On October 28, the U.S. Department of Treasury published a final rule restricting investments in advanced technologies and products in countries of concern. The restriction takes effect on January 2, 2025, and will prohibit or implement a reporting requirement for transactions involving semiconductors and microelectronics, quantum information technologies, and artificial intelligence (AI) in countries of concern.
Under the new rule, U.S. persons will be prohibited from investing in Chinese advanced semiconductor firms like state-owned foundry Semiconductor Manufacturing International Corporation (SMIC). Similarly, U.S. individuals and companies will be banned from investing in Chinese AI firms that focus on military applications. U.S. entities will still be able to invest in Chinese firms specializing in legacy semiconductors as long as a reporting requirement is met. Publicly traded securities and certain limited-partner investments will also be exempted from the restriction. U.S. investments accounted for around 17% of all foreign investments in Chinese AI companies between 2015-2021 and the new rule is expected to further restrict the amount of foreign funding available to advanced chip firms in China.
In addition to restrictions on investments, the U.S. government is considering caps on advanced AI chip exports to additional countries outside of the Department of State’s Countries of Concern list. The new cap will reportedly focus on restricting advanced chip exports to countries in the Persian Gulf over concerns that chips from those countries are being diverted to China. Under the new cap, advanced chipmakers like NVIDIA Corporation, Advanced Micro Devices, Inc. (AMD), and Intel Corporation could face caps on exports of AI chips to countries such as the United Arab Emirates and Saudi Arabia.
Leading semiconductor firms also continue to face legal and regulatory risks for restricted technology found in advanced Chinese chips. For example, Taiwan Semiconductor Manufacturing Company (TSMC) recently received a notice from the U.S. Department of Commerce that ordered the company to halt all shipments of chips smaller than 7 nm to companies in China. The restriction was imposed after an advanced chip manufactured by TSMC was discovered inside Huawei Technologies’ latest Ascend 910B AI processor. The Taiwanese chipmaker has asserted that its chips had been secretly rerouted to Huawei via Beijing-based computing power provider Sophgo Technologies Ltd. Additionally, TSMC has been forced to suspend exports to two other unspecified Chinese chip developers that previously placed orders for 7 nm chips over suspected their suspected ties to Huawei.
U.S.-based GlobalFoundries, Inc. has also faced regulatory action from the Department of Commerce over its chip exports to China. The company was fined $500,000 (€459,060) by the agency on November 1 after it was found to have exported 74 shipments of silicon wafers worth $17 million (€ 15.6 million) to a company on the U.S. Department of Commerce’s Entity List between February 2021 and October 2022 without seeking a license. The firm, SJ Semiconductor Corp, is a subsidiary of SMIC and was added to the Entity List in 2020 for ties to China’s military. GlobalFoundries attributed the violation to a data error that failed to flag SJ Semiconductor during the company’s compliance screening process.
EU and U.S. target automotive exports from China
On October 28, the EU Commission finalized new import tariffs on EVs manufactured in China more than a year after the bloc first launched its anti-subsidy probe into low-priced exports of Chinese EVs. The tariffs will apply for a period of five years from October 30 and will be imposed on top of the EU’s standard 10% import duty for cars. The new tariff ranges from 7.8% for Tesla to 35.3% for companies under the state-owned SAIC Group.
The imposition of tariffs against Chinese EVs raises fears that Beijing could fast-track the country’s own anti-competition investigations into EU exports of pork, brandy, and dairy. However, both the EU and China are reportedly still in negotiations over an agreement to remove the tariffs which could delay any potential trade response from Beijing.
Vehicles manufactured in China could also face additional restrictions exporting to the U.S. market after the Department of Commerce proposed a new rule in September that would ban connected vehicles including EVs from containing Chinese-made software and hardware components.
The proposed rule is being introduced due to national security concerns and would tentatively come into effect in 2027 for software and in 2029 or 2030 for hardware components. The restriction would disrupt automotive supply chains involving connected or smart components from China and could prevent U.S. automakers like General Motors and Ford from importing components and vehicles from their subsidiary or joint venture plants in China.
China’s increases state control of rare earth metals
Beijing has also continued to increase its own restrictions on rare earth metal exports in tandem with additional trade controls from the U.S. and EU. For example, the country’s new Regulation on Rare Earth Administration has introduced a rule that requires exporters to provide Chinese authorities with detailed downstream information about how rare earth shipments are being used in overseas supply chains. This new regulation provides the Chinese government with visibility into how its critical rare earth metals are used and could allow Beijing to impose more targeted controls against Western companies in the defence and advanced electronics sectors.
In addition to new export disclosures, China has also introduced a new security law that restricts foreign access to information about rare earth mining operations in the country – further decreasing supply chain visibility into China’s mining sector. In the short term, these new regulations could further complicate the procurement process for rare earth metals from China as exporters adjust to the newly introduced compliance measures. These regulations also increase the long-term risk of sourcing rare earth metals from China as the state’s increased control over the country’s rare earth mining and processing sites could allow Beijing to impose widespread export controls if global trade tensions continue to increase.
China launches military drills around Taiwan
Geopolitical tensions between China and Taiwan spiked briefly after the Chinese military launched a one-day military drill on October 14. The drills took place in the Taiwan Strait and around areas to the north, south, and east of Taiwan following an independence-leaning speech by the island’s president, William Lai. The drills were conducted in areas within Taiwan’s 24 mile (44 km) nautical mile zone and simulated blockades on key ports in Taiwan. There were no notable disruptions to shipping or flight operations as a result of the drills.
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