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On October 7, 2022, the United States Department of Commerce announced a series of export controls that signaled a marked shift in U.S. policy and a new era of global technology competition. These restrictions aim to curb two crucial exports to the People’s Republic of China (PRC). The first target is advanced semiconductors that could be used to train powerful artificial intelligence (AI) models; the second is semiconductor manufacturing equipment (SME) that could enable domestic production of semiconductors smaller than 14 nanometers to train and run AI models. Previously, U.S. strategy focused on maintaining a technological lead of a couple of generations over adversaries. Now, an absolute lead is the desired goal.
However, the PRC is signaling that Western restrictions will not hold them back.
Less than one year after the United States announced its export controls, the Chinese tech giant Huawei announced its newest smartphone, the Mate 60 Pro, on September 29, 2023. The Mate 60 Pro uses a domestically produced chip known as the Kirin 9000S, a seven-nanometer chip, which suggests a failure of U.S. policy to prevent the PRC from manufacturing chips smaller than 14 nm.
One year after the U.S. Department of Commerce established semiconductor export controls, the PRC’s seemingly significant progress in semiconductor manufacturing warrants U.S. reflection and reconsideration. The PRC’s progress, while impressive, is not itself shocking. The export controls have gaps that render them only partially effective, and perhaps even detrimental, to U.S. goals. Moving forward, the United States must ensure that the means it deploys match the ambition of its goals, especially in the complicated realm of great power competition, trade, and artificial intelligence.
The United States Semiconductor Strategy
Semiconductors are the foundation of the modern era of computing. They are the core processing units of our laptops, phones, entertainment devices, washing machines, and virtually every other piece of modern technology. Without semiconductors, the modern world grinds to a halt. While a critical input to basic consumer goods, cutting-edge semiconductors are also essential to training AI models. Increasing levels of computing power, in addition to key technical innovations in the past ten years, have powered a new era of dual-use AI tools. Not only can AI help discover new drugs, solve protein folding, and generate compelling written text, but it can also create novel bioweapons, increase the speed of decision-making in warfare, and serve as a tool for the control and domination of minorities.
Given the vast potential of AI, the United States is focusing on ensuring Western dominance in semiconductors and preventing the PRC from possessing advanced capabilities. The United States has developed a three-pronged strategy to limit PRC’s progress while ensuring Western dominance.
The first prong limits the PRC’s access to U.S. and allied semiconductors, SME, intellectual property, and technical assistance. To do so, the United States introduced export controls on October 7, 2022. First, these controls specifically limit the United States from exporting logic chips like advanced AI chips and the SME that the PRC could use to build chips smaller than 14 nm. Second, the United States also implemented two Foreign Direct Product Rules (FDPRs), putting extraterritorial export controls on semiconductor items that include U.S. inputs, including the design of many semiconductors. While the United States designs many semiconductors, the Dutch company ASML makes the most advanced semiconductor SME, and Japan is a major player in advanced semiconductor manufacturing. While the United States could have attempted to enforce these rules unilaterally, the Netherlands and Japan agreed to implement similar restrictions in January 2023.
The second prong prevents the PRC from accessing key U.S. knowledge on semiconductor production by prohibiting U.S. citizens from investing or joining the board of Chinese companies building AI tools.
These two components of the semiconductor strategy cover the key chokepoints of the United States and allied control: intellectual property, advanced semiconductors, and SME.
The final prong is boosting U.S. and allied investment and research into semiconductor production and advancement. To do so, the United States has passed and is beginning to implement the Chips and Science Act. The CHIPS Act represents a $52.7 billion investment into semiconductor production and research, including $39 billion dedicated to incentivizing semiconductor manufacturing. On top of this dollar amount, there is also a 25 percent tax credit for companies investing capital in U.S. semiconductor manufacturing. Other allies, like the EU and South Korea, have also implemented similar legislation. Even countries that traditionally have played a small role in the semiconductor supply chain, like India, are looking to become involved.
It is too early to judge the efficacy of the CHIPS Act due to the complexities and long time horizon of industrial policy. However, the effectiveness of the export controls can already be critiqued, given they have been in effect for a year already. On the surface, the export control regime is firm, but several gaps undermine its effectiveness.
Holes in the Web?
While the U.S. semiconductor strategy may seem airtight, the export control regime must stifle domestic Chinese innovation and address imperfect export control enforcement and scoping to achieve success.
The introduction of Huawei’s seven-nanometer chip, the Kirin 9000S, designed and produced in partnership with Chinese manufacturer SMIC, is the latest challenge to the U.S. export control strategy. The United States aimed to freeze domestic Chinese design and production at or above 14 nanometers. The seven-nanometer Kirin 9000S defies this key goal of the U.S. export controls.
Looking closer at Huawei’s achievement, the picture becomes more complicated. While the Kirin was primarily an original design by Huawei and SMIC, it seems they used last-generation imported DUV lithography machines rather than domestic machines. Indeed, domestic lithography tools seem to be generations behind the top-of-the-line ASML tools, which highlights a significant hole in the PRC’s domestic semiconductor stack and its continuous reliance on Western technology.
It is also unclear how successful the PRC’s domestic semiconductor production process is. DUV lithography machines may have the capacity to create seven-nanometer chips, but precision is key due to the minuscule nature of these chips. When the process is not precise enough, the cost increases drastically due to the low yield of usable chips. While some analysts believe the yield is relatively high, others are more skeptical of SMIC’s progress. While the only public use of the seven-nanometer semiconductor thus far has been in the Kirin 9000S, producing a seven-nanometer chip designed for training AI is possible. Additionally, depending on the seven-nanometer yield, government subsidization could allow for the production of semiconductors as small as five nanometers.
However, even without Huawei/SMIC’s innovation, it is unclear if the export controls are strong enough to achieve the U.S. goal of limiting the PRC’s AI ambitions. Nvidia has released graphics processing units (GPUs) designed to train AI just below the capabilities threshold the United States set and only slightly less capable than the previous GPUs the company was selling in the PRC. Although they may slow down the time it takes to train models while increasing costs, it is unlikely that the controls will slow down the PRC in the short run.
Rethinking the United States Strategy
Due to the potential threats and uncertainty surrounding the PRC’s production and acquisition of semiconductors, how should the United States and its allies move forward? The United States must devise a theory of success and implement means proportionate to the desired goal. The United States is currently trying to achieve an absolute lead in semiconductor manufacturing and usage, potentially degrading the PRC’s capacity. However, the current means are not up to the task.
The U.S. export controls of October 7, 2022, are flawed. In particular, increasing the cost for the PRC’s companies to develop advanced AI but not degrading that capacity is ineffective due to government subsidization. Additionally, the United States implemented the export controls without coordinating with allies like Japan and the Netherlands. While these states eventually agreed to implement similar rules, acting unilaterally and trying to persuade allies after the fact may have undermined future allied coordination on the issue.
Simply expanding export controls is not the answer. Some have suggested that the United States should further limit the GPUs that could be exported to the PRC and place additional controls on the essential inputs to SME. However, there is even domestic pushback to such a policy position, with the major United States semiconductor companies against the expanded proposals. Stricter controls could also disrupt the supply chain. Making the Chinese market inaccessible may limit funding needed for research, slowing innovation and making it more difficult for allies to stand with the United States due to local political and economic pressure. Lastly, these controls could incentivize foreign companies to design out U.S. intellectual property, decreasing the leverage of the United States in the global semiconductor supply chain.
Other options exist to create more effective semiconductor export controls, such as focusing on stricter enforcement of the current controls, end-use random sampling programs, or enforcement of know–your–customer regimes in cloud computing. Such additional policies would make it more difficult for the PRC to effectively avoid the current export controls. However, they would still have access to domestic capacity, like the seven-nanometer manufacturing process and the Nvidia GPUs that are currently legally imported. The PRC would still have a clear motive to design and produce domestic chips and find new ways to circumvent the export controls.
The status quo and the expanded export control regime result in challenging tradeoffs. Due to the current geopolitical context, a comprehensive export control regime is not feasible, even if it is part of the solution. Instead, the United States should go back to the drawing board. While the United States is trying to slow or halt the PRC’s progress, the goal is to minimize the national security risks of the People’s Liberation Army’s access to advanced computing. The United States could take a different approach to tackle these same risks. For example, incentivizing the PRC to use virtual GPUs in the United States could enable surveillance while decreasing some domestic impetus to develop advanced semiconductors. The United States could also try more speculative solutions, such as on-chip hardware monitoring.
While these are not the only options, they help elucidate one of the most important points when designing policy: the means used must be proportionate to a given goal.
U.S. Export Controls Going Forward
As of October 17, 2023, the United States has decided to move forward with updated export controls. While the full impact of the updated export controls is unknown, the new restrictions do seem like they will have a substantive impact on the PRC’s future AI capacity.
These updated controls take the moderate path, focused on closing loopholes. The updated restrictions limit Chinese companies’ ability to purchase Nvidia’s A800 and H800, which are used to train AI models. This is especially interesting due to the semiconductor companies’ pushback to such restrictions. There are also attempts to make it more difficult for the PRC to receive restricted semiconductors from third countries.
However, holes in the web remain, including the capacity of the PRC’s domestic semiconductor production. The Kirin 9000S is early evidence that domestic production could help fill the gap left by Nvidia’s chips, and it is unclear if the export controls will impact this domestic capacity. For this reason, there are signs in this new announcement that the Biden Administration’s updated export controls will still be insufficient to stop the PRC’s race forward.