China’s Semiconductor Import Strategy: Navigating Global Restrictions

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Despite numerous attempts to prevent China from accessing next-generation semiconductors, a recent report published by a bipartisan committee under the US House Representatives has revealed how China is able to get equipment capable of manufacturing devices with nodes as small as 7nm. Why are semiconductor restrictions important for the West, how has China managed to circumvent these controls, and what does this mean for the West going forward?

A motherboard painted in red, featuring processors and adorned with the flag of the Republic of China.

Why are semiconductor restrictions on China important for the West?

At Electropages, we have covered the ongoing situation between China and the West for a number of years, and just when it seems that the story is getting old, new developments manifest. In our previous articles, we have always looked at what caused the tension between the two sides, but we have rarely touched on the advantages that the West presents when restricting semiconductors to China.

When the West prevents semiconductors and the tools used to make them from being shipped to China, it undoubtedly hurts both economies in the short term. For example, deep EUV system developed by ASML sells for $200M a piece, and if China were allowed to buy those systems tomorrow, ASML would undoubtedly sell a good number. This would see a Western company easily adding billions to its revenue while China would add tens of billions to its semiconductor industry. 

Economic and Military Implications of Semiconductor Access

However, from the West’s perspective, this is where the benefits would end. By giving China access to the latest tech, the West would face a number of challenges that would undermine not only its economic ability but also its military ability. 

From the economic perspective, if China is allowed to utilise next-generation semiconductors, then not only could it offer products to the market that have the potential to undercut Western companies, but China would also be able to advance its own technologies (such as AI) significantly. Such advances could easily be capitalised on, whether it is through IP ownership or providing services to the West that outperform anything the West can offer. 

This was certainly the case in the early 2010s when China had by far the best AI systems in existence. While the West had numerous rules against data collection, China had access to all the latest semiconductors, computing platforms, and databases that it used to create nationwide camera surveillance systems that could identify each and every citizen. 

From the military perspective, China having access to the latest semiconductors would present a significant threat to Western militaries and defence capabilities. In order for the West to maintain its sovereignty and exercise power across the world, it needs to have the best weapon and defence systems available. Any nation that is able to match, or worse, outperform, the West’s military capabilities would not only present a major threat to peace but could very well use that power to drive nations away from the West. 

By preventing China from accessing the latest technology, its military will always be a decade or two behind the West. As such, the West will always have a military advantage over China, regardless of how many troops China may have (the Russo-Ukraine war has proven just how important technology is, with Ukraine being able to push back against a much larger force).

How has China managed to circumvent these controls?

Despite stringent efforts to restrict China’s access to the latest semiconductor technologies, a revealing 741-page report from a committee under the U.S.-China Economic and Security Review Commission uncovers the multifaceted strategies China employs to circumvent these controls. This report provides an in-depth look at China’s technological progression, particularly its advancement to 7nm semiconductor nodes.

The report indicates that China has adeptly navigated through regulatory loopholes to acquire crucial industrial equipment. While regulations prohibit exporting equipment capable of producing sub-14 nm devices, there’s no restriction on equipment meant for older, larger nodes. Such equipment, although primarily intended for less advanced manufacturing, can be repurposed or modified to produce smaller, more advanced semiconductors. For example, a lithographic system rated for 22nm might be adapted to produce 14nm devices with lower efficiency but viable output. This practice of adaptability demonstrates China’s resilience in overcoming technological barriers imposed by export controls.

China’s Strategic Ambitions and Technological Adaptation

Moreover, China’s approach isn’t limited to exploiting loopholes in equipment acquisition. The report elaborates on China’s broader military and technological ambitions, showcasing its transition from a “fast follower” to a leader in several key technologies. This ambition extends to the semiconductor domain, where advanced technology is crucial not just for economic leverage but also for military and strategic superiority. China’s investment in defense-related AI applications and the integration of commercial technological advances into its military capabilities highlight the strategic significance of maintaining, and advancing, semiconductor technology prowess.

Furthermore, the report sheds light on the challenges facing the U.S. export control system. China’s ability to leverage dual-use technologies—those having both commercial and military applications—presents a unique challenge to traditional export control mechanisms. This necessitates a strategic rethinking of how export controls are structured, focusing on preempting the repurposing of technology and addressing the nuances of dual-use technological advancements.

In conclusion, China’s sophisticated approach in circumventing semiconductor technology restrictions underscores the need for a more nuanced and dynamic export control regime. This regime must consider not only the current technological landscape but also the potential for technological adaptation and the broader context of China’s military and technological ambitions.

What does this mean for the West going forward?

The release of devices by Huawei, such as the Mate 60 Pro, proves that the semiconductor restrictions on China have not been entirely successful. While they certainly do hold China back and significantly increase the price of semiconductors from China’s perspective, the ability of manufacturers to circumvent some of the restrictions and provide China with some equipment undeniably hurts Western interests.

Trying to close the loophole, however, could prove challenging as it would require regulators to prove that hardware could be adapted and improved to produce next-generation devices. Considering that almost anything can be adapted to any degree, it is hard to prove that a device sold by a manufacturer is somehow violating regulations when it is customers who integrate modifications.  

Moving forward, there is very little that can be done to prevent China from accessing the latest technology, as it will eventually happen. If China isn’t allowed access to equipment and fabrication services, it will develop these internally and eventually become entirely independent from the rest of the world with regard to semiconductors, and this future could be far worse for the West.


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