Now, the U.S. government has moved to deploy a sweeping set of export controls designed to keep China from acquiring next generation chip technology. These actions have significant repercussive effects on technology markets around the world and U.S. foreign relations. OverTraders.com takes an in-depth look at these complex restrictions to better understand their financial impact on the key sectors involved and the greater geopolitical picture.
Overview of Export Controls on U.S. Chip Technology to China
The United States uses a variety of tools to ensure that advanced chip technology does not reach China. These tools consist of the Commerce Control List (CCL), Entity List, and the U.S. Persons Rule. The CCL includes many items that are subject to export controls. In comparison, the proscribed Entity List explicitly lists persons, companies, and other organizations that conduct activities contrary to U.S. national security or foreign policy interests. The U.S. Persons Rule applies license requirements to all U.S. citizens and entities. This is especially true for those engaged in R&D or manufacturing of advanced semiconductors in China.
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) is the lead agency in the export controls crossfire. They vigorously enforce and administer these essential regulations for the public good. BIS is in charge of regulating the export of dual-use commercial goods and technologies with both commercial and military applications. The State Department has an equally important role, especially when it comes to controlling the export of military goods and militarily useful technologies. This separation of duties serves to underscore the complex and sometimes contradictory character of the U.S. export control regime.
These controls aren’t without precedent. In reality, throughout history the U.S. government has utilized export controls to push forward its foreign policy and national security goals. The new, broader restrictions on chip technology to China represent a major step up. Increasingly, these measures are focusing on China’s technological progress and how it may affect U.S. competitiveness and national security.
Background of the Export Controls
The new export controls on chip technology to China have been a long time coming. This amendment codifies the stark new geopolitical reality as well as the incredibly fast pace of semiconductor technology. In October 2022, the U.S. government introduced seismic changes to its export control regime. These changes were part of sweeping restrictions that covered all of China. This has been done through an unnecessary new licensing requirement. This requirement hinges on if materials will be consumed in the fabrication of advanced node semiconductors.
The October 2022 controls completed the implementation of a U.S. Persons Rule that had applied to China specifically. This rule is an attempt to prevent U.S. citizens and companies from contributing to the development or production of advanced semiconductors in China. This regulation applies even when such activities are not captured by other export control regulations. This measure reflects the U.S. government's concern that U.S. expertise and technology could inadvertently contribute to China's technological advancements.
For the first time since 1988, the U.S. government has taken affirmative steps to impose IEEPA sanctions. This move addresses growing worries over outbound investments in sensitive sectors. In August 2023, the Biden administration used IEEPA to issue an executive order directing the U.S. Treasury Department to establish a program to review outbound investments in national critical sectors such as AI and semiconductors. This action underscores the U.S. government's determination to prevent the transfer of technology and capital that could enhance China's capabilities in these areas.
Purpose and Goals of the Regulations
The primary purpose of the export controls on chip technology to China is to slow down China's technological advancements in key areas, particularly artificial intelligence (AI) and advanced semiconductors. The U.S. government has come to understand just how egregious the implications of these technologies are for our national security. They view China’s swift advancement in all these areas as damaging to American interests.
The rules are primarily aimed at preventing China from acquiring the technology and knowhow needed to produce cutting-edge semiconductors. These particular semiconductors are absolutely essential for today’s most advanced applications, including AI, supercomputing, and military systems. By restricting China's access to these technologies, the U.S. government hopes to maintain its technological edge and protect its national security.
These steps are intended to motivate other countries to adopt their own export controls. This will encourage a more multilateral approach to restricting Chinese access to sensitive technologies. The U.S. government recognizes that unilateral action is only so effective and that cooperation from key allies and partners is essential to achieving its goals. Countries like the Netherlands, Germany, South Korea, Japan, and Taiwan control key chokepoints in the AI and semiconductor value chain.
Biden Administration's Export Limits
The Biden administration has taken a definitive, aggressive stance on export controls. Now, it has a barrage of measures aimed at restricting China’s access to cutting-edge technologies. Of course, the U.S. government is coming to a pretty robust consensus. For those who see China as a preeminent technological and economic rival, they know that this calls for very different decisive action to protect U.S. interests.
The Biden administration’s has been notable for its twin foci on export controls and investment restrictions. The Biden administration moved to further restrict the export of certain chip technology. It has clamped down on outbound investment in vital industries such as AI and semiconductors. This dual approach reflects a somewhat modern understanding that both technology transfer and capital flows can help China advance technologically.
These policies are a huge step forward, but they’ve received an unexpectedly cool reception from industry and friendly allied groups. Many companies have objected that these new, stringent export controls will make them uncompetitive and break vital, global supply chains at the same time. Economic interests have allies very concerned about the impacts of the travel restrictions. They highlight the need for a more coordinated approach to address this issue.
Key Features of the Export Limits
The Biden administration’s export restrictions on semiconductor technology to the PRC are notable for three primary reasons. First, they take aim at a broad swath of technologies—from advanced semiconductors, to AI chips and related manufacturing equipment. This extensive reach signals the U.S. federal government’s alarm that China may attempt to obtain these technologies through a number of avenues.
Second, the new export limits cover both end-use restrictions and end-user restrictions. End-use restrictions prevent the export of certain technologies for defined uses, like use in military or intelligence applications. End-user restrictions restrict access to specific companies or organizations identified as posing a threat to U.S. national security.
The export restrictions also feature a U.S. Persons Rule. The applicability of this rule is very broad, even beyond the normal scope of U.S. citizens and companies anywhere in the world. This rule is an important step toward preventing American know-how and innovation from propping up the Chinese technological rise. It covers them even when those activities are not specifically prohibited by separate export control regulations.
Implications for Data Center Construction
The recent export limits on leading-edge chip technology to China have major ramifications for the pace of data center construction in China. Data centers need cutting-edge semiconductors to operate every component in processing, storage, and networking. Limiting access to such technologies could delay the pace of building new data centers within China. They might even curtail the production of current data centers.
The real burden of the restrictions The restrictions would have the effect of raising costs for Chinese data center operators. As overall access to advanced semiconductors diminishes, the cost of these highly technological components will only go up. Costs of building and operating data centers in China will likely continue to rise. Such a price upsurge would seriously endanger the competitiveness of Chinese companies.
Furthermore, the export restrictions might push Chinese firms to accelerate the building of their own domestic semiconductor production capabilities. This process will take time, but could greatly reduce China’s reliance on foreign suppliers for strategic resources. In doing so, it would provide a major counterweight to the negative impact of export controls. It would need a lot of money and technological advancement.
The Geopolitical Landscape of Chip Technology
The export controls on chip technology to China are not an economic story at all. They are a geopolitical story. Influence over key advanced technologies is emerging as the necessary base of 21st century power. The U.S. government now views China’s accelerated technological developments as possibly the biggest long-term threat to its hegemony. To preserve its competitive advantage, it argues that robust action is needed.
The export controls are an attempt to stop China’s rise. Further, they are meant to be one element in a larger strategy to prevent the country from becoming an overwhelming technological hegemony. This push came with a host of new ideals aimed at improving U.S. competitiveness and innovation, as well as shoring up alliances with like-minded countries. The U.S. government recognizes that it cannot address the challenge posed by China alone and that cooperation with allies and partners is essential.
Beyond U.S. legislation and regulation, the geopolitics of chip technology is further defined by the actions of other countries. It’s hard to overstate the importance of foreign partners in this context such as the Netherlands, Germany, South Korea, Japan, and Taiwan in the global semiconductor ecosystem. Their decisions on export controls and technology transfer will have a significant impact on the effectiveness of the U.S. measures.
The Cold War on Chips
Many behind-the-scenes observers have referred to the export controls on chip technology to China as the start of a “cold war on chips." This analogy reflects the growing competition between the U.S. and China in the technology sector and the increasing use of economic and technological tools to advance national security interests.
The "cold war on chips" is characterized by a number of features, including:
Increased export controls and investment restrictions.
Efforts to reshore or friend-shore semiconductor manufacturing.
Increased government funding for research and development.
Potential 3 – Building alliances and coordinating policies with like-minded countries.
The “cold war on chips,” as many have labeled it, has wide-ranging consequences for the world economy and international relations. Greater trade tensions may be a longer-term consequence of this episode. It would jeopardize global supply chains and further fragment the technology ecosystem around the globe.
Impact on China and Russia's AI Development
These new export controls on U.S. chip technology to China are meant to limit China’s ability. This of course strikes at their capacity to build more sophisticated AI systems. AI is perceived as a make or break technology. It affects every sector of our nation — the defense, intelligence, and economic competitiveness just to name a few. By restricting China's access to advanced AI chips, the U.S. government hopes to slow down its progress in this field.
The secondary impact of these controls applies to Russia’s second largest AI development effort. Though the controls are largely targeted at China, they would impact Russia’s ability to access advanced chip technology. Given the close military relationship between China and Russia, this makes this especially salient. Indeed, there is enormous potential for bilateral tech transfer between these two countries.
China’s 2020 Export Control Law contains a similar catch-all provision. Second, it aims broadly at any end-use that would threaten China’s national security or interests. This law is a further indication of China’s intent to bolster its ability to manage the export of sensitive, controlled technologies. It too seeks to protect national security interests.
Economic Consequences of AI Technology Restrictions
Additionally, the restrictions on AI technology exports have serious economic ramifications. They affect more than just the U.S. and China; they affect the entire global economy. Economic Driver The AI industry is the greatest economic drivers of our lifetimes. Any disruptions to its development and deployment would bring all of such serious consequences.
The U.S. national security enterprise is initiating one of the most ambitious, contentious campaigns. It’s aim is to deprive China of access to the most advanced AI and related technologies. We are doing this through strict new export controls and investment restrictions. Together, these actions work to block China from being able to acquire and develop key technologies.
Such broad restrictions would mean higher compliance costs for businesses that use AI, less innovation, and more employer community economic development. This would almost certainly lead to a highly fragmented global AI market. Regions could start to grow their own parallel and AI-tailored ecosystems.
The Cost of AI Development
At its core, AI development is an incredibly expensive and resource-intensive prospect. Clearly, investing heavily in research and development is key. In addition, you require access to massive datasets and sophisticated computing infrastructure to achieve success. Strategic export controls on advanced semiconductor technology will make AI development in China prohibitively expensive. These restrictions prevent access to other key components—including advanced AI chips.
The regulations will lead to a negative brain drain. Super talented AI researchers and engineers may vote with their feet and leave China to seek greener pastures in countries with AI-friendly use-case based regulations. This might especially dampen China’s development in a time of already-lingering doubt on the competitiveness of China in the global AI market.
The restrictions might push seedlings innovation to China. Chinese companies will need to create their own home grown domestic AI chip industry. This in turn would make them more competitive globally, fostering the vibrant new industries, technologies, and firms that create good jobs.
Effects on the Global Data Center Market
The worldwide data center market is inextricably tied to tech sector, specifically, the burgeoning AI industry. Data centers are already providing the sophisticated computing infrastructure required to train and deploy these AI models. Broadly applied export controls on US chip technology would severely damage the global data center market. Or, at the very least, they could curtail the flow of advanced AI chips or fine chemicals used to develop other key components.
Those limitations might increase the market for data centers to other Asian countries, aside from China. Businesses are increasingly wanting to be able to move their AI workloads as regulatory environments change or become more favorable. This is a win-win scenario for data center operators in countries including the U.S., Europe and Japan.
The limitations are expected to impede the expansion of the global data center market. This would have an outsized effect on the industry as a whole. If they do, and export controls do damage the AI industry, demand for data center services tank. This trend might put a damper on future investments in new data center builds.
The U.S. government’s recent actions have profound and complicated implications for global technology markets and international relations. What the long-term consequences of such measures could be remains unclear. Make no mistake — they will go on to color the overarching global technology landscape for years to come.
