U.S. Shifts China Policy: What You Need to Know

U.S. policy towards China is temporarily tending towards relative rationality

On September 22nd, the U.S. Department of Commerce released the final policy patch for the “Chip Act.” This rule is the first policy related to Chinese semiconductors issued by the United States since the launch of the Huawei Mate60. It may shed light on the recent U.S. attitude towards China’s efforts in semiconductor self-reliance.

This new regulation represents an amendment and softening of the U.S. regulations from March 22nd, departing from the previous rigid stance. Coupled with the recent thaw in relations between the U.S. and China, there seems to be a slight warming in the glacial period, introducing new variables into the recent technological confrontation between the two nations.

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Analysis of U.S. Policy Towards China

The U.S. Department of Commerce has refined two core provisions of the “Chip Act” through four new regulations to facilitate the implementation of the law. The two core provisions are as follows:

1. They are prohibiting CHIPS fund recipients from expanding their foreign semiconductor manufacturing capabilities within ten years.
2. They are restricting CHIPS fund recipients from engaging in joint research or technology licensing with relevant foreign entities.

Let’s delve into the specifics:

1. Expansion of advanced capacity limited to 5% due to efficiency improvements resulting from equipment upgrades. This expansion of advanced semiconductor manufacturing capability is determined by the increase in cleanroom and other physical spaces. Notably, facilities using processes below 28nm, such as TSMC’s Nanjing factory with a 16-28nm process and Samsung’s Xi’an facility with a 19nm 1x nm flash memory process, fall under advanced processes.
2. Expansion of mature capacity limited to 10% through measures like adding new cleanroom space, ensuring that the increase in production capacity stays within this threshold. A notification process is also established for expanding facilities using mature processes to confirm compliance with security barriers. The expansion of 28nm process production is restricted to 10%.
3. Prohibition on these entities from producing special chips related to U.S. national security, including those used in quantum computing, radiation-intensive environments, and other specialized military capabilities. Radiation-intensive backgrounds encompass sensitive applications like space, nuclear energy, and detection.
4. Allowing these entities to engage in joint research and technology licensing with “related entities” that do not impact U.S. national security. “Related entities” include entities listed in the entity list and research activities such as international standards and patent licensing.

These regulations aim to provide clarity and guidelines for the implementation of the “Chip Act” and its core provisions while addressing the nuances of semiconductor manufacturing and research.

These four new regulations represent corrections to the policy introduced by the U.S. government on March 22nd. There are three key highlights:

1. Shift from Monetary Restrictions to Facility-Based Limits: The primary reason for the introduction of these new regulations is the inability of the previous rules to be effectively implemented. The previous rules placed a rather unprofessional restriction on normal operations of entities in China by prohibiting them from making investments exceeding $100,000 in “significant expansion.” For semiconductor production lines, where even small components can cost more than $100,000, this was an impractical limitation. The shift in the restriction from a monetary limit to one based on facilities and physical space is a more rational and practical approach.
2. Acknowledging International Business Realities: The U.S. government has taken into account the appeals of international companies and has granted exemptions for inevitable business activities such as patent exchanges and technology collaborations with Chinese companies like Huawei, which are already on the entity list. Compared to the initial irrational one-size-fits-all approach, these new regulations show an understanding of the interdependence between international companies and Chinese counterparts. It also underscores that as long as Chinese companies possess advanced technology, it is challenging for others to completely exclude them from the international market.
3. 85% Supply Requirement Removed: The previous requirement that at least 85% of the increased capacity resulting from equipment upgrades or expansions must be supplied to the parent company is no longer mentioned. This provision was even more questionable than the $100,000 restriction. For instance, TSMC’s production line in Nanjing has a capacity of only 40,000 wafers, with only a small portion dedicated to advanced processes. What would be the increase in capacity after upgrades? How could 85% of this be specifically supplied to Taiwan, China? These seemingly uninformed regulations likely bear the mark of U.S. politicians, and it indicates that the U.S. regulatory landscape may have some aspects initiated by amateurs and later corrected by experts. Therefore, in the future, we might need to approach some of the perplexing U.S. regulations with equanimity, as there might be efforts to rectify them down the line.

When these policy patches were introduced, U.S. Commerce Secretary Raymond emphasized that the “Chip Act is fundamentally a national security plan.” While this sentiment may sound familiar, it carries some new implications. In contrast to previous instances where the U.S. broadly expanded the scope of national security, adversely affecting the legitimate interests of international companies, and notably, even U.S. businesses, thereby constraining policy flexibility, the U.S. is now compelled to respond more rationally to the demands of international companies. This signifies a more rational approach to acknowledging the inherent nature of an interconnected global market. Hence, Raymond’s statement and these new regulations subtly suggest that the Chip Act cannot infinitely expand into all areas of the U.S.-China confrontation.

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Thinking of U.S. Policy Towards China

As the sensitive period approaches when the U.S. Department of Commerce is expected to publicly announce the results of its investigation into Huawei’s Mate60, the introduction of these “course-correction” rules by the U.S. carries significant implications.

Coupled with recent statements, such as Commerce Secretary Raymond’s remarks about China not having widespread 7nm manufacturing capabilities and the establishment of an economic working group between the U.S. and China on September 22nd, along with comments from China’s Ministry of Commerce spokesperson He Yadong on September 21st regarding the receipt of permit applications for the export of gallium and germanium-related items, where certain companies have received dual-use export licenses, it becomes evident that within the ongoing long-term U.S.-China technological rivalry, there is potential for localized bilateral warming during specific periods.

These signs indicate that amid the sustained trend of U.S.-China technological confrontation, there could be periods of partial thawing.

With the formation of the “walled garden” of U.S. technology restrictions on China and the gradual depletion of U.S. policy tools, particularly as sanctions approach China’s self-reliant capabilities, the benefits of sanctioning China are diminishing. Increasing sanctions could actually accelerate China’s autonomous development and optimization. Moreover, when the U.S. plays its cards sparingly, using the semiconductor card – its biggest one – it may have difficulty in “constraining” China in other domains, considering the broader spectrum of areas where China and the U.S. interact both competitively and cooperatively.

Overall, after several years of U.S.-China confrontation, with diminishing returns from sanctions and growing fatigue within U.S. society over China-related issues, there is recognition that many international issues require Chinese cooperation for effective progress. The diplomatic losses incurred due to confrontation are becoming increasingly evident. In this dynamic, as the U.S. takes stock of its performance in the lead-up to elections, a more rational phase in U.S.-China policy may have its own rationale. Within this context, the U.S. investigation into the Mate60 and its subsequent responses may carry significant implications.

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