The U.S. unveiled new restrictions on China’s access to vital components for chips and AI, escalating a campaign to contain Beijing’s technological ambitions but stopping short of earlier proposals that would have sanctioned more key Chinese firms.

The Department of Commerce slapped fresh curbs on the sale of high-bandwidth memory chips made by U.S. and foreign companies, likely affecting South Korea’s SK Hynix Inc. and Samsung Electronics Co. as well as Idaho-based Micron Technology Inc. Those components handle data storage and are essential for AI applications.

The agency also expanded existing controls on chipmaking gear, including products made by U.S. firms at foreign facilities, but with carveouts for key allies, such as Japan and the Netherlands. That comes after months of negotiations between Washington, Tokyo and the Hague, during which Biden officials floated — but ultimately did not pursue — applying U.S. controls to companies like Tokyo Electron Ltd. and ASML Holding NV.

Shares of semiconductor equipment companies, including U.S. gear makers Lam Research Corp., Applied Materials Inc. and KLA Corp., rallied Monday. ASML said in a statement that it does not see the new controls having “any direct material impact” on its business in 2024.

The Biden administration’s goal, building on years of evolving trade restrictions, is to slow China’s domestic development of advanced semiconductors and artificial intelligence systems that may help its military. The U.S. will restrict China’s “ability to produce technologies key to its military modernization or repression of human rights,” the Commerce Department’s Bureau of Industry and Security, which oversees export controls, said in a statement.

China objected strongly to the new chip restrictions, criticizing the U.S. move as economic coercion that seriously threatened global supply chains. “The U.S. continues to generalize the concept of national security, abuses export control measures, and implements unilateral bullying,” the Ministry of Commerce said in a statement Monday. “China will take necessary measures to resolutely safeguard its own rights and interests.”

Huawei suppliers

The new rules blacklisted 140 additional Chinese entities accused of acting on Beijing’s behalf, with a focus on companies that produce chip manufacturing equipment that’s crucial to China’s pursuit of semiconductor self-sufficiency. That includes ASML’s Chinese lithography software rival, Dongfang Jingyuan, which the Dutch equipment giant accused of stealing its trade secrets.

The sanctions also affect a handful of suppliers to Huawei Technologies Co., including gear maker SiCarrier as well as chipmakers Qingdao Si’En, SwaySure, and Shenzhen Pensun Technology Co., or PST.

The long-in-development rules fell short of earlier proposals, Bloomberg News reported last week, setting off a widespread rally among semiconductor supply chain players from Tokyo Electron in Asia to ASML in Europe. Specifically, the Biden administration elected not to add to the entity list two firms that they had previously considered: Shenzhen Pengjin High-Tech Co., which makes semiconductor equipment, and ChangXin Memory Technologies Inc., which is trying to develop AI memory chip technology.

Asked during a press briefing how many Huawei-linked entities the U.S. is aware of and not adding to the entity list, a senior administration official said the rules aren’t focused on associations with a particular company. Rather, the official said, the list captures Chinese companies that are trying to develop advanced chip capabilities.

Still, the regulatory language published Monday cites Huawei ties as justification for some of the new sanctions. Certain restricted firms “pose a significant risk of contributing to the efforts of Huawei Technologies Co., Ltd., a party on the Entity List, to support China’s government’s goal of indigenous production of ‘advanced-node ICs’ to support its military modernization,” the rule reads.

The sanctions on Huawei suppliers were a key focus of lobbying efforts by chip tool companies including Lam, Applied Materials and KLA. Those firms argued for months that unilateral U.S. measures — affecting both individual Chinese chip fabrication facilities, as well as the China market more broadly — would hurt American industry without comparable measures from allies.

Beyond specific company sanctions, the controls unveiled Monday impose restrictions on the sale to China of two dozen types of manufacturing equipment and three software tools — including gear that’s manufactured overseas. That provision uses an authority known as the foreign direct product rule, or FDPR, which allows Washington to control foreign-made goods that use even the tiniest amount of U.S. technology.

Allied carveout

But there’s an exemption to FDPR equipment rules for certain countries — most importantly, Japan and the Netherlands. The idea, according to a senior administration official, is to create a pathway for countries that can impose comparable controls to enact such measures themselves. “We need our allies on board with our controls so that they’re as comprehensive and effective as possible,” Secretary of Commerce Gina Raimondo said in a press briefing.

ASML said Monday that if the Dutch government makes a “similar security assessment to the one underpinning the U.S. restrictions” on specific Chinese fabs, “exports of DUV immersion lithography systems to these specific locations could also be affected.”

The use of FDPR, even with exemptions, is an effort to prevent U.S. toolmakers from avoiding trade restrictions by locating their manufacturing in other countries. A recent report from the Center for Strategic and International Studies, a Washington-based think tank, found that U.S. gear suppliers have increasingly exported products to China from non-U.S. countries since 2016, and especially since 2019.

Memory chips

The new controls also restrict the sale of high-bandwidth memory chips — building on existing curbs affecting advanced logic chips, which serve as the brains of devices. The memory rules apply to HBM2 and more advanced chips, a senior administration official said, and use FDPR to control both U.S. and foreign firms. The global leader in providing HBM chips is South Korea’s SK Hynix, followed by Micron and Samsung.

There are exemptions to the rule, the official said, that allow Western companies to package HBM2 chips in China. Those exemptions are limited to packaging activities that present low risk of technology being diverted to Chinese firms, according to the official.

“This action is the culmination of the Biden-Harris Administration’s targeted approach, in concert with our allies and partners, to impair the PRC’s ability to indigenize the production of advanced technologies that pose a risk to our national security,” Raimondo said in a statement.

(With assistance from Foster Wong.)

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