Get Ready for More U.S. Restrictions on Tech Exports to China

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A semiconductor factory in eastern China’s Jiangsu province in March 2021.


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Expect more, further-reaching action from the Biden administration in the continuing technology Cold War between the U.S. and China.

 New restrictions targeting exports of semiconductors and equipment used to make them could be unveiled by the Commerce Department on Thursday, codifying restrictions outlined in recent letters to companies like Advanced Micro Devices (ticker: AMD) and



Nvidia

(NVDA), says Owen Tedford, a senior research analyst at Beacon Policy Advisors. The department didn’t respond to a request for comment.

The rules, part of a broad effort to limit China’s access to critical technology and decouple supply chains in areas that could pose national-security concerns, comes as friction between Washington and Beijing intensifies. Some two-dozen export-control restrictions have been rolled out since the Trump administration began looking at its relationship with China through a national-security lens, as bipartisan support for a stronger stance against China has grown.

The fact that Nvidia’s shares slipped in late August when it disclosed its Commerce Department letter, warning that its sales could be hurt, could limit the near-term hit to U.S. chip makers when the measures are released. But the expected controls in several areas of the industry supply chain would mark one of the most significant sets of new restrictions on U.S. technology headed to China, says Paul Triolo, a global technology-policy specialist at the advisory firm Albright Stonebridge who helps clients navigate political and regulatory matters related to China.

While some of the past restrictions were implemented by putting Chinese companies on an entity list that prohibited U.S. investment or sales to the targeted firm, the Commerce Department is expected to use the Foreign Direct Product Rule, Tedford says. That could make it harder for U.S. companies to get licenses to continue sales to those companies, he says.

Over the summer, a Commerce Department-led review found that the U.S. approved 81% of requests for licenses that were required for some exports, allowing the sale of sensitive technology that could be used by China’s military.

Restrictions could also apply to foreign companies selling to China such as



ASML Holding

(ASML), Tedford says.  

The Trump administration used the Foreign Direct Product Rule to restrict both U.S. and foreign companies from shipping products made using U.S. technology or software to Huawei Technologies. Partly as a result, Huawei’s sales dropped by nearly a third in 2021, forcing the company to overhaul its business.

Other measures are also under consideration, including the possible addition of new companies to the entity list, blocking U.S. companies from exporting to them. One possible target could be the Chinese state-owned chip maker Yangtze Memory Technologies, says Tedford.

Some in Congress have been calling for increased scrutiny of Yangtze amid reports



Apple

 is considering using the company’s NAND chips for phones sold inside China. The Biden administration has also been looking into whether Yangtze is selling chips to Huawei, which could be a violation of earlier U.S. export controls.

The Biden administration could also issue an executive order aimed at scrutinizing outbound investments in sectors deemed relevant to national security, Tedford says. The order under consideration is aimed at creating transparency, rather than blocking investment, and could go beyond technology to include sectors like agriculture and healthcare, which the Biden Administration highlighted when it expanded the national security considerations the Committee on Foreign Investment in the U.S. uses to assess deals, Tedford says.

The restrictions would add to the list of challenges China faces as it seeks to become self-reliant in chipmaking. Policy makers are already grappling with a corruption probe of officials of the country’s largest state-backed chip investment fund.

Beijing’s response to the U.S.’s various restrictions is still evolving. Triolo expects that at this month’s 20th Party Congress, Xi Jinping will renew calls for self-reliance and faster innovation in critical areas like semiconductors. Possible initiatives include offering policies favoring companies entering areas like graphics-processing unit design and seeking to attract venture-capital investment for the chip industry.

In the near term, though, Triolo says it will be difficult for China to replace Nvidia and AMD.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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