’s chip ambitions, warning that Beijing is part of a group of nations seeking global hegemony and hence must be curbed. Amari further added that any sanctions need to be carefully calibrated to avoid a complete decoupling that risks global economic stability. 

Though the Japanese and Dutch Governments won’t go as far as the US with their sanctions, Beijing will find itself in a difficult spot with any more additional restrictions from these two countries. If the US, Japan, and the Netherlands act together, China will have no access to the technology or equipment to build advanced semiconductors. 

Semiconductors are one of the hottest technology items of this decade. All the major technology sectors, like wired communication, consumer electronics, industrial electronics, automotive electronics, wireless communication, and computing and data storage, require semiconductors. 

China which aims to become the global leader in artificial intelligence and quantum computing needs an uninterrupted supply of semiconductors to achieve this goal. However, the pandemic restrictions and the ongoing US sanctions have unveiled the loopholes in China’s supply chain, further strengthening Beijing’s belief that autonomy in the semiconductor industry is the only way for China to become the global tech leader. 

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