Export Controls Are ‘Messier Option’ to Address Legacy Chip Concerns, Researchers Say

U.S. export controls may not be the best way to counter China’s legacy semiconductor industry, especially because the EU and other allies aren’t likely to adopt similar restrictions, researchers said this month. The researchers said they expect the U.S. to turn more frequently to entity-based controls -- including through the Bureau of Industry and Security’s Entity List -- and other national security tools to address risks relating to more mature-node chips.

A new report from Rhodium Group examines a host of pathways that the U.S. can take to restrict both exports and imports of legacy node chips to and from China. It said the U.S. is “most likely” to use national security trade restrictions in “addressing legacy chip concerns,” including through tariffs, antidumping and countervailing duties, and cybersecurity restrictions.

Export controls “are a messier option,” the researchers said. The U.S. is “already struggling to align partners” on export controls for less available, advanced chips and chipmaking tools, they said, referencing the restrictions BIS released in October 2022 and updated a year later (see 2310170055). They also said U.S. allies may not agree with what the U.S. considers “advanced” chips and what it considers older, legacy chips.

“The US is trying to police a blurry divide between tools for advanced versus mature node chips,” the report said.

The researchers said U.S. policymakers may not be correct in assuming it’s “only a matter of time before” the Group of 7 nations expand their semiconductor export controls targeting China. Although the report said G7 nations want to reduce their dependencies on China in critical industries -- and the EU has proposed strengthening its export control and investment screening regimes (see 2309270015 and 2405160081) -- some European member states are pushing back.

The Netherlands and Germany in particular are objecting to U.S. efforts to expand chip controls, the report said, and they believe more controls will only “accelerate China’s import substitution policies” and cause their exporters to lose market share. While the Netherlands has agreed to some expanded chip-related export controls, the U.S. is still pushing the country to go further, including by stopping its semiconductor companies from servicing certain advanced chip tools under preexisting contracts with Chinese customers (see 2403270038).

Rhodium said mixed signals about the best path forward from different EU member states' industries risks causing “policy paralysis” within the European Commission.

“While the US has considerable leverage to wield long-arm measures for regulating advanced node chips,” the report said, “it is still an open question whether it can draw tighter coordination on legacy chip restrictions.”

Rather than expanding technology-based export controls and “risking an even leakier export control regime,” Rhodium said the U.S. is more likely to rely on entity-based sanctions, including through the Entity List. The researchers said even though many Chinese chipmakers are already on the list, they could face tighter export licensing restrictions if BIS decides to make them subject to its foreign direct product rule, which places restrictions on certain foreign-made items that are made with U.S.-origin software or technology.

The U.S. could also turn to financial sanctions, and some lawmakers have suggested placing blocking sanctions against companies on the Entity List by also adding them to the Treasury Department’s Specially Designated Nationals List (see 2309200052 and 2401180067). But Rhodium said that would be the “bluntest approach to prohibiting any type of transaction with Chinese chipmakers,” and it could be “highly disruptive to electronics supply chains and would meet heavy resistance from US partners over their extraterritorial effect.”

While equipment manufacturers and fabless design firms sourcing chips from China “are not necessarily wedded to Chinese chipmakers,” Rhodium said they are still “seeking the best price in the market and the manufacturing capacity” to meet demand.

“Policymakers will need to offer carrots alongside these sticks for de-risking plans to gain real traction,” the report said.