U.S. planning 'draconian' sanctions against China's semiconductor industry: Report

The U.S. government is considering more severe restrictions on China's access to advanced chip making tools, which even some US allies reportedly call 'draconian.' Key proposals include applying the Foreign Direct Product (FDP) rule, pressuring allies to limit service and repair of equipment in China, and broadening the unverified list requiring licenses for certain technologies. These measures aim to hinder advancements of China's semiconductor industry.

One key proposal is application of the FDP rule, which would allow the U.S. to exert control over foreign-produced items that contain any American technology. According to a Bloomberg report, this would particularly impact companies like Tokyo Electron and ASML, restricting their ability to provide China with advanced wafer fab equipment (WFE). This measure is seen as 'draconian' by U.S. allies, but it reflects the administration's determination to restrict China's chipmaking progress. 

Additionally, the U.S. is urging its allies, including Japan and the Netherlands, to impose stricter limits on businesses within their borders, notably restricting their capabilities to service and repair semiconductor equipment already delivered to China. Again, if enacted, this will primarily impact ASML and Tokyo Electron. This measure aims to prevent Chinese chipmakers, such as SMIC, from maintaining or upgrading their equipment using foreign assistance, thereby stalling their progress in developing more advanced nodes and producing chips on sophisticated process technologies. 

Further sanctions on specific Chinese semiconductor companies are also under consideration. These additional measures would tighten existing controls and increase the pressure on China's chipmakers. The U.S. government wants to ensure that Chinese firms have limited access to critical technology, thereby hindering their ability to advance in the semiconductor industry. 

Another strategy involves expanding the criteria for the unverified list. This list requires companies to obtain licenses for shipping certain restricted technologies. By broadening this list, the U.S. aims to signal that firms continuing to serve Chinese customers deemed security risks might face additional controls, which could prevent Chinese companies from circumventing current restrictions by relying on foreign equipment and expertise. 

The U.S. WFE industry has voiced concerns that current export restrictions unfairly harm American companies while not irrecoverably hindering Chinese progress. Yet, companies like Applied Materials, KLA, and LAM Research argue that the proposed FDPR and other measures could lead to non-cooperation from allies and incentivize global firms to exclude U.S. technology from their supply chains. The American makers of fab equipment are reportedly advocating for expanding the criteria for the so-called unverified list to prevent Chinese firms from bypassing existing controls.

But while these measures aim to hinder China's technological advancements and to some degree protect American technologies from being copied by Chinese companies, they also pose significant economic challenges and risks for U.S. and allied companies as they too can lose sales due to U.S. curbs against China.