Balancing the Ledger: Export Controls on U.S. Chip Technology to China – CSIS | Center for Strategic and International Studies

Photo: nespix/Adobe Stock
Report by Sujai Shivakumar, Charles Wessner, and Thomas Howell
Published February 21, 2024
An initial assessment of recent attempts by the United States to limit or delay China’s ability to acquire and produce advanced semiconductor technologies reveals a mixed picture in a complex and rapidly evolving industry. On the one hand, new chip restrictions have significantly affected China’s semiconductor ecosystem, limiting access to equipment essential for next-generation production. On the other hand, China is intensifying its domestic investments in more advanced chips while also reducing market shares of U.S. firms—and by extension, the revenues U.S. firms need to invest in the next-generation of technology. Over time, this loss of market share could well undermine the competitiveness of U.S. firms in this key industry. The initial volley of restrictions has also revealed limitations of export controls, both because the technology is rapidly changing and because there are gaps in compliance between U.S. companies and those of allies.
One key conclusion, however, is that there is “no way back” to the global semiconductor ecosystem that existed prior to the pandemic. The U.S. chip supply chain vulnerabilities that the Covid-19 emergency exposed are too alarming to allow a reversion to a business-as-usual supply chain anchored in China. Further, Chinese perceptions of the United States’ reliability as a supplier have understandably changed. It is unlikely that U.S.-China semiconductor-related trade will return to the status quo ante.
While the United States retains a substantial lead in semiconductor design and certain equipment, the most advanced chips are no longer manufactured by U.S.-based firms. This has troubling implications for new technologies such as artificial intelligence (AI) and quantum as well as for the security of supply for key industrial inputs. The Biden administration is to be commended for recognizing the central importance of the industry, its vulnerabilities, and the fact that the industry has been both challenged abroad and neglected at home. As the world enters a period of renewed policy focus on this enabling technology, it is important that the government’s analytic capabilities are improved to inform policy, develop effective mechanisms for allied coordination, and create the government-industry partnerships and long-term investments that will be needed to sustain and grow a more resilient U.S. semiconductor ecosystem.
On October 7, 2022, the Department of Commerce’s Bureau of Industry and Security (BIS) announced dramatic revisions to its export controls on semiconductor technology, intended to foreclose China’s ability to obtain high-end semiconductor chips, technology, manufacturing equipment, and know-how. These restrictions were substantially tightened on October 17, 2023, as the Department of Commerce finalized its proposed U.S. export control rules. The consequences of these restrictions have been far-reaching and their impacts on the semiconductor industry are only now coming into view.
The restrictions were not, however, an isolated act. They follow in the wake of a 2019 ban by the administration of President Donald Trump on U.S. companies’ delivery of goods and services to Chinese telecom equipment maker Huawei without export licenses, effectively cutting off Huawei’s access to key U.S. semiconductors. Reflecting a growing policy consensus, President Joe Biden tightened these restrictions in 2022.
In addition, the Biden administration has further restricted outbound investment. In a major move, on August 9, 2023, President Biden signed an executive order to create a mechanism for restricting outbound investment in the semiconductor, quantum information, and AI sectors in foreign “countries of concern,” a designation that includes China. The Department of Treasury, responding to the executive order on outbound investment, is preparing to establish outbound restrictions on U.S. investments in Chinese AI sectors critical to military, intelligence, surveillance, and cyber-enabled capabilities. Other restrictions are likely to follow.
The U.S. government cites national security grounds for these restrictions, which are straining relations with the domestic chip industry, U.S. allies, and China. A Department of Commerce official commented in October 2023, “The PRC government is attempting to divert a lot of civilian technologies, particularly in computing, space, AI and communications, into areas of supercomputers in civil-military fusion programs as well as other areas such as surveillance that link with human rights abuses.” The export controls are characterized as a direct response to this unique and far-reaching challenge from what some see as a “near peer” power bent on surpassing the United States by whatever means possible. While facing pushback from U.S. companies and allies, the Biden administration is nonetheless pursuing a policy of limiting China’s access to the most advanced chips and the tools to produce them. The policy is envisioned over a five-year time frame or longer. “It’s a grand vision,” Secretary of Commerce Gina Raimondo says, “five or six years . . . we will have achieved a lot of that.”
Will U.S. allies follow the United States’ lead in restricting the movement of advanced technologies to China? U.S. allies are in the process of imposing parallel restrictions, perhaps most importantly Dutch and Japanese limits on the export of advanced lithography equipment to China. However, the allied response to date has been characterized as “piecemeal,” and the dissonance between U.S. and allied systems of export control leave substantial holes in the restrictive net envisioned by U.S. policymakers.
Indeed, the success of U.S. controls is likely to depend on the ability to harmonize U.S. restrictions with those of key allies, whose export controls differ substantially from those of the United States, resulting in substantial gaps. In general, U.S. allies have a narrower scope for restrictions.
In addition, semiconductor firms in Japan, South Korea, and Europe operate in a different part of the semiconductor ecosystem, have different commercial interests, and do not necessarily share U.S. views of strategic competition. U.S. allies in Europe and Asia have not replicated the extraterritorial application of U.S. controls, which means that if their companies wish to continue trading with China, they may do so by establishing overseas subsidiaries. Moreover, EU decisionmaking is enmeshed in cumbersome procedures. While the European Commission is seeking the authority to impose export controls on key technologies, including semiconductors, progress is likely to be slow, as all 27 member states must approve the grant of such authority. This level of consensus may well prove difficult, especially in a relevant time frame.
Whatever the imperfections of U.S. and allied export controls on chips, the current restrictions appear to have a significant impact on China’s semiconductor ecosystem. The Dutch decision to block exports of ASML’s most advanced extreme ultraviolet (EUV) lithography tools should, in principle, foreclose China’s ability to produce advanced chips at the two- and three-nanometer nodes. These advanced chips are needed to sustain China’s AI development. Currently, China simply cannot replicate ASML’s lithography technology: “Producing this kind of complex machinery entirely within China is not likely to happen in the foreseeable future,” industry insiders say.
Further, China’s most advanced maker of semiconductor lithography equipment, the government-run Shanghai Micro Electronics Equipment, announced in the summer of 2023 that it would start delivery of lithography equipment capable of manufacturing chips at the 28-nanometer node, “well behind the industry’s cutting-edge of 2 to 3 nanometers.” For the foreseeable future, most Chinese companies will be relegated to the production of higher-node, sometimes called “legacy” chips, though this shift, fueled by very substantial state-backed investments risks posing significant challenges to Western production systems and profitability.
More broadly, China’s advanced tech development efforts appear to be impaired by the loss of access to high-end U.S. semiconductor devices.
While the overall effect of these restrictions is not yet clear, they appear to be having significant impacts on some Chinese companies.
China is responding to U.S. moves to block advanced technology transfers by upping its own game in a number of ways:
Significantly, China is also taking measures to disrupt the U.S. semiconductor industry and signaling what it could do if pressed further by Western technology restrictions:
In the face of these actions by China, some critics suggest U.S. restrictions could be rolled back. But, as noted, it seems much more probable that there is no way back to the global semiconductor ecosystem that existed prior to the pandemic. The U.S. chip supply chain vulnerabilities revealed by the Covid-19 emergency are too alarming to allow reversion to a business-as-usual supply chain anchored in China. Moreover, Chinese perceptions of the United States’ reliability as a supplier have understandably changed. It is unlikely either side will be willing, or allowed, to return fully to the previous supply chain.
The realignment of microelectronics supply chains for resilience and security, instead of purely for efficiency, will inevitably modify, and perhaps damage, existing innovation networks and complicate the operations of semiconductor companies. This is already happening: for example, the large chip fabrication plants Western firms have established in China with tens of billions of dollars in investment are already being affected by new export controls and are now hostage to the vagaries of the U.S.-China chip rivalry.
The impact of these developments on revenue for some U.S. equipment companies is significant, with the attendant risk of long-term impacts on the research and development (R&D) that underpins their competitive position. Similarly, China is reducing access to its domestic market for some U.S. semiconductor companies, which will negatively impact the ability of these U.S. companies to invest in new facilities and equipment. The hard truth is that U.S. companies are competing under a new set of circumstances with what is, for many, their largest customer.
Indeed, the notion that the United States and its allies can significantly slow Chinese capabilities in microelectronics is a hypothesis—nothing more—and the events of 2022 suggest Chinese capacities are far from static. They will need to be continuously reassessed in light of ongoing indigenous developments. China’s use of institutional “technology extractors” (such as local content requirements, joint ventures, and technology-for-market-access deals) to acquire foreign technologies is extremely skillful and these practices have continued to expand since the country’s accession to the World Trade Organization (WTO) in 2001, notwithstanding its commitments in its protocol of accession and Western export controls. According to one estimate, in the first decade after accession, the number of identifiable technology extractors jumped from 53 to 339, involving over 100 industrial sectors.
Against this background, China has proved to be skilled at acquiring foreign semiconductor technology, chips, and manufacturing equipment, including proscribed items, export controls notwithstanding. The slow implementation of the most recent round of allied export controls has enabled China to acquire Western equipment subject to controls—perhaps the most dramatic manifestation of which was SMIC’s ability to secure European and U.S. equipment to manufacture chips for Huawei’s new smartphone. Highly regarded former TSMC vice president Burn J. Lin said in October 2023 that SMIC should be able to advance to manufacturing chips at the five-nanometer node using the same equipment. While yields may be lower and costs higher than with advanced Western equipment, firms backed by low-cost capital and with preferential access to national markets, can and likely will remain formidable competitors in global markets.
Historically, China has proved to be unable to develop significant microelectronics innovations on its own, which quite possibly remains the case today. At the same time, the recent developments noted above suggest this dynamic may be changing, aided by leaky controls and systemic theft. In any case, complacency regarding the limits of Chinese capabilities may not be justified.
Traditionally, Chinese policymakers viewed continuous acquisition of foreign chip technology as a sine qua non for the development of its own semiconductor industry. Thus, in 2000, then-minister of information industry Hu Qili noted that South Korea’s three major semiconductor enterprises
“built up their fortunes on their cooperation with the United States and Japan. . . . If we just engage in development behind closed doors, totally rely on ourselves in the aspects of talented people, funds, and technologies, and produce products only to serve and support ourselves, it is absolutely impossible to establish ourselves in the intense international competitions.”
On the one hand, China has sought to draw in foreign firms with advanced technology to complement its own efforts:
“Chinese authorities . . . aim to create world-leading semiconductor firms in terms of technology. But the country’s semiconductor firms are mostly lagging behind their international competitors technology-wise, and the hard reality is that it would be very difficult for China to catch-up through its own research and development efforts. Buying existing firms with advanced technology instead of developing its own seems a quick fix.”
Some progress was made, but the new CFIUS controls and similar measures among like-minded states have virtually closed this option.[1]
On the other hand, it is prudent to consider the real possibility that the new Western controls will drive Chinese policymakers and businesses to undertake truly indigenous innovation in microelectronics and that such efforts could lead to technological breakthroughs that could transform the global chip industry.
Indeed, China’s government remains determined to catch up with the West in microelectronics. The 20th National Congress of the Communist Party report, released soon after the U.S. announcement of tightened export controls in October 2022, identifies the trade conflict with the United States as the “economic main battlefield” and promises “high-level technology self-strength and self-independence.”
Western export controls have reportedly resulted in pushback by listed Chinese companies, “prompting them to increase their investment in R&D to enhance their technological innovation capabilities.” The growing innovative capability of Chinese companies has recently been acknowledged by the Boston Consulting Group, whose annual roster of the top 50 innovating companies in the world now includes Chinese firms such as Alibaba, Lenovo, Huawei, Xiaomi, JD.com, and Tencent. China’s leading chip foundry, SMIC, has already demonstrated what is achievable, having narrowed the gap with world-leading semiconductor firms from trailing several generations behind in 2000 to several years behind at present.
It’s not entirely impossible to use less-advanced tools to make more advanced chips. It’s very difficult to have a clear cutoff on what machine can do what . . . The differences very often depend on how precise and how uniformly the work they could perform, and what are the throughputs, or efficiency, of those tools.
But efficiency is essentially a U.S. criterion. A fundamental difference between U.S. and Chinese chip manufactures is that U.S. manufacturers need to—indeed must—generate profits, usually on a quarterly basis. Chinese manufactures, with heavy and ongoing state support, are not constrained in the same manner. Companies that can compete without regard for losses are formidable competitors.
In sum, the recent innovative developments and workarounds in China’s chip ecosystem are concerning. The Biden administration has embraced the term “small yard, high fence” to explain its technology controls affecting China—in other words, the universe of restricted technologies will be comparatively small, but the restrictions will be extremely stringent. But realizing this objective presents a formidable challenge. China’s “yard” of advanced chip technologies with national security implications is expanding rapidly in a sprawling fashion—in multiple, often poorly understood directions. Moreover, the Western “fence” is currently full of holes, not least because of the lack of full congruence between U.S. and allied export control regimes. For these reasons, the concept of a “small yard, high fence” must be regarded as aspirational and certainly not a near-term reality.
Regardless of the difficulties of controlling high-tech exports to China, the U.S. innovation system itself is vulnerable. Additional policy measures and investments are needed in many areas, not least in the semiconductor space. Competing with China will require substantial and sustained investments, not always a strong point for the United States.
The Need for Sectoral Expertise in Policymaking
One glaring vulnerability in the chip sector is the paucity of relevant government expertise in U.S. and allied countries with respect to both the commercial and defense-related aspects of particular semiconductor technologies. The result is that “relevant agencies often lack the expertise to assess exporters’ requests for a licence to sell products abroad.” BIS has under 600 employees and an annual budget of about $200 million, resources that are simply inadequate to address the agency’s many responsibilities. Absent an increase in the quality and depth of expertise to inform policy decisions, allied controls risk being ineffective. Recruitment of qualified staff with the necessary remuneration levels is essential. Direct and recent experience is critical for informed decisionmaking.
The Need for Informed Advisory Committees
The United States has in the past made episodic efforts to establish advisory bodies to guide semiconductor industry policymaking, and U.S. departments, agencies, and National Laboratories possess substantial internal expertise on specific themes. However, there is no central standing body of relevant expertise and data gathering and analytic capability to advise the Department of Defense or the Department of Commerce in real time with respect to what are often highly technical U.S. policy decisions on export licensing with wide-ranging implications.
There is a positive precedent, however. In the late 1980s and early 1990s, the Sematech research consortium convened large numbers of scientists and engineers from industry, government laboratories, and academia to develop a technology road map for the semiconductor industry. This ad hoc effort succeeded beyond all expectations and was carried forward in Sematech’s organic technical advisory bodies. While successful, this advisory body eventually became something of a one-off effort after the withdrawal of government support for Sematech and did not result in establishing a permanent advisory body that could provide technical semiconductor expertise to the government.
However, the working groups from industry, government, and academia that flourished under Sematech’s auspices remain a possible model or starting point for an effective U.S. chip advisory brain trust. Importantly, the proposed National Semiconductor Technology Center (NSTC) has a major opportunity to fill this gap on an ongoing basis. The potential value of the NSTC will be its ability to provide long-term guidance based on close consultation with industry on how the needs of the industry can intersect with national security needs. Providing a long-term view with frequent level setting by advisory groups will be essential to its success.
Complexity and Cooperation
Although the United States and its allies are determined to strengthen the durability and security of semiconductor supply chains by separating them from China, it is important to recognize that those chains are an enigma, even to companies embedded within them and to the end users they serve. The complexity is daunting. Chip supply chains often involve tens of thousands of companies in network arrangements that are many layers deep and constantly changing. Understanding them is difficult because most entities in this network want to keep the identity of their suppliers confidential. This means an original equipment manufacturer (OEM) that sources directly from several hundred equipment and materials vendors may have no idea who supplies those vendors or in what country these suppliers—and their suppliers in turn—are located. Some analysis suggests many of these vendors are East Asian. This complexity and opacity mean it is very hard to target policies to reward or isolate particular actors within this system. Moreover, policy actions are likely to have unexpected and often counter-intentional outcomes, potentially harming U.S. commercial and national security interests.
Mapping Supply Chains
If the objective is to facilitate disentanglement of U.S. chip supply chains from China (assuming that is possible and desirable), it would be imperative to develop public-private partnerships between U.S. government and industry to map out supply chains and develop ways to ascertain from where key inputs are coming. Bringing industry together to discuss supply chains will be—to use a modest word—difficult. To paraphrase a Chinese saying, extracting this information from the semiconductor industry will be “like pulling the teeth from the mouth of a tiger.” Even so, a rudimentary mapping may help shed some light. Sematech’s working groups, noted above, are a potential model and starting point, as the oral histories of some participants suggest. This model may well be applicable to the NSTC, not least as a means of staying close to industry concerns and needs as well as a primary source of information.
New Arrangements for Harmonization
With respect to harmonization of U.S. chip export controls with those of allies and strategic partners, current modalities are inadequate. The Wassenaar Arrangement is a voluntary multilateral export control regime with 42 member countries that seeks to ensure international stability by promoting transparency and responsibility with respect to transfers of conventional weapons and dual-use products and technologies. Wassenaar was created in 1996 to succeed the Cold War-era Coordinating Committee for Multilateral Export Controls (COCOM), a more stringent control regime. Exports of some chip technologies to China by signatories are already restricted pursuant to Wassenaar commitments. However, any attempt to utilize Wassenaar to coordinate enhanced allied semiconductor export controls will necessarily be complicated, perhaps fatally, by the fact that Russia is a Wassenaar member and will likely oppose any tightening of chip export controls directed at China.
This reality suggests the need for new arrangements, perhaps informal but nonetheless effective, on the part of like-minded states. U.S. policymakers must understand that consultations and cooperation with allies and industry will be absolutely essential to the success of U.S. policy in this domain. That means close coordination on policy while genuinely taking into account partners’ perspectives and needs. Clearly articulating specific objectives and consulting with industry on the effectiveness of proposed measures is more important than announcements of new “controls.” The semiconductor space is not one for unrestrained unilateral action. Close cooperation, however challenging, is the path to success.
Sujai Shivakumar is director and senior fellow of the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Charles Wessner is a senior adviser (non-resident) with the CSIS Renewing American Innovation Project. Thomas Howell is an international trade attorney specializing in the semiconductor industry and a consultant with the CSIS Renewing American Innovation Project.
This report is made possible by general support to CSIS. No direct sponsorship contributed to this report.
Please consult the PDF for reference.
This report is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2024 by the Center for Strategic and International Studies. All rights reserved.
Center for Strategic and International Studies
1616 Rhode Island Avenue, NW
Washington, DC 20036
Tel: 202.887.0200
Fax: 202.775.3199
See Media Page for more interview, contact, and citation details.
©2024 Center for Strategic & International Studies. All Rights Reserved.

source