U.S. mulls fresh bid to restrict chipmaking tools for China's SMIC -sources

[July 08, 2022]  By Alexandra Alper, Karen Freifeld and Stephen Nellis

WASHINGTON/NEW YORK (Reuters) - The Biden administration is considering new targeted restrictions on shipments of chipmaking tools to China, seeking to hamstring advances by China's largest chipmaker, SMIC, without slowing the flow of chips into the global economy, five people familiar with the matter told Reuters.

The Commerce Department, which oversees export policy, is actively discussing the possibility of banning exports of chipmaking tools to those Chinese factories that make advanced semiconductors at the 14 nanometer node and smaller, the people said, to stymie China's efforts at making more state-of-the-art chips.

In the meantime, the agency would allow those same tools to be sent to plants owned by the same firms but which make less advanced semiconductors, to safeguard the supply of commodity chips as the world recovers from a chip shortage.

A spokesperson for the Commerce Department did not comment directly on the idea, but said "with respect to semiconductor-related export license applications in particular, (Commerce) and the other reviewing agencies ... consider a variety of factors in making licensing decisions, including the technology node for the proposed export."

The agency also stressed that the Biden administration regularly consults with allies and the industry about how best to tailor measures to deny China access to advanced technologies with both civilian and military uses.

SMIC did not respond to a request for comment.

A spokesman for the Chinese Embassy in Washington, Liu Pengyu, said: "By repeatedly seeking to politicize, weaponize and ideologize economic and trade issues and exercise technological blockade and decoupling against other countries, the U.S. would only remind other countries of the risks of technological dependence on the U.S. and prompt them to quickly become independent and self-reliant in science and technology."

If the nascent idea moves forward, it would be the first time the Commerce Department officially takes a factory-by-factory approach to export policy, although sources said unofficially it was now applying the approach to SMIC.

It would also allow the Biden administration to tighten export controls on SMIC's most advanced factories, while allowing tools to flow to its facilities that make commodity chips for automobiles and everyday consumer electronics.

That, in turn, would help further the U.S. goal of halting China's progress toward more advanced node semiconductor manufacturing, to safeguard U.S. competitiveness and national security.

A logo of Semiconductor Manufacturing International Corporation (SMIC) is seen at China International Semiconductor Expo (IC China 2020) following the coronavirus disease (COVID-19) outbreak in Shanghai, China October 14, 2020. REUTERS/Aly Song

SMIC, or Semiconductor Manufacturing International Corp, has said it began production of 14-nanometer chips in late 2019.

The company was added to a trade blacklist by the Trump administration over alleged military ties in 2020, but the measure banned only exports of a small subset of chipmaking equipment destined for the firm.

That policy left decisions on exports of everything else up to the discretion of U.S. agencies, leading to long delays in approvals for licenses to ship to the company, as agencies bickered about what exports to greenlight.

Reuters reported in December that the Biden administration was still at loggerheads over whether to tighten the restrictions on SMIC, but had raised the possibility of discussing with allies further restrictions on selling chip-making equipment to China.

If the Commerce Department plows ahead with the concept, which has not yet been drafted into a formal proposal, the United States would seek to bring on board allied countries that boast top chipmaking equipment producers like the Netherlands, Japan and South Korea, the sources said, though that might prove challenging.

An official from the Commerce Department discussed the possible changes with companies on Friday at the end of an annual conference led by the agency, two sources said.

It is not clear if the Biden administration would also seek to block shipments of other items to the targeted facilities as well, one of the sources said. Other agencies within the U.S. government would need to vet any Commerce Department proposal before it could be implemented.

A surge in purchases of cars and personal electronic devices during the coronavirus pandemic fueled a global chip crunch in late 2020. But as the global economy cools, a drop in demand is eliminating shortages for products like personal computers, Android smartphones and television sets, even as production of some goods like automobiles remains hampered by shortages, according to Stacy Rasgon, an analyst with Bernstein.

(Reporting by Alexandra Alper in Washington, Karen Freifeld in New York and Stephen Nellis in San Francisco; Editing by David Shepardson, Matthew Lewis and Christopher Cushing)

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