US Finalizes Rules Preventing China’s Access to $52 Billion Chips Funding

Commerce Department announced final rules on CHIPS Act funding to curb China from benefiting from the $52 billion related to CHIPS funding.

Semiconductor chips on a printed circuit board on Feb. 17, 2023. Florence Lo/Illustration/Reuters

The Department of Commerce announced Friday the final funding rules under the CHIPS and Science Act, preventing China from benefiting from the $52 billion incentives and clearing the last hurdle before awarding the $39 billion portion for semiconductor production.

The rules restrict CHIPS funds recipients from investing in most semiconductor manufacturing—advanced and legacy—in “foreign countries of concern” for ten years or from conducting joint research or technology licensing with “foreign entities of concern” on technology or products of national security concern. They also prohibit recipients from using the incentives to build, modify, or improve a chip facility outside the United States.

Commerce will reinforce the “guardrails” by taking back the entire federal award in case of violations, according to the Department’s press release.

The U.S. definition of “foreign countries of concern” includes China, Russia, North Korea, Iran, and any other countries determined by the Department of State. The Commerce secretary may also add more countries to the list for the purpose of CHIPS funding. Foreign entities of concern include entities owned or controlled by foreign countries of concern and those on the Bureau of Industry and Security’s entity list and the Treasury Department’s Chinese Military-Industrial Complex Companies (NS-CMIC) list.

“One of the Biden-Harris Administration’s top priorities—made possible by the CHIPS and Science Act—is to expand the technological leadership of the U.S. and our allies and partners. These guardrails will protect our national security and help the United States stay ahead for decades to come,” said Secretary of Commerce Gina Raimondo in the press release.

“CHIPS for America is fundamentally a national security initiative, and these guardrails will help ensure companies receiving U.S. Government funds do not undermine our national security as we continue to coordinate with our allies and partners to strengthen global supply chains and enhance our collective security.”

The ”guardrails” are pretty specific; Commerce said it worked with many organizations, including domestic and foreign semiconductor industry representatives, the Department of Defense, and the intelligence community, after the rules were initially proposed in March.

For example, the rules clarify that wafer production is considered semiconductor manufacturing. In addition, a “material expansion” for advanced chip facilities is defined as adding cleanroom—rooms with temperature, humidity, and airflow controls in chips foundries or fabs—or other physical spaces that would grow the production facility by over 5 percent.

The percentage becomes 10 when applied to legacy manufacturing. The exception for material expansions of legacy chip fabs would require “85 percent of the final products containing the chips to be used or consumed” in the “foreign country of concern,” said Vikram Viswanathan, director of policy at the CHIPS Program Office at Commerce, at a webinar Friday.

He also said that even though Commerce received requests to increase or remove the percentage thresholds, they stayed the same in the final rules for national security reasons.

At a House hearing on Tuesday, Ms. Raimondo said that her department was holding off the awards associated with semiconductor production until the final rules were in place.

“The whole purpose of this program is national security, so we don’t want a penny of this money going to help China get ahead of us, and we cannot have companies on the receiving end of CHIPS grants to do research and development with another country that undermines our national security,” she also told lawmakers on the House Science, Space and Technology Committee.

At the webinar, Mr. Viswanathan clarified that the rules would not affect existing legacy chip manufacturing in China; what they focused on was the expansion.

Commerce Secretary Gina Raimondo testifies before the House Committee on Science, Space, and Technology at the Rayburn House Office Building in Washington, on Sept. 19, 2023. Kevin Dietsch/Getty Images

US Chip Production Is Key

Still, U.S. chip production is the key, James Lewis, director of the Technology and Public Policy Program at the Center for Strategic and International Studies think tank, told The Epoch Times.

“They’re intended to keep money from going to China, which was a big congressional concern. Probably unnecessary since companies are increasingly reluctant to invest in China because of business risk but a political requirement,” Mr. Lewis spoke of the “guardrails” released Friday.

“The CHIPS Act will be a success if there are more fabs in the US and US chip production has gone up. So far, there’s been no progress, but it is early days,” he added. “But the US needs to keep in mind these are the only goals that count and speed up implementation.”

“CHIPS is a good idea, but we’ll see if the Administration can pull it off,” he said.

Jeff Ferry, chief economist at the Coalition for a Prosperous America (CPA), agrees that domestic semiconductor production is important and said that Commerce’s latest move was “a step in the right direction but does not go far enough.” CPA is an advocacy organization representing exclusively manufacturers that have production in the United States.

In particular, he has problems with the definition of “advanced” chips.

“The Biden administration, in partnership with the chip industry, has defined a very narrow segment of the chip industry as ‘advanced,’ and the other 90% of the chip industry as ‘legacy.’ This is a largely fictional differentiation in that you can make advanced products using the latest so-called legacy chips,” Mr. Ferry told The Epoch Times. “Seven, nine, and 12-nanometer chips can do lots of very advanced work.”

The CHIPS funding rules were finalized weeks after China’s Huawei Technologies Co. launched a new smartphone model using a 7-nanometer chip—a milestone of computing power albeit two generations behind the most advanced—on Aug. 29, during Ms. Raimondo’s visit to China.

Mr. Ferry referred to the Huawei breakthrough as a case for broadening the restrictions on technology transfer and equipment sales. “What we need to do is to broaden those restrictions, make it more difficult for them, and at the same time, put the accelerator down on domestic research and development and domestic production,” he said.

The Commerce Department has received over 500 statements of interest and 100 pre-applications and applications, said Morgan Dwyer, chief strategy officer for the CHIPS Program Office, at the webinar.

Packaging Technology Included

Ms. Dwyer also confirmed at the webinar that semiconductor packaging technology is covered under the expansion restrictions. Packaging stacks chips up to increase computing power. For example, instead of having a 3-nanometer chip, one can stack 7-nanometer chips together to get to a similar level of computing power.

Ray Yang, a semiconductor industry veteran and a director at the Industrial Technology Research Institute (ITRI), an influential think tank in Taiwan, previously told The Epoch Times that controlling advanced packaging technology would be a natural next step for the United States to curb China’s chip ambitions, following sanctions on advanced equipment that would stop Huawei at 7-nanometers.

The Epoch Times has contacted the Department of Commerce for comment.