In the coming weeks, the U.S. Department of Commerce’s Bureau of Industry (BIS) plans to expand U.S. semiconductor export controls aimed at limiting China’s access to advanced semiconductor manufacturing equipment. The move is intended to slow advances in supercomputing and AI technologies that could bolster the Chinese military and potentially compromise U.S. national security. These export rules have seen a slew of revisions, amendments, and corrections over the past few years as traditionally slow-moving government agencies strive to enact regulations that keep pace with rapid real-life technological developments.
Leveraging the Foreign-Produced Direct Product Rule
To strengthen restrictions, the Biden administration intends to invoke the Foreign-Produced Direct Product Rule (FDPR) to broaden U.S. authority to restrict exports of chips and chipmaking equipment from countries like Taiwan, Singapore, Israel, and Malaysia to Chinese semiconductor manufacturers. The U.S. Federal Register defines this “rule” as a measure to prevent high-risk foreign companies from using certain American technologies to design, develop, and produce products outside the United States. The FDPR lets the U.S. restrict the sale of products made with American technology, no matter where they are produced or sold. Recently, officials have expanded this little-known export rule from the late 1950s to block Chinese attempts to acquire advanced semiconductor chips and production equipment.
New Targets and Lower Thresholds
U.S. technology is ubiquitous. And because almost all global chip factories contain or rely on at least some U.S. technology or tooling, the FDPR’s impact on and coverage of the semiconductor industry is significant. This rule effectively allows U.S. lawmakers to extend their policy reach into third-party nations to control foreign transactions between these U.S. allies and competitors, or adversaries. This extraterritorial application of U.S. law has drawn criticism from international legal experts and foreign governments, who argue it infringes on national sovereignty and disrupts global trade norms. Despite these concerns, the U.S. has continued to expand its use of the FDPR, applying it against Chinese telecom giant Huawei in 2020 and later against Russia after its military invasion of Ukraine. The U.S. has continued to expand its restrictions as semiconductor chips have grown ever more advanced.
According to Reuters, the newly proposed draft update reveals that the United States plans to “add about 120 Chinese entities to its restricted trade list, including fabs affected by the rule, toolmakers, providers of EDA (electronic design automation) software, and related companies.”Suppliers for entities on the list need to obtain licenses to ship to them, which are likely to be denied.”
Additionally, the U.S. is pushing to broaden the rule’s scope to include more products—essentially lowering the threshold for the amount of American-made content that makes a product subject to the rule. Under FDPR guidelines, a single chip’s designation could be enough to trigger the rule, making an entire piece of machinery subject to U.S. export control. However, the new guidelines have not made it clear whether the rule impacts the ongoing maintenance of covered products in impacted Chinese facilities.
High Stakes
Violations of these export control regulations can result in severe penalties. According to the BIS, civil fines can reach up to $300,000 or twice the value of the transaction, whichever is greater, for each violation. Criminal penalties for willful violations can include fines of up to $1 million and imprisonment for up to 20 years. Additionally, violators may face suspension of export privileges, effectively cutting them off from U.S. technology and markets. In fact, in 2023, U.S. authorities levied the largest BIS fine in the agency’s history—a $300 million fine on Seagate Technology for selling computer drives to FDPR entity-listed company Huawei. To put it succinctly, the stakes are high for companies operating in this space.
Allies and Exemptions
The Biden administration continues to place pressure on allies like Japan to withhold advanced technology and tooling from China and join the coalition of countries restricting technology access. However, notably, the FDPR rule exempts and will not apply to at least 30 countries, including key allies like Japan, the Netherlands, and South Korea, which are major producers of semiconductor manufacturing equipment. As a result, major companies like ASML (Netherlands) and Tokyo Electron (Japan) will not be affected by the FDPR, and their stocks saw an uptick in the news.
The Balancing Act
Of course, national security is always a fine balancing act. The U.S. has the unenviable job of trying to balance its security interests with its role as a fair market participant. It has been careful to avoid abusing its influence and upsetting global allies who very well wish to keep their own trade options open. However, Bloomberg reports that even U.S. companies feel the weight of these restrictions on exports to China, saying that they are being “unfairly punished.” U.S. companies’ inability to export their goods into one of the largest technology markets on earth (China) negatively impacts U.S. market share and opens the door for other countries to compete in their absence.
So, as the United States continues to refine and expand the Foreign-Produced Direct Product Rule, we’ll surely continue to see growing tensions and uncertainty among allies and adversaries alike. The delicate balance between national security and maintaining a competitive edge in the global market remains a challenge and an opportunity for policymakers and industry leaders to collaborate.
While we have yet to see the full impact of these new restrictions, history suggests that China will not simply fade into obscurity. With restrictive U.S. policies putting its “back against the wall” and China’s own desire to maintain its position on the global stage, China is likely to accelerate its efforts to develop domestic alternatives. The coming years will likely witness a chess game of moves and countermoves as both nations strive to secure their technological futures. Ultimately, if history is any indicator of the outcome of this technological chess match, I believe that innovation will likely be the end result.
Audrey Sivasothy is a Houston-based technical writer with extensive experience in regulatory compliance, quality auditing, and policy analysis. Her expertise spans medical, defense, and aerospace industries, including over a decade in semiconductor distribution compliance. Audrey’s writing combines her technical industry knowledge with policy and legal insights and offers readers a unique perspective on major industry regulations, news, and developments. Sivasothy is a graduate of Rice University and a JD candidate specializing in business and compliance law.
