Foreign Affairs

US Companies Reel After New Export Rules Make Waves In China

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• U.S. technology companies have found their China-based operations suddenly crippled after new import restrictions blocked business interactions with Chinese chip manufacturers.
• The Biden administration imposed new restrictions in October on semiconductor-related trade targeted at preventing China from accessing advanced technology that could give a boost to its military.
• “It is very likely the growing legal uncertainty will further encourage U.S. firms to divest from China and seek ‘safer’ destinations, accelerating a process already underway,” Min-Hua Chiang, a research fellow and economist at the Heritage Foundation’s Asian Studies Center, told the Daily Caller News Foundation. 

U.S. companies connected to the Chinese chip manufacturing industry are scrambling to cut ties with Beijing after the Biden administration imposed a slew of export restrictions in October.

The Biden administration blacklisted multiple Chinese companies involved in China’s semiconductor manufacturing industry earlier in October, part of a larger effort to prevent China from accessing and illegally copying sensitive U.S. technology that can be used to advance Beijing’s agenda of military superiority.

In response, U.S. companies have temporarily shut down operations or blocked U.S. citizens from performing vital functions while they navigate the new restrictions, injecting chaos and uncertainty into the global market for advanced technologies, according to multiple reports.

“It is very likely the growing legal uncertainty will further encourage U.S. firms to divest from China and seek ‘safer’ destinations, accelerating a process already underway. Adding to the uncertainty is the question of when and how China may retaliate for the new export control laws against U.S. firms operating in China,” Min-Hua Chiang, a research fellow and economist at the Heritage Foundation’s Asian Studies Center, told the Daily Caller News Foundation.

The latest round of export restrictions prevents Chinese firms from both purchasing semiconductors and obtaining critical materials needed to produce the high-tech electronics and is the most significant restriction on Chinese exports to date, according to Dustin Carmack, an expert in emerging technologies at the Heritage Foundation and former chief of staff to the Director of National Intelligence under the Trump administration.

“If you’re an American company, you’re stuck between a rock and a hard place,” Carmack told the DCNF.

Earlier in October, U.S. companies Lam Research, Applied Materials and KLA Corporation, leading companies of the chip supply chain, withdrew American staff from China-based facilities and ceased providing services that could potentially benefit Chinese customers further along the manufacturing chain, the Financial Times reported.

“We were told that the company needed time to evaluate what they can sell in China,” a sales manager for Applied Materials told the FT. “It is unsustainable if we could only provide services but not sell equipment.”

The increasingly uncertain regulatory environment around China’s semiconductor industry has added incentives, on top of widespread aversion to being associated with Beijing’s human rights abuses, for U.S. firms to make changes to their operations, Carmack explained to the DCNF. Other notable companies, such as Intel, are already downsizing in response to falling demand, he added.

Apple suspended a massive purchase of memory cards from China’s Yangtze Memory Technologies Co. (YMTC) after being hit by unexpected export restrictions, Nikkei reported Monday, citing sources familiar with the matter. The technology giant planned to eventually support up to 40% of all the iPhone flash memory needs from YMTC, which clock in at 20% cheaper than their rivals.

YMTC has ties to the Chinese military, according to Carmack.

“To operate in China, many times you have some kind of nexus of understanding with the Chinese government to sell to that market. They can’t ship those operations off overnight,” said Carmack.

The risks of selling U.S. technology to Chinese consumers are broad, with the U.S. potentially aiding China’s surprising progress in highly advanced technology, including quantum computing and hypersonic missiles, Carmack explained to the DCNF.

Private Chinese companies have been able to circumvent export controls and acquire U.S. technology to boost their hypersonic weapons program, the Washington Post reported Monday. Pentagon grants and contracts often facilitate purchases of U.S. software by Chinese firms, which then sell the products to the Chinese military.

Under Chinese President Xi Jinping, China has sought to achieve economic self-sufficiency and modernize its military in the process, a phenomenon scholars call “decoupling.”

“They’ve also been stockpiling a lot of equipment, thinking that this type of restriction could come down the pike,” said Carmack.

China decried the controls. They could “hurt the interests of U.S. companies … hinder international sci-tech exchange and trade cooperation and deal a blow to global industrial and supply chains and world economic recovery,” Chinese foreign ministry spokesperson Mao Ning said on Oct. 8.

The newest round of controls also bar U.S. “persons” from operating on behalf of the listed firms without a special license, The Wall Street Journal reported.

Americans based in China will have to choose between their jobs and their residency status or American citizenship, according to the WSJ. The outlet found at least Americans in 43 senior executive positions at 16 Chinese companies listed under the restrictions.

The Silicon-Valley trained executives brought their technological expertise to China, many through the Chinese Communist Party’s “Thousand Talents” program, according to the WSJ.

“The new U.S. export control measures are likely to further motivate China to strive for greater self reliance, but they will also substantially complicate its efforts to do so,” Min-Hua told the DCNF.

The NSC and the Commerce Department’s Bureau of Industry and Security did not immediately respond to the DCNF’s requests for comment.