On October 7, 2022, the Department of Commerce's Bureau of Industry and Security (BIS) announced an interim final rule (IFR)Footnote ¹ that “restrict[s] the [People's Republic of China's] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”Footnote ² in order “to protect U.S. national security and foreign policy interests.”Footnote ³ The rule stems from concerns about Chinese development of “[a]dvanced computing items and ‘supercomputers’ [that] can be used to enhance data processing and analysis capabilities, including through artificial intelligence (AI) applications[,] . . . [that] improve the speed and accuracy of its military decision making, planning, . . . logistics, [and] autonomous military systems, . . . improve calculations in weapons design and testing including for WMD, such as nuclear weapons, . . . [and] monitor, track, and surveil citizens [‘without regard for basic human rights’].”Footnote ⁴ Amending the Export Administration Regulations (EAR),Footnote ⁵ the IFR “implement[s] . . . controls on advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and certain semiconductor manufacturing items.”Footnote ⁶ They also “expand[] controls on transactions involving items for supercomputer and semiconductor manufacturing end uses” and impose a license requirement on “specific activities of ‘U.S. persons’ that ‘support’ the ‘development’ or ‘production’ of certain ICs in the PRC.”Footnote ⁷ In effect, the rule restricts direct access to the most advanced U.S. chips, chip design software, and semiconductor manufacturing equipment (and components for that equipment). It also cuts off indirect access to U.S. technology and software through foreign manufacturers of chips and chip-making equipment. Since all high-end chips produced worldwide have some connection to the United States, either directly or indirectly, and since China lacks equivalent-quality homemade substitutes, the rule endeavors to prevent China from using, manufacturing, and developing such chips.Footnote ⁸ These new export controls are part of a broad legal and economic policy strategy designed to advance U.S. national security goals in light of increased competition with China.

Chips make the computing world possible by processing, storing, and receiving information.Footnote ⁹ They manipulate data, run software, and control electronics. They fuel a wide variety of technologies and industries, including artificial intelligence, super and quantum computing, and advanced wireless networks. In addition to being critical for civilian products like smartphones, chips can be used to develop nuclear weapons, hypersonic missiles, and missile defenses.Footnote ¹⁰ Chips are thus not only essential for everyday life, they are also vital to national security.

For all their ubiquity and import, chips are not easy or cheap to make. A chip's core is composed of a semiconductor, a material, such as silicon and gallium arsenide, with electrical conductivity values less than conductors, like copper, but greater than insulators, like rubber. Chip fabrication involves fashioning the semiconductor into a thin wafer, coating it, exposing it to UV light to transfer a pattern, and lithographically etching it to create switches, called transistors.Footnote ¹¹ The transistors are then networked together into integrated circuits. A single wafer can comprise hundreds of integrated circuits with, possibly, billions of transistors. Once finished, it is sliced into chips, each made of a single integrated circuit, tested, packaged, and sold for its ultimate end use.Footnote ¹² The process can take up to two months and include thousands of steps.

The supply chain for chips is global. The silicon, design software, chip design, semiconductor manufacturing equipment, fabrication facility (or fab), testing and packaging plant, and end use assembly may all be from or in different countries.Footnote ¹³ Often, companies will specialize in one of these steps. Fabricating chips requires incredibly sophisticated buildings, equipment, and technology. Fabs cost billions of dollars to build, and single machines that are part of the fabrication process can cost more than a hundred million dollars. Given the demand for chips, the number of fabs worldwide is relatively small. For the most advanced chips that power supercomputers and artificial intelligence capabilities, there are only a handful of firms that create the chip design software, design the chips, produce the manufacturing equipment, and fabricate the chips. The supply chain for these high-end chips is thus quite tenuous and susceptible to disruption.

The centrality of chips to economic development, their potential for military use, the scarcity of their manufacture, and their vulnerability to supply chain interruptions make them a resource, like oil and gas, of immense strategic importance. Even though semiconductors remain one of the United States’ top five exports,Footnote ¹⁴ it fabricates only 12 percent of the world's semiconductors,Footnote ¹⁵ down from 37 percent thirty years ago, and none of the most advanced semiconductors.Footnote ¹⁶ A 2016 report from the National Security Agency and the Department of Energy warned that a loss of American leadership in the development of semiconductors would “severely compromise” national security and “undermine profitable parts of the U.S. economy.”Footnote ¹⁷ And a 2021 report by the National Security Commission on Artificial Intelligence concluded that,“[i]f a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off U.S. access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”Footnote ¹⁸ Consequently, the U.S. government has sought to ensure that U.S. access to the most technologically advanced chips is not threatened. For the same reason, the government has an interest in ensuring that countries that are considered national security threats do not have access to these same technologies. These dual interests—to maintain technological advantage and to prevent adversaries from equaling or gaining that advantage—are imperatives that have led the Biden administration to undertake two corresponding sets of initiatives: the CHIPS and Science Act and the IFR.

To preserve U.S. technological superiority, the administration sought passage of the Act, which was signed by President Joseph R. Biden, Jr. on August 9, 2022.Footnote ¹⁹ The Act “provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development,” including $39 billion in incentives for manufacturers and $13.2 billion for research and development and workforce development.Footnote ²⁰ Multiple firms have already announced investments in new U.S. chip fabrication facilities.Footnote ²¹ Secretary of Commerce Gina Raimondo emphasized: “Semiconductors are ground-zero in [the] technological competition [with China] and central to our new investment strategy. They drive innovation in nearly every emerging technology and support critical national security applications.”Footnote ²²

The IFR is designed to prevent China from having access to, or being able to fabricate itself, the most sophisticated chips. The comprehensive and proactive approach undertaken by the rule is new.Footnote ²³ A few weeks before it was announced, National Security Adviser Jake Sullivan telegraphed the coming rule and its rationale: “Our competitors are using increasingly sophisticated means to illicitly acquire sensitive technologies, information, and know-how, and we must adapt accordingly. On export controls, we have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies.”Footnote ²⁴ He continued: “We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today. Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”Footnote ²⁵

To achieve these ends, the new rule leverages U.S. technological dominance at key steps in the high-end chipmaking supply chain to restrict China's access to and its ability to make the most sophisticated chips and supercomputers. Broad in scope, the changes comprise additions and revisions to five components of the EAR: the Commerce Control List (CCL); end-use controls; Foreign-Direct Product (FDP) rules; the Entity List; and U.S. persons rules. Changes to the CCL established new export controls and expanded existing controls for advanced chips and associated technology and software. These revisions include: creating new Export Control Classification Numbers (ECCNs) to cover high-end chips, chip-making equipment, and supercomputers; expanding the scope of some existing ECCNs; revising the regional stability (RS) controls specific to China; expanding the applicability of those RS controls to the new ECCNs and their associated technology and software; creating a presumption of denial for license applications from non-U.S. persons for all these items; and limiting license exceptions.Footnote ²⁶ The updates to the CCL prevent the export of these items from the United States to China or (when sold to a party in a third country) their re-export to China, without a license. As a backup, the IFR also adds a provision that establishes a license requirement for controlled chips or associated technology and software when a person has knowledge that such item is destined for an end-use relating to supercomputers located in or destined for China or IC fabrication facilities in China.Footnote ²⁷ In addition, the FDP rules subject foreign-made items (chips, chip manufacturing equipment, and supercomputers) that are destined for the PRC to the EAR controls when those items are “the ‘direct product’ of certain specified ‘software’ or ‘technology’ subject to the EAR” or were made by a product that itself was direct product of such software or technology.Footnote ²⁸ A new FDP rule also controls foreign-made products destined for twenty-eight Chinese entities that are on the Entity List.Footnote ²⁹ Finally, the IFR bars “U.S. persons,” corporations and individuals, from “‘support[ing]’ the ‘development’ or ‘production’ of certain ICs in” China without a license.Footnote ³⁰ “Supporting” includes “servicing” items and shipping or facilitating the shipment of items to or within the PRC. Since the IFR's announcement, numerous American executives, engineers, and scientists working in the semiconductor industry in China have resigned, been let go, or been reassigned.Footnote ³¹

Cooperation with other countries will be critical to the rule's success. The Netherlands, where ASM International and ASML Holding NV are headquartered, and Japan, where Tokyo Electron Ltd. is located, are especially important, as these companies develop and manufacture semiconductor production equipment critical to fabricating the most advanced chips. They could create equipment that is not reliant on U.S. technology (and therefore not subject to the FDP rules), and sell it to the PRC, making the U.S. rules ineffective. Following discussions with the United States, the two countries have reportedly agreed to adopt export control measures of their own.Footnote ³² Should the Dutch and Japanese governments indeed accede, “[t]he three-country alliance would represent a near-total blockade of China's ability to buy the equipment necessary to make leading-edge chips.”Footnote ³³ Countries where chips are made will also need to take actions to effectuate the goals set by the United States. In November, Germany announced that it would block the sale of a fab in Dortmund to a Swedish subsidiary of a Chinese company.Footnote ³⁴ And shortly thereafter the United Kingdom ordered a Dutch subsidiary of a Chinese company to reverse its takeover of Britain's largest fab.Footnote ³⁵ Taiwanese and South Korean companies operating in China—Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung Electronics Co., and SK Hynix Inc.—have been granted one-year licenses by the Department of Commerce.Footnote ³⁶ The controls have had immediate impact, with Chinese imports of semiconductor manufacturing equipment down 40 percent in November.Footnote ³⁷

The Chinese government has described the export controls as “sci-tech hegemony” and “technological bullying.”Footnote ³⁸ In a meeting with President Biden in Bali on November 14, President Xi Jinping said that “starting a trade war or a technology war, building walls and barriers, and pushing for decoupling and severing supply chains [as the United States has done] run counter to the principles of market economy and undermine international trade rules.”Footnote ³⁹ “Such attempts,” he continued, “serve no one's interests. We oppose politicizing and weaponizing economic and trade ties as well as exchanges in science and technology.”Footnote ⁴⁰ A month later, China initiated a dispute at the World Trade Organization alleging the new export control rules are inconsistent with U.S. obligations under provisions of the General Agreement on Tariffs and Trade 1994, the General Agreement on Trade in Services, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights.Footnote ⁴¹ The Ministry of Commerce commented in a statement: “In recent years, the US side has continuously overstretched the notion of national security, abused export control measures, [and] hindered the normal international trade of chips and other products.”Footnote ⁴²