Paul van Gerven
23 June

As the US government implements one export restriction after another, the semiconductor industry is left wondering where it will end.

“The health and vitality of the US semiconductor industry are essential to America’s future competitiveness. We cannot allow it to be jeopardized by unfair trading practices,” said President Ronald Reagan when announcing import tariffs for Japanese semiconductors. The move was about more than unfair trade, though, as the New York Times explained: “The tiny slivers of silicon that are the essence of computers and other electronic products, are considered vital to national security.”

That was 1987, and history is repeating itself. Deeply concerned about China’s rapid technological advance, as well as its own incomplete semiconductor manufacturing base, the US has engaged in another semiconductor trade war. But this time it doesn’t look like it will peter out in a few years.

Watertight

The US has been particularly wary of two major Chinese tech firms, Huawei and ZTE, for a long time. Already in 2012, the House Intelligence Committee deemed the companies a national security threat. An investigation into ZTE for dealings with Iran and North Korea, initiated by the Obama administration, resulted in the telecom company being blacklisted in 2018. Surprisingly, however, the sanctions were lifted swiftly, in exchange for a hefty fine and putting in place mechanisms to assure compliance with US trade restrictions.

But from then on, the US has worked steadily to tighten the net around Huawei without any backpedaling. The Commerce Department placed the telecom giant and its affiliates on the “Entity List” in 2019, which, among other things, made it illegal to supply US technology and software to Huawei. This doesn’t affect American companies only: any company using US technology in their products needs to comply or risk repercussions.

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To the annoyance of the Trump administration, however, this barely slowed down Huawei. Due to the fact that the rule exempted foreign-produced goods from US export controls if the goods contained less than 25 percent US-origin export-controlled technology, many companies could keep supplying Huawei. Chief among them: TSMC, on which Huawei depends to manufacture its advanced chip designs.

And so the US moved ahead recently and created a special rule scrapping the 25 percent condition for Huawei and other blacklisted entities. Since TSMC depends on US semiconductor equipment and software for its manufacturing operations, this means the US government can bar TSMC from supplying Huawei. Or at least, that was the intention – it turned out that the updated regulations still weren’t watertight. TSMC has indicated it won’t exploit remaining loopholes, however.

Unending succession

Lined up next, starting 29 June, is an expansion of existing export restrictions to cover all military end-users in China, which, according to US definitions, includes private firms. The new rule requires companies with US technology to screen their customers for ties with the Chinese military and present their case to US regulators. The latter have provided little to no guidance on what will and what won’t be allowed, however, leaving companies guessing on how to deal with it.

More of this is sure to come: the US is undoubtedly adamant about thwarting China’s technological ambitions. The way it’s going about it, implementing one (often hazy) restriction after the other, makes industry very nervous. What’s allowed today, could be illegal tomorrow. So far, effects have started to ripple through the ecosystem, but on a systemic level, the damage has been limited. Few will be reassured that it will remain that way.