On October 7, 2022, the Biden administration suddenly restricted exports of certain equipment and services to Chinese semiconductor companies. Motivated by national security concerns, the policy aims to slow the Chinese industry’s ability to produce advanced node semiconductors. Chad P. Bown interviews Kevin Wolf, former assistant secretary of commerce for export administration under the Obama administration, to describe how the October 7 export controls impact US and foreign companies up and down the global semiconductor supply chain.
This transcript has been lightly edited for clarity and length. Listen to the Trade Talks episode, published November 2, 2022, or download the full transcript here.
Chad P. Bown: With respect to China, how did US export control policy change over the first 18 months or so of the new US administration?
Kevin Wolf: It didn't really, it really just adopted where the Trump administration ended at the last literal days of the administration and maintained those policies for the first year, year and a half, or so.
And during this time, there were several things going on. They were, as an administration, developing a coherent narrative across all areas and other issues related to China. And second, it took a long time to get political officials in place in order to be able to administer the system.
The first year or so was just maintaining where things ended at the end of the Trump administration.
CB: For close watchers of national security issues, there was never a sense that the new Biden team would simply reverse the Trump administration's export controls, including those that stopped American equipment from going to Chinese chipmaker Semiconductor Manufacturing International Corporation (SMIC) to potentially make those fancy, advanced node semiconductors.
KW: It was clear from the beginning of the administration, and even before the administration, that the people at the National Security Council had fundamental national security concerns with respect to advanced node semiconductors in China and their per se relevance to the modernization of China's military and weapons of mass destruction fleet.
It was always clear—for those who follow things that people write, even before they joined the administration—that something significant was going to happen on the advanced node semiconductor and semiconductor production equipment as a policy matter. But exactly what it would be was largely unknown.
Biden and export controls for semiconductors? Something is coming
CB: With the Biden administration and export controls for semiconductors, something important was coming, but exactly what and when was unclear.
Then in the summer of 2022, two big things happened.
KW: The first was the news that SMIC had developed, to whatever degree, a chip at a very advanced node at the seven-nanometer level. And there was clearly an indication from the administration that they needed to move and move quickly to achieve their objectives, to stop that from advancing.
And then there was, from all indications, a great deal of concern at the Chinese reaction to House Speaker Nancy Pelosi's visit to Taiwan. That enhanced the national security concern with respect to doing something, and something significant, through export controls and many other vehicles.
CB: SMIC, that same company that the Trump administration had put on the Entity List—to stop it from getting tools to make more advanced node chips—had managed to make progress anyway.
That—combined with China's massive military response to how Speaker Nancy Pelosi's visit to Taiwan, the democratic island that Xi Jinping has said he wants to unify with the communist mainland—set the stage for what happened next.
On September 16th, National Security Advisor Jake Sullivan gave an important speech, which spelled out the Biden administration's national security objectives for export controls.
“On export controls, we have to revisit the longstanding premise of maintaining ’relative‘ advantages over competitors in certain key technologies. We previously maintained a “sliding scale” approach that said we need to stay only a couple of generations ahead.
That is not the strategic environment we are in today.
Given the foundational nature of certain technologies, such as advanced logic and memory chips, we have to maintain as large of a lead as possible.”
KW: That was really the first coherent articulation of what national security meant when you're outside the scope of items that have some identifiable relationship to the development or production of weapons, military items, or classic export control considerations.
He also said quite explicitly in his speech that the era of “sliding scale” changes with the evolution of technology is over. Whereas for things that had historically been controlled, an unwritten rule was that, in the policy consideration, so long as we're staying a couple of generations ahead with respect to this otherwise commercial item, then that was acceptable. He said that's over. And now the objective is to maintain as large of a lead as possible.
The US export controls announced on October 7
KW: The October 7th rules are focused on limiting, in China, the development or production of four things: advanced node semiconductors, semiconductor production equipment of any type, advanced computing capabilities, and supercomputers. And the US government is implementing this objective through novel uses of lists of controlled items, through controls on activities by US persons, and extraterritorial reach with respect to foreign made items going to specific Chinese companies.
CB: Let's start with the first of those—advanced node semiconductors.
This is production of fancy, small, fast chips. The regulation is pretty specific about what types of chips were being targeted—advanced logic, advanced DRAM (dynamic random access memory), and advanced flash memory chips.
The policy is restricting US exports of the top-of-the-line tools made by American companies from going to facilities in China making semiconductors.
Let's try to sort through which companies in China are affected and how.
There are a number of foreign headquartered multinationals making chips in China— Taiwan's TSMC, South Korea's Samsung and SK Hynix, even the American company, Intel, still has a plant that is in the middle of being sold off to SK Hynix.
Did the new US export control rules apply to even those four companies’ semiconductor plants in China?
KW: Yes. So the rule as written did not distinguish between if it's a company headquartered out of China or a Chinese-headquartered company.
But what the administration said in the rule was it was going to treat differently the companies that were headquartered out of China than the companies that were headquartered in China.
The rule was fairly explicit that, if you're a Chinese headquartered company, the licensing policy for any exports or covered activities to a facility that does one of these types of advanced node work would be denied. No exceptions. You can't get the US item or the benefit of the US service for it.
If, however, you are a foundry that is headquartered outside of China, there would be a case-by-case review policy.
CB: There would be a case-by-case review policy for the four, foreign headquartered multinationals that we mentioned that had plants in China.
The existence of such a policy was announced on Friday, October 7th, but some of these controls were going into effect right away, and the foreign companies needed licenses to keep those plants pumping out chips. And those licenses—presumably determined after the case-by-case reviews—were not announced with that new rule on October 7th.
The companies and the Bureau of Industry and Security (BIS) scrambled, but Commerce got licenses out to the four multinationals before the controls went into effect, so none of them had to even temporarily shut down their plants.
But how should we interpret the fact that these licenses are for one year only, as opposed to, say, 18 months or two years or something else?
Is that just pro forma and they'll just get another one-year license one year from now? Or no, that's a signal that these companies need to start winding down those facilities in China right now and be ready to get out in a year?
KW: There is no pro forma, this is all completely new. Remember, the policy goals, the objectives, the approach—everything about this is nontraditional, nonclassical. So it's all being made up on the spot.
I don't know if anybody has decided what's next. And a lot of that will be a function of diplomacy, of working with the allies bilaterally and trilaterally. What happens in the multilateral regimes, the Wassenaar Arrangement—in terms of whether some of these controls can be made multilaterally—what the policy judgment of the US government is about what the right node is with respect to China, and these broader concerns about China’s indigenous capability.
I think the only thing you can take from the one-year authorizations that have been reported is that there's a one-year authorization. And it is going to be an interesting year to see what happens.
Digging into the weeds of the October 7 rule
CB: How did the export controls that the Biden team announced on October 7th compare to the Trump administration's export controls applied to SMIC?
KW: The SMIC policy was the grandfather of the October 7th policy for the mature versus advanced concept. But the Biden team used every other tool that either had already existed, or ones that hadn't existed, in order to have sort of a comprehensive policy of cutting it off, not just for one company, but for the entire country.
If it's advanced nodes, we're cutting it off completely. (Minus the one year for the multinationals as we sorted out.) But for mature nodes, one reason why it's so complicated of a rule is they went out of their way not to affect (once people understand the rule, it's going to be a lot of chaos for a couple of months as people figure out what's actually prohibited and permitted), the inputs for the production and development distribution of mature node logic or memory, the older generation chips.
CB: So even Chinese companies are allowed to continue to produce the mature, older node legacy semiconductors. But how is BIS doing this, especially for the companies that might produce both advanced and mature node chips? What's the rule?
KW: The prohibitions are based at a facility level, not a company level. And this is another novel aspect of the rule that is creating lots of confusion. Not that the rule is unclear, but it takes a while to sort out what the lines are given the novelty. It’s not based upon whether a company makes advanced node chips. If another facility, even if owned by the same company, is only doing mature node production, then that facility is not affected by this part of the rule.
CB: One way to look at this then is that the US government could have gone farther and said, “We're not going to allow any US equipment or any US persons to service any Chinese owned facilities, even the ones manufacturing the mature nodes.” Why do you think the Biden administration decided against doing that?
Is this out of recognition that we're still suffering chip shortages, even for mature node chips? And China is a massive producer, and if the US were to stop their ability from making even those chips right now, that might hurt the auto sector and other downstream industries that buy those semiconductors? And we don't want to make supply chain disruptions worse than they already are?
KW: The rules implemented are remarkably consistent with the policy vision of what national security means that Jake Sullivan articulated in his speech. So the answer to your question is the reflection of a determination that mature node chips in China are not, per se, a national security threat, and the export control rules don't apply to them.
I don't know what internal discussions were had about those other impacts on the supply chain. But to take it at face value, the reason the rules were not applied to mature node chips is because the national security assessment was focused on the advanced node capabilities.
How the new rules will impact the global semiconductor supply chain
CB: Obviously, Chinese semiconductor companies trying to make advanced node chips are going to suffer if they can't get access to American equipment and tools from companies that we mentioned before, like Applied Materials, Lam Research, and KLA. The main competitors of those three companies include Tokyo Electron in Japan and ASML in the Netherlands.
How are all of those companies likely impacted by these new rules?
KW: There's obviously a significant negative financial impact on those companies, and I'm referring to the US companies.
For the two primary non-US competitors—one in Japan, one in the Netherlands—I don't know if this has any effect on them. In fact, in media reports they said it would only have a tiny effect because they implied that they've been able to develop their tools without US equipment, without US technology, and can wall off any US persons that are involved in providing support.
The impact is very different depending upon whether it's a US tool company or a non-US tool company.
CB: On the issue of unilateral export controls, from the beginning of their administration, the Biden team has emphasized the need for the United States to work with allies. This October 7th policy decision was so big—we’ve barely scratched the surface, but we've already managed to describe how the new US export controls are impacting companies headquartered in South Korea and Taiwan, as well as those that are making tools like Tokyo Electron in Japan and ASML in the Netherlands.
At the Center for a New American Security (CNAS) on October 27th—after the export controls were imposed—Biden administration official Alan Estevez, undersecretary of commerce for industry and security at BIS, spoke about how the Biden administration was working with allies to turn these unilateral export controls into multilateral controls that the allies would impose too.
Implications for China and its response
CB: As we're recording this, there's not yet been a formal policy reaction from China. So that's something we'll have to watch out for as well.
Is there anything in this October 7th announcement that might be seen as an off ramp? Something that says. “If Chinese firms stop doing X, then they can get access to these exports and technology again?”
KW: There is no off ramp. It's the country of China which is the issue. It's the ecosystem of China. It's the state policy of China to blend civil and military applications and to acquire purely civil items of advanced capability for use in modernizing its military, which is the threat.
There's nothing baked into this rule or the policy considerations that would suggest that there is an off ramp, because there's no reality the Chinese government is going to change any of those policies that I just summarized.
For more on the history of US export controls on China, implications for artificial intelligence, and US policy coherence with respect to China, listen to the podcast episode or read the full transcript here.