China is building a thriving semi industry off US leftovers, export controls be damned

House Committee on China wants more comprehensive ban on chipmaking equipment exports to Middle Kingdom

US export controls have had mixed results in stemming the flow of chipmaking equipment into China, according to a congressional investigation, which found US and allied companies sold $38 billion worth of semiconductor tools in 2024 alone.

Those sales, it should be noted, were mostly older equipment that's either exempt from US export rules or was sold to unregulated parties in China. In other words, these equipment vendors did nothing wrong and were acting in compliance with US export control rules.

However, according to the House Select Committee on the Chinese Communist Party (CCP), this fact alone highlights the flaws in current US trade policy, which pose a threat to the national and economic security of both the United States and its allies.

"The People's Republic of China (PRC) is already fervently seeking to build a world-leading semiconductor manufacturing industry from raw materials through semiconductor manufacturing equipment to finished product," the committee report reads. "The United States and our allies should ensure the CCP's pursuit of this goal is as challenging and expensive as possible."

In particular, congressional investigators note that while the US has some success in blocking the sale of chipmaking equipment to specific companies, like China's Semiconductor Manufacturing International Co. (SMIC), they do little to stop state-backed companies not already on the US entities list from acquiring hardware.

Further complicating the matter, several of the most sophisticated semiconductor toolmakers are located outside the US in places like the Netherlands and Japan. While these nations have largely aligned themselves around US trade policies regarding China, the committee notes their execution of these rules isn't always consistent.

"While the Netherlands has denied extreme ultraviolet (EUV) lithography to the PRC market, the toolmakers have continued to provide vast quantities of highly capable SME that is not labeled as 'advanced,' as particularly illustrated by ASML's sales of deep ultraviolet (DUV) and other lithography systems," the report reads.

DUV is an older lithography that was used until recently to produce chips down to around 7nm. Leading edge fabs have since transitioned to ASML's EUV equipment for production of smaller nodes. However, thanks to export controls restricting the sale of this equipment, DUV systems remain in high demand in the Middle Kingdom.

To address these challenges, the committee argues in favor of a more comprehensive ban on the sale of semiconductor manufacturing gear to Chinese interests moving forward. They also say that if allies fail to adopt aligned export controls, their semiconductor equipment should be made subject to the Foreign Direct Product Rule (FDPR), a legal mechanism that lets US export law reach foreign-made products that are the direct product of US technology or software. For example, the FDPR is why Taiwan Semiconductor Manufacturing Co. (TSMC) does not knowingly supply Chinese chipmaker Huawei with chips, as TSMC's equipment is built around American intellectual property, and doing so would subject the company to heavy fines.

"It is far past time that the toolmakers start treating the CCP and its national champions as threats to their corporate longevity, rather than as valued customers," the investigators concluded. ®