Semiconductors are increasingly a part of everyday life, from consumer electronics such as smartphones, laptops, cars, televisions and washing machines, to financial, business and communications infrastructure such as ATMs, payments and banking services, the internet and advanced computing. The latest generation of chips plays a vital role in the development of AI.

Their strategic importance has recently been illustrated by their inclusion in the top tier of the G7’s shortlist of Common High Priority items that are prohibited to be supplied to Russia, having been identified as key parts in Russian weapons systems found on the battlefield in Ukraine. (Hence the somewhat incongruous crackdown on a surge in exports of washing machines to Russia.)

US restrictions

At a longer term strategic level, the US has for several years been leading efforts to restrict the growth of China’s advanced technology base, particularly in sectors linked to military and AI. The ‘chip war’ between the US and China has become a focal point of their competition to secure a technological advantage. This has taken three main forms:

• in October 2022, the US imposed export controls on advanced semiconductors and related manufacturing equipment to China. These were expanded in October 2023.  While most chips for consumer items are permitted, those that exceed certain performance parameters or density thresholds are prohibited (such as Nvidia A800 and H800, and Intel Gaudi2 chips) without a licence. The controlled manufacturing equipment is mostly that used for fabricating logic chips under a 16-nanometer threshold, and in wet chemical processing, dry etching, and various types of deposition;

• subjecting an increasingly wide range of Chinese organizations to a total ban on the supply of all US goods, or in some cases a ban on the supply of advanced semiconductors, by adding them to its Entity List; and

• in August 2023, an executive order restricted US investment in Chinese entities involved in semiconductors, quantum technologies and certain AI systems.

Geostrategic competition

Other countries are being inexorably drawn into this geostrategic competition. The US export controls apply not only to advanced semiconductors and their manufacturing equipment that are made in the US but also to those made outside the US that either contain more than 25% by value of controlled US components or that are made using US technology or manufacturing tools.

Under the US Export Administration Regulations Advanced Computing Foreign Direct Product Rule (§ 734.9(h)), if a product meets certain criteria it may not be supplied  – either as a standalone item or incorporated into another product – to companies headquartered in China or to US-embargoed countries, including states considered to have a high transshipment risk.

The two other countries producing advanced semiconductor manufacturing equipment – the Netherlands and Japan – have followed the US in imposing export controls on such items, as part of a trilateral arrangement agreed in January 2023.

UK’s approach

For its part, the UK is aiming to strike a balance between limiting national security threats posed by China while continuing to promote trade and investment. To date the UK has given no indication that it intends to impose new export controls on China similar to those of the US.

However, the UK government has indicated, in response to the latest US steps, that it may consider restrictions on outward investment to China. Inward investment has been subject to heightened scrutiny since January 2022, under the National Security Investment Act. A Chinese acquisition of a UK semiconductor manufacturer, Newport Wafer Fab, was blocked by the UK government in November 2022 using the new powers under this Act.

China was also added to the UK’s list of arms embargoed countries in May 2022, resulting in heightened scrutiny of exports and research collaborations with Chinese organizations with military links. Unlike the US, the UK does not publish a list of such entities.

But through its “military end-use controls” it is able to block sensitive exports of goods and technology in a low-profile way, without announcing a restrictive policy that might risk destabilizing its valuable trading relationship with China. A reported increase in licence refusals for semiconductor exports to China may be evidence of that, although the lack of public details on such licence applications makes it difficult to draw definitive conclusions.

China’s response

The US government appears likely to update its rules on an annual basis, to adapt them to the rapid evolution in technology. The direction of travel is clearly towards a ratcheting-up of these types of restrictions, led by the US, which then extends its controls to items made outside the US incorporating US components or using US technology.

China is not responding to these steps passively. Its dominance of the supply of certain critical minerals gives it particular leverage which it has shown that it is prepared to exercise. In response to the US measures, China has: imposed its own limits on the export of two critical semiconductor components, germanium and gallium; banned the sale of American Micron chips to Chinese companies; and imposed export controls on graphite products, a crucial component of electric vehicle batteries.

Supply chain risks

The risks to the development of stable supply chains for vital advanced semiconductors are evident. As both sides tighten and extend their restrictions, it will be increasingly important for businesses involved in such supply chains to ensure that they are fully abreast of the requirements and that they have in place robust measures to ensure their full compliance, since any breaches are liable to be seen by the authorities as undermining key geostrategic goals and to be penalized accordingly.