New US export control rules aim to close loopholes that Chinese firms used to buy and make advanced AI chips. They add dozens of items to a list of restricted chip-making equipment and blacklist 13 Chinese companies, including China’s AI leaders.

The message is clear: the Biden Administration prioritizes security over sales. Yet unanswered questions abound. Will reinforced export controls cause a rift with allies? Will they hold back US innovation? And will they even prevent China from developing cutting-edge technology?

Start with the impact on US companies. California-based NVIDIA took an immediate hit. Its high-flying shares dropped almost 8%. Overall, 30 chip stocks, including Intel, AMD, Applied Materials, and ASML, the Dutch lithography machine maker, lost a combined $73 billion in market value. US semiconductor companies warn that cutting sales to China will boomerang in the long term, hurting their competitiveness.

When the US imposed restrictions on exports to China last year, NVIDIA created a new line of export control-compliant, albeit lower-grade, AI chips. The updates will bar NVIDIA from selling the modified chips. Although the company claims the new restrictions will not have “a near-term meaningful impact on our financial results,” it acknowledged they may impact its ability to develop products “in a timely manner” and force certain operations out of China.

As Western supplies shrink, China is redoubling its own efforts to develop high-performance chips. Huawei’s new Mate 60 Pro smartphone contains a domestically produced seven-nanometer chip, showing that China can produce cutting-edge hardware despite American export restrictions. In a pointed shot, the phone was launched at the same time as US Commerce Secretary Gina Raimondo visited Beijing, surprising the US government.

Get the Latest
Sign up to receive regular emails and stay informed about CEPA's work.

Although experts caution that Chinese capabilities are not state of the art and the country remains reliant on Western tech, Beijing seems determined to catch up. China is importing record amounts of Western chipmaking equipment before new Dutch and Japanese export controls come into effect and pouring nearly $150 billion into subsidies for Chinese chipmakers.

Washington will face mounting political and legal obstacles at home and abroad to hold back China. Export controls are difficult to enforce without proper resources, and the US Congress is expected to deny expanded budget requests from the Bureau of Industry and Security.

Strains are bound to grow with allies, too. In order to be effective, the US needs its European and Asian allies to adopt similar export controls. The Netherlands and Japan so far have joined. However, the US will need to update and expand its controls annually, provoking potential conflicts.

Already, the US has been forced to make concessions. Washington has given South Korean chipmakers an indefinite waiver to continue sales to China and is expected to do the same for Taiwanese giant Taiwan Semiconductor Manufacturing Company (TSMC).

Europe represents another challenge. Despite increasing coordination within the European Union, its 27 member states run separate export control regimes.

Against these downsides, proponents of the tough US export controls argue that they will slow down Chinese advances and impose unsustainable costs on Beijing. Traditionally, Chinese subsidies feed corruption and inefficiency. Chinese production of seven-nanometer chips is considered unsustainable economically — and the country could struggle to reach the current gold standard of five or fewer nanometers.

However, US export controls encourage Chinese firms to stockpile legacy tech and design out US inputs. As the controls stiffen, these costs will rise. Western industry will suffer. Transatlantic relations will face strains. Expect a tough road ahead in the battle to contain Chinese tech.

Matthew Eitel is Special Assistant to the President & CEO at the Center for European Policy Analysis (CEPA). His research focuses on EU-US technology, trade, and national security, particularly export controls and transatlantic tech policies vis-à-vis China.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

Read More From Bandwidth
CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy.
Read More