On Friday, the U.S. Commerce Department is set to release final regulations aimed at preventing semiconductor manufacturing subsidies from benefiting China and other nations viewed as potential threats to American national security. These regulations represent a crucial step before the Biden administration can distribute $39 billion in subsidies for semiconductor production. The “Chips and Science” legislation, a significant initiative, allocates $52.7 billion for U.S. semiconductor production, research, and workforce development.
The proposed regulations, initially introduced in March, establish “guardrails” by restricting recipients of U.S. funding from investing in the expansion of semiconductor manufacturing in countries such as China and Russia, which are deemed concerning. Additionally, the regulations limit recipients of incentive funds from participating in joint research or technology licensing initiatives with foreign entities that raise national security concerns.
U.S. Implements Stringent Export Controls Targeting Semiconductor Access of China
In October 2022, the department implemented new export controls aimed at cutting off China’s access to specific semiconductor chips produced using U.S. equipment. This action was part of a broader strategy to impede Beijing’s progress in both technological advancements and military capabilities.
On Tuesday, Commerce Secretary Gina Raimondo informed Congress by saying, “We have to be absolutely vigilant that not a penny of this helps China to get ahead of us.”
“If funding recipients breach the imposed restrictions, the Commerce Department reserves the right to reclaim the federal awards,” Raimondo informed Congress. She emphasized her dedication to expediting the approval of awards, stating, “I feel the pressure. We are behind, but it is more important that we get it right. And if we take another month or a few more weeks to get it right, I will defend that because it’s necessary.”
The regulation in question sets forth stringent measures governing funding recipients, particularly in the realm of semiconductor manufacturing. Over a span of 10 years, these recipients are disallowed from significantly augmenting semiconductor manufacturing capacity in specific foreign territories that are deemed concerning. Additionally, collaborative research or technology licensing endeavours with certain foreign entities are subject to restrictions. However, the regulation does permit adherence to international standards, engaging in patent licensing, and utilizing foundry and packaging services.
Specifically, the final rules explicitly proscribe any substantial expansion of semiconductor manufacturing capacity for cutting-edge and sophisticated facilities within the mentioned foreign countries of concern for the specified decade. A noteworthy inclusion in the clarification is the encompassing of wafer production within the broader definition of semiconductor manufacturing.
Regulatory Framework, Impact on Semiconductor Industry, and Chip Funding
The final rule establishes a clear link between expanded semiconductor manufacturing capacity and the augmentation of physical infrastructure, such as cleanrooms or other facilities, by delineating material expansion as any increase in production capacity exceeding 5%.
Of paramount importance is the prohibition against recipients augmenting production capacity beyond a 10% threshold by incorporating new cleanroom spaces or additional production lines, thus ensuring that facilities remain within the stipulated limits.
Furthermore, the rule categorizes certain types of semiconductors as critical to national security, invoking tighter restrictions. This heightened scrutiny encompasses semiconductors integral to cutting-edge technologies like quantum computing, existing-generation chips, and mature-node chips. Additionally, it extends to semiconductors operating in radiation-intensive environments and those crucial for specialized military capabilities.
Some US semiconductor companies have embraced the new rules, viewing them as a step towards ensuring fair competition. However, there are concerns among others within the industry who worry that these regulations may hinder their ability to compete with Chinese counterparts. Additionally, experts caution that these rules could potentially trigger a global semiconductor shortage, negatively impacting the worldwide economy.
The true effectiveness of these regulations in curbing China’s access to US semiconductor subsidies is yet to be fully understood. Nevertheless, they undeniably send a strong message about the United States’ commitment to preserving its technological supremacy in the semiconductor realm and mitigating China’s emergence as a significant industry rival.