WASHINGTON – When Commerce Secretary Gina Raimondo was in Beijing in August to discuss trade with economic officials, she and others in the tech industry were shocked by a new smartphone, unveiled by Chinese telecom giant Huawei.
The phone was named the Mate 60 Pro, featuring a seven-nanometer processor developed by a Huawei subsidiary and produced at the Chinese semiconductor fabrication plant SMIC. It immediately set off alarm bells among Western nations because it meant that China had achieved this breakthrough despite extensive measures the U.S. and its allies have taken, through export controls and trade restrictions, to block the country from accessing cutting-edge technologies in the sector.
The phone renewed the concerns that U.S. export control policies were not effective. Some lawmakers and experts have called for tougher and more comprehensive sanctions, while chipmakers and China watchers have warned against cutting Chinese companies out of the global semiconductor supply chain.
The U.S. chips blockade against China began gradually. In 2019, the Department of Commerce under the Trump administration cited violation of sanctions against Iran to add Huawei to the so-called Entity List. Companies wishing to export U.S. technologies to Huawei and its international subsidiaries are required to obtain licenses from the department’s Bureau of Industry and Security, or BIS. SMIC was put on the same list in 2020.
In October 2022, Commerce strengthened its blockade by implementing a series of blanket export controls. The new restrictions limited the export of advanced semiconductors, necessary for training artificial intelligence models. They also targeted semiconductor manufacturing equipment (SME) that are required to produce chips smaller than 14 nanometers. Japan and the Netherlands, two key exporters of advanced SME, also followed suit in 2023.
The launch of the Huawei Mate 60 Pro, however, suggests that the U.S. strategy of freezing China’s semiconductor manufacturing abilities may be in serious jeopardy.
“U.S. sanctions have failed”
Huawei and SMIC’s success in manufacturing and selling a seven-nanometer chip in a commercially available device shows that U.S. sanctions have failed, said Dylan Patel, a semiconductor analyst at the research firm SemiAnalysis.
“The sanctions have too many holes in them,” Patel said, adding that the Commerce Department’s BIS was giving out export licenses “too easily.” Although BIS now routinely denies licenses to Huawei and SMIC, companies can still obtain a license to sell semiconductors and SME to other Chinese entities, including some shell companies.
It is also widely known to the industry that SMIC can manufacture semiconductors at the seven-nanometer level without technologies the U.S. explicitly blocks, Patel said. As early as 2021, SMIC began shipping a seven-nanometer chip for cryptocurrency mining.
For SME the U.S. closely restricts access to, like lithography, the printing of circuit patterns onto silicon wafers, SMIC can purchase older-generation machines or push equipment it already owns to achieve similar results.
The firm also continues to have access to chemicals and software necessary for designing and manufacturing the chips but are not part of the current export controls, Patel said.
“While they might want to prevent China from making seven-nanometer chips, they don’t restrict the equipment required for it properly. So then it kind of makes it pointless, if you will,” Patel said. “The lawmakers need to be much more willing to what is required, rather than trying to straddle the line and play this game.”
Huawei and SMIC did not respond to requests for comment.
And China is not standing still in the face of tightening sanctions. Both the national and local governments have made significant investments to onshore its semiconductor supply chain, said Arrian Ebrahimi, a semiconductor expert who previously worked at the Semiconductor Industry Association, the leading trade group for the industry in Washington.
Ebrahimi said the Chinese national government has also attempted to take a more centralized approach to direct investments to address the country’s “strategic needs” and choke points in the supply chain where China relies on foreign technologies, rather than projects that yield the most financial return.
China has also countered U.S. chip controls with trade and export restrictions of its own, harming some of the biggest U.S.-based tech companies. In May, the country banned the sale of chips from Micron, a top U.S. manufacturer of memory and storage chips, to Chinese companies that handle “critical information infrastructure.”
In July, China announced that it will now require permits for the export of rare earth metals, including gallium and germanium, both of which are crucial to semiconductor manufacturing.
The competing visions
Despite SMIC’s manufacturing capabilities being an open secret in the industry, Huawei’s new phone surprised lawmakers and officials in Washington.
In hearings before Congress, Raimondo called reports about the phone upsetting and “incredibly disturbing.” And a group of 10 House Republicans sent a letter to BIS, in which they said they are “extremely troubled and perplexed” by Huawei and SMIC’s bypassing of U.S. export controls.
Some lawmakers have taken Huawei’s phone as a mandate to double down on the chips blockade. Rep. Mike Gallagher (R-Wis.), the chair of the House Select Committee on the Chinese Communist Party, called for ending all U.S. exports to Huawei and SMIC following the Mate 60 Pro announcement.
Gallagher, a frequent advocate for tougher China policies, told the Medill News Service that he is urging the Biden administration to continue tightening export controls and closing loopholes that allowed Chinese companies to access sensitive U.S. technologies.
“It is time to respond by imposing maximum economic sanctions on bad actors like Huawei to protect our national security and send a clear message to anyone currently selecting vendors for their next-gen wireless and fiber telecom networks,” Gallagher said in a statement to Medill News Service.
The Commerce Department did not respond to a request for comment, but at a national defense forum in early December, Raimondo urged lawmakers to provide more money for her department to enforce export controls.
“I have a $200 million budget. That’s like the cost of a few fighter jets,” she said. “If we’re serious, let’s go fund this operation like it needs to be funded.”
Gallagher and two other Republican lawmakers responded harshly, saying any funding talk will need to match enforcement actions, like revoking existing export licenses to Huawei, and changes to make BIS “a true national security agency.”
But, U.S. chipmakers have been pushing back against further crackdown on semiconductor exports to China. The New York Times reported in October that officials from Nvidia, Intel and Qualcomm have met with high-level White House officials, including Raimondo and Secretary of State Antony Blinken, to argue against tougher export controls.
All three companies have extensive business interests in China. Qualcomm, a chipmaker specializing in wireless technology, reported that almost 64% of its revenue came from China in 2022.
After Commerce announced in October additional export controls, SIA issued a statement cautioning against “overly broad, unilateral controls” and urged the administration to coordinate with allies and ensure market competition.
Jeffrey Bean, the program manager for tech policy at the think tank ORF America, also expressed concern over the idea of completely cutting off China from access to U.S. semiconductor technologies.
“Outright total semiconductor decoupling at this point would be highly damaging to the PRC, but also highly damaging to the U.S. industry and the U.S. tech economy, who still draw a significant portion of their revenue from that market,” Bean said.
Bean noted that many U.S. allies and the chipmakers themselves have adopted strategies to diversify their supply chain and reduce dependency on China. But, a complete semiconductor decoupling from China will cause U.S. companies to cede the Chinese market and hurt their revenue and, by extension, their R&D budgets intended to retain technological leadership.
Cooling the temperature
After months of exchanging top officials and diplomats, President Joe Biden met with President Xi Jinping of China in mid-November on the sidelines of the Asia-Pacific Economic Cooperation summit in San Francisco.
During a news conference following the meeting, Biden said the two sides have agreed to resume military-to-military communication and cooperate on curbing fentanyl production but announced no deliverables on export controls or trade policy.
Jake Werner, the acting director of the East Asia program at the Quincy Institute, a foreign policy think tank, argues that although the U.S. has cast its restrictions on China as making the U.S. more competitive, those restrictions in effect exclude China from high return and strategically important markets, which can lead to global destabilization.
SMIC’s success in manufacturing seven-nanometer chips could be an opportunity for the U.S. to reconsider its approach in the semiconductor arms race, Werner said.
“To me, it indicates an opening to rethink the entire goal, because I think the goal was unsound to start with,” Werner said. “If the goal is successful, it will poison the relationship. It will prevent China from contributing what it could to innovation that actually is needed globally.”
One of those areas could be AI security. China has outpaced the U.S. in passing comprehensive legislation on AI regulation. In early November, China also signed an agreement to cooperate with the U.S., UK and the European Union in managing the risk AI poses, particularly in cybersecurity.
Some experts have speculated that China may leverage cooperation in AI security to negotiate for eased export controls, but the Biden administration has made clear in the past that it is unwilling to negotiate on issues that have national security implications.
“I think the answer to competition should be redoubling competition and should not be trying to reduce the ability of companies to compete,” Werner said.
