On October 17, the Biden administration marked the first anniversary of the imposition of U.S. chip restrictions against China by passing a new round of export controls aimed at further tightening China’s access to advanced semiconductors and chip making equipment.
The new round of controls follows a significant chip manufacturing breakthrough made by Chinese companies in August, which saw Huawei Technologies Co., Ltd. and Semiconductor Manufacturing International Corporation (SMIC) successfully manufacture an advanced 7nm chip despite U.S.-led curbs. Another blacklisted Chinese chip company that had made advances in recent months is Yangtze Memory Technologies Corp (YMTC), which developed an advanced 232-layer quad level cell 3D NAND die and a new solid-state drive (ZhiTai Ti600) for AI, machine learning, and high-performance computing.
New U.S. export controls aim to close loopholes
The Biden administration responded by introducing a new set of export controls. The new regulations will come into effect on November 17 and are aimed at closing common work arounds used by global chip manufacturers and Chinese companies.
Advanced chipmakers complied with initial restrictions on high-performance chip exports by slowing down the speed at which their chips communicate with one another to produce variants of their most advanced chips that can still be exported to China. However, some of these chips still operate at high-enough performance speeds to be used for some AI and computing work, which has limited the overall effectiveness of the current chip curbs. The new semiconductor curbs attempt to eliminate this loophole by placing defined restrictions on the performance density of chips exported to China.
The new regulations will also make it more difficult for Chinese companies to circumvent restrictions on chip making equipment. Chinese companies have reportedly been routing equipment purchases through offshore affiliates or entities in Macau. The new rules will target this loophole by imposing a presumption of denial policy for all export license requests if the shipment is intended for a company whose parent company is headquarted in Macau or China.
The new restrictions also place export controls on a larger range of advanced chip making equipment ranging from that used in EUV lithography to wafer fabrication and cleaning. Another notable restriction includes the addition of 14 Chinese semiconductor design companies to the Export Administration Regulations (EAR) Entity List. The EAR is a set of U.S. trade guidelines that governs export and licensing requirements for controlled commodities. Companies on the EAR Entity List are flagged as being subject to additional export controls when seeking to purchase controlled goods from U.S. companies.
Despite the new chip controls, the U.S. granted an indefinite waiver exempting South Korean chip companies within China from U.S. chip controls.
The U.S. added another 42 Chinese companies to the EAR Entity List over allegations of cooperation with Russian defense and industrial companies. The news followed earlier reports indicating that the U.S. Government began investigating Chinese firms that could be suppying precursor materials ultimately used in the Fentanyl drug trade.
China imposes restrictions on graphite exports
China responded to the latest round of U.S. chip restrictions by announcing new controls on the export of certain graphite products. China mines 65% of the world’s natural graphite and more than 90% of refined graphite is produced in the country. The restrictions were announced on October 20 and build on previous Chinese export controls targeting two other precious metals, germanium and gallium, by requiring export permits for graphite shipments. The restrictions apply to shipments of high-intensity synthetic graphite and natural flake graphite and could impact the electric vehicle industry as both forms of graphite are crucial input materials for lithium batteries used in electric vehicles (EV).
The curbs go into effect December 1 and could lead to significant short-term increases in graphite prices. China is the largest single source of graphite for multiple countries, including the United States (33%) and Japan (90%), while South Korea imports around 93% of all its anode materials from the country.
EV companies have begun pre-emptive stockpiling. Alternate sources for American and European EV makers include Tanzania and Mozambique. The U.S. began investing in domestic graphite mines and processing plants as part of its supply chain resiliency efforts, but is unlikely to be a major graphite producer in the short-term.
China is also applying regulatory pressure on Taiwanese companies as tensions continue to rise in the lead up to Taiwan’s presidential elections in January 2024
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