New US rule on foreign chip equipment exports to China to exempt some allies, sources say
Adds comment from Commerce Department, background on trilateral agreement, paragraphs 4, 7, 11-18
By Karen Freifeld
NEW YORK, July 31 (Reuters) - President Joe Biden'sadministration plans to unveil a new rule next month that will expand U.S. powers to stop exports of semiconductor manufacturing equipment from some foreign countries to Chinese chipmakers, two sources familiar with the rule said.
But shipments from allies that export key chipmaking equipment - including Japan, the Netherlands and South Korea - will be excluded, limiting the impact of the rule, said the sources who were not authorizedto speak to media and declined to be identified.
As such, major chip equipment manufacturers such as ASML ASML.AS and Tokyo Electron 8035.T will not be affected. Shares in both companies surged following the news.
The rule, an expansion of what is known as the Foreign Direct Product rule, would bar about half a dozen Chinese semiconductor fabrication factories, or fabs,at the center of China's most sophisticated chipmaking efforts from receiving exports from many countries, according to one of the sources.
Places whose exports would be affected would include Israel, Taiwan, Singapore and Malaysia.
Reuters could not determine which Chinese chip fabs would be impacted.
"The U.S. Department of Commerce is continually assessing the evolving threat environment and updating our export controls, as necessary, to protect U.S. national security and safeguard our technological ecosystem," a department spokespersonsaid in a statement. "We remain committed to working closely with our allies who share our values."
Asked about the impending export control package, Chinese foreign ministry spokesperson Lin Jian said efforts by the U.S. to "coerce other countries into suppressing China's semiconductor industry" undermines global trade and hurts all parties.
Lin added that China hopes relevant countries would resist U.S. efforts and safeguard their long-term interests.
"Containment and suppression cannot stop China's development, but will only enhance China's determination and ability to develop its scientific and technological self-reliance," he said.
Aiming to impede supercomputing and AI breakthroughs that could benefit the Chinese military, the U.S. imposed export controls on advancedchips and chipmaking equipment for China in 2022 and 2023, restricting shipments from California-based companies like NvidiaNVDA.O and Lam ResearchLRCX.O.
But Washington recognized that export controls agreed upon by several key countries were necessary and, last year, reached a deal for Japan and the Netherlands to also restrict semiconductor manufacturing tools to China. The three countries dominate the production of advanced chipmaking equipment.
The U.S. has been trying to add more restrictions to that agreement and also to get South Korea and Germany to join the coalition, sources said.
The new rule, currently in draft form, shows how Washington is seeking to keep up pressure on China's burgeoning semiconductor industry without antagonizing allies.
"They're being cautious in using the rule because it makes our allies very uneasy," said James Lewis, a researcher at the Center for Strategic and International Studies in Washington. "There's only so far you can push this without people jumping off the ship."
"The U.S. isn't going to give up on restricting technology to China," Lewis added. "The Europeans got a temporary pass. (Other) countries got a temporary pass.
But the rule is "like a promise that we'll keep coming back at this," he said.
The Foreign Direct Product rule stipulates that if a product is made using American software or technology, the U.S. government has the power to stop it from being sold - including products made in a foreign country.
The rule has been used for several years to keep chips made abroad from Chinese tech giant Huawei HWT.UL, which re-invented itself after it struggled with the U.S. restrictions, and is now a central player inadvanced chip production and development.
The rule also was used in 2022 to cut China off from certain semiconductor chips made anywhere in the world.
As part of thelatest export control package, the U.S. plans to lower the amount of U.S. content that determines when foreign items are subject to U.S. control, sources said, adding that it closes a loophole in the Foreign Direct Product rule.
Equipment, for example, could be designated as falling under export controls simply because a chip containing U.S. technology is incorporated into it, they said.
The U.S. also plans to add about 120 Chinese entities to its restricted trade list, including the fabs that would be hit by the rule, plus 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.
The planned new rule is only in draft form and could change, but the aim is to publish it in some form next month, the sources said.
Aside from Japan, the Netherlands and South Korea, the draft rule exempts over 30 other countries which are part of the same A:5 group.
The Commerce Department says on its website that it categorizescountries "based on factors like diplomatic relationships and security concerns. These classifications help determine licensing requirements and simplify export control regulations, ensuring lawful and secure international trade."
ASML shares jumped 6.5% in morning Amsterdam trade, while Tokyo Electron shares closed 7.4% higher. Other Japanese makers of chip-related equipment also made strong gains with Screen Holdings 7735.T climbing 9% and Advantest 6857.T up 4.5%.
The planned exemptions are a sign the U.S. needs to be diplomatic when implementing restrictions.
"Effective export controls rely on multilateral buy-in," said a separate U.S. official who declined to be identified. "We continually work with like-minded countries to achieve our shared national security objectives."
($1 = 0.9245 euros)
Reporting by Karen Freifeld; Additional reporting by Alexandra Alper in Washington, Sam Nussey in Tokyo, Toby Sterling in Amsterdam and Liz Lee in Beijing; editing by Chris Sanders, Edwina Gibbs and David Gregorio
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