With New Controls, Job of BIS Growing 'Exponentially' Harder, Former DOD Official Says

New advanced computing and chip export controls against China (see 2210070049) represent an “unprecedented degree” of U.S. intervention to preserve technology leadership and could deal a major blow to China’s semiconductor industry, the Center for Strategic and International Studies said in a report last week. But there are several “lingering gaps” in the new policy that the Bureau of Industry and Security should “swiftly” address if it hopes to make the rules as effective as possible, the report said, including adding more companies to the Entity List, making sure the restrictions are adopted by allies and ensuring the agency is properly staffed.

BIS needs to add all Chinese entities involved in artificial-intelligence chip design to the Entity List, the report said, specifically pointing to Cambricon, a Chinese company whose customers include organizations on the Entity List. “It is extremely telling that the department was unable to add leading Chinese AI chip companies such as Cambricon to the Entity List in time for the rollout of this policy,” said the report, written by Gregory Allen, a CSIS expert and former Defense Department official.

“The slow pace of the current process for adding Chinese companies to the blacklist has been a source of intense frustration for both Congress and the White House,” he wrote, adding that “it ought to have been completed in time to include in this policy.” Chinese entities can “change shell companies to evade export controls in a matter of days or weeks,” Allen added. “The Department of Commerce should be empowered to act equally as fast.”

But Allen said he believes Cambricon and “every other Chinese chip design company of any significance” will be added to the Entity List in the “near future,” saying the new, strict controls are a sign of more to come. They are a “new U.S. policy of actively strangling large segments of the Chinese technology industry -- strangling with an intent to kill.”

He also said a new policy that allows BIS to more easily transfer companies from the Unverified List to the Entity List should help with that effort. The change, introduced along with the new controls, will allow BIS to add a company on the UVL to the Entity List if the agency can’t complete an end-use check two months after the company is added to the UVL (see 2210070006).

“With this rule change, the Department of Commerce can now effectively block exports to any Chinese organization in 60 days,” Allen wrote. “This provides a much faster and more flexible response to Chinese shell companies and other export evasion tactics.”

The U.S. also will have to combat Chinese attempts to evade the controls and indigenize its supply chain, the report said. While some of the controls apply to U.S.-owned entities operating in China, they don’t apply to Chinese-owned entities operating in other countries, including India. “This greatly increases the challenges associated with preventing the international subsidiaries of Chinese corporations from smuggling chips into China in violation of U.S. export controls,” the report said

Although the controls increase “obstacles to China’s production of an indigenous supply chain,” the country “is not going to give up,” Allen wrote. He pointed to the Shenzhen government, which provides subsidies to companies that buy Chinese alternatives to U.S. electronic design automation software.

BIS also must work to make sure its controls are imposed multilaterally, Allen wrote. “The United States needs to ensure that all of its allies are rowing in the same direction when it comes to keeping China’s semiconductor industry down,” the report said. “Turning these unilateral export controls into multilateral ones will be a major challenge.”

Perhaps most importantly, Allen wrote, BIS needs more congressional funding, staffing and support from the intelligence community to implement the controls. He said there is “no realistic way” to measure how much Russia and China are investing in export control evasion tactics, but there is “every reason to suspect” those efforts are “massively” increasing. The U.S. should meet this challenge by awarding BIS an increased budget, the report said. “[T]he job of the Department of Commerce’s BIS in terms of administering the export licensing process and enforcing these export controls has gotten exponentially more difficult,” Allen wrote.

If the controls are implemented effectively, they will “dramatically” restrict exports of high-end AI chips and advanced semiconductor manufacturing equipment to China, the report said. The Biden administration is saying “enough is enough,” Allen wrote. “This is not a policy of decoupling (yet), but it is proof of the United States’ unwillingness to remain tightly coupled to the Chinese technology sector under previous conditions.”

Still, the controls didn’t catch China by surprise, the report said. Beijing has been “anticipating significantly broadened” chip export controls and has been buying equipment at a “pace far in excess” of demand. “In essence, China has been buying everything it can from the store before it closes,” Allen wrote. “The full consequences of China’s equipment hoarding are not yet clear.”