Overview of US Export Controls on Semiconductors

Over 150 foreign semiconductor companies operate in China, and since 2022, a rapidly escalating regime of US export controls and Chinese countermeasures has fundamentally altered their operating environment. The US Bureau of Industry and Security (BIS) has placed over 600 Chinese entities on the Entity List, restricted exports of advanced chips (7nm and below) and semiconductor manufacturing equipment, and extended jurisdiction through the Foreign Direct Product Rule (FDPR). These restrictions govern approximately USD 320 billion in annual chip trade, directly affecting revenue, compliance obligations, and supply chain strategy for major players including Nvidia, Intel, AMD, ASML, Applied Materials, and Tokyo Electron.

Overview of US Export Controls on Semiconductors

The US government, principally through the BIS under the Export Administration Regulations (EAR), has imposed a layered set of controls targeting China’s advanced semiconductor capabilities. The key measures include:

• October 2022 rule — Restricted exports of advanced computing chips (performance thresholds: 600+ GB/s interconnects, 300+ TOPS) and semiconductor manufacturing equipment capable of sub-14nm logic, sub-128-layer NAND, and sub-18nm DRAM fabrication. This rule directly blocked exports of Nvidia A100/H100 and AMD MI250/MI300 GPUs to China.
• October 2023 update — Broadened the definition of “supercomputer” triggers, lowered performance thresholds to capture more mid-range chips, and extended controls to memory bandwidth. Expanded licensing requirements to additional countries under the “funnel” approach.
• December 2024 / 2025–2026 updates — Further tightened controls on high-bandwidth memory (HBM2E, HBM3), chiplet interconnect technologies, and advanced packaging equipment. Added 150+ additional Chinese entities to the Entity List, including key EDA tool developers and chip design houses.

The Foreign Direct Product Rule (FDPR) is the most far-reaching mechanism. It asserts US jurisdiction over any chip or semiconductor manufacturing equipment made with US-origin technology, software, or equipment — regardless of where it is produced. In practice, this means a chip designed in Japan, fabricated in Taiwan on ASML lithography equipment (which contains US-origin components), and packaged in Malaysia still falls under US export controls if destined for a listed Chinese entity. Foreign chip companies must conduct extensive end-use and end-user screening on every China-bound shipment that touches US technology.

China’s Countermeasures Under PRC Export Control Law

China has responded with its own export controls under the PRC Export Control Law (出口管制法, chūkǒu guǎnzhì fǎ, effective December 2020) and the PRC Foreign Trade Law (对外贸易法, duìwài màoyì fǎ). The following table summarizes the key Chinese countermeasures and their impact on foreign chip companies:

Practical Impact on Foreign Chip Companies Operating in China

The combined effect of US and Chinese controls has created distinct operational challenges for foreign semiconductor companies with China operations:

1. Licensing uncertainty. US BIS license approval rates for advanced AI chips to China fell below 20% from March 2023 through 2026. The approval process takes 3–9 months with no guarantee — making product roadmaps and revenue forecasting nearly impossible. Companies like Nvidia have responded by developing “China-compliant” chips (such as the H20, L20, and L2) that fall below the performance thresholds but are still commercially viable.
2. Supply chain bifurcation. Foreign chip companies are increasingly maintaining two supply chains: one for China-bound products (using non-restricted IP, older process nodes, and different packaging) and one for global markets (full capability). This bifurcation adds 15–30% to R&D costs per product line and complicates inventory management.
3. Technology transfer screening. Under the PRC Foreign Investment Law (外商投资法, wàishāng tóuzī fǎ, Articles 22–24), China prohibits forced technology transfer — but the US EAR’s FDPR now restricts what technology foreign companies can share with their Chinese subsidiaries or JV partners. The PRC Export Control Law’s Article 12 requires entities to establish internal export control compliance systems, creating dual-compliance obligations that can conflict.
4. Talent mobility restrictions. The US Chip Act (2022) and subsequent CHIPS Program Office guidelines restrict US semiconductor personnel from working in or with China on advanced-node technologies. Similarly, China’s new foreign talent regulations restrict Chinese nationals from sharing certain technology with foreign employers. This has reduced the talent pool available for joint R&D centers.
5. Financial service disruptions. Since 2024, several international banks have tightened compliance screening on China semiconductor transactions, delaying payments by 30–90 days. Some banks have simply exited the sector entirely, citing sanctions risk. Foreign chip companies now report that 15–20% of China-bound transactions face additional compliance hold times.

China’s Semiconductor Self-Sufficiency Strategy

China has accelerated its semiconductor self-sufficiency drive in response to US restrictions, which directly affects the competitive landscape for foreign chip companies:

• National Integrated Circuit Industry Investment Fund (大基金, dà jījīn) — Phase I (2014, RMB 138.7B / USD 19B), Phase II (2019, RMB 204B / USD 28B), and Phase III (2024, RMB 344B / USD 47.5B). The funds target domestic chip design, manufacturing, packaging, equipment, and materials. Phase III specifically focuses on advanced manufacturing and DRAM/HBM technology.
• Domestic substitution rate — China’s self-sufficiency rate for semiconductors reached approximately 25% in 2025 (up from 15% in 2020), according to IC Insights data. The government target is 40% by 2028 and 70% by 2035. This means foreign chip companies face increasing competition from domestic rivals in the mid-to-low-end market segments, while remaining dominant in high-end (7nm+) and specialized chips.
• Local manufacturing capacity — SMIC’s 28nm capacity has expanded 300% since 2020. Hua Hong Semiconductor (华虹半导体, Huá Hóng Bàndǎotǐ) has built two new 12-inch fabs focusing on power management and MCU chips. Nexchip (合肥晶合集成, Héféi Jīnghé Jíchéng) has become China’s third-largest foundry by revenue. These domestic alternatives reduce foreign companies’ China market share in legacy-node products.

Penalties and Compliance Risks

Violating either US or Chinese export control regimes carries severe penalties:

• US BIS/OFAC penalties — Civil penalties for EAR violations can reach USD 300,000 per violation or twice the value of the transaction, whichever is higher. Willful violations are criminal offenses carrying fines up to USD 1 million and 20 years imprisonment. In 2024, BIS imposed USD 1.1 billion in total penalties on semiconductor-related export control violations. Companies such as Seagate Technology were fined USD 300 million for selling hard drives to Huawei after the Entity Listing.
• PRC Export Control Law penalties — Under Article 41, entities that export controlled items without a license face confiscation of illegal income, fines of 5–10 times the value of the exported items, and revocation of import/export operating rights. Article 43 provides for criminal liability in serious cases, with maximum sentences of 7 years imprisonment for responsible personnel.
• PRC National Security Review (外商投资安全审查) — Under the 2020 National Security Review rules (外商投资安全审查办法, effective January 2021), semiconductor M&A or JV formation transactions are subject to mandatory national security review if they involve dual-use technologies, critical infrastructure, or sensitive personal data. This review can last 3–12 months and can block transactions even if other approvals have been obtained.

Compliance Strategies for Foreign Chip Companies

Based on current regulatory conditions (2026), foreign semiconductor companies operating in China should consider the following compliance framework:

1. Establish dual-source supply verification — Verify that all materials, components, and equipment sourced in China do not fall under restricted categories on either the US BIS Commerce Control List (CCL) or the PRC dual-use control list. Implement automated screening software that cross-references both regimes.
2. Implement end-use and end-user verification — Screen all China customers against the BIS Entity List, Unverified List, Military End-User List, and PRC’s own restricted entity lists. Contracts should include mandatory end-use declarations and audit rights.
3. Create a China-specific legal entity firewall — Establish a standalone China subsidiary with separate IT systems, firewalled design databases, and restricted personnel access to US-origin EDA tools. This reduces the risk that a Chinese subsidiary’s activities inadvertently trigger the FDPR.
4. Maintain a dedicated trade compliance officer — Both US EAR and PRC Export Control Law encourage or require designated compliance officers for companies above certain volume thresholds. The compliance officer should monitor regulatory changes weekly (BIS Federal Register notices, PRC MOFCOM export control announcements).
5. Build relationships with domestic Chinese foundries — For non-restricted products (28nm+ legacy nodes, power management, MEMS, sensors), second-source qualification at SMIC, Hua Hong, or Nexchip reduces supply chain risk. This requires PRC EDA tool certification and potential Technology Transfer Approval under the PRC Export Control Law.
6. Prepare for scenario-based contingency planning — Run quarterly tabletop exercises modeling: (a) further US restrictions on legacy-node equipment, (b) expanded Chinese export controls on rare earths and critical minerals, (c) financial sanctions escalation. Document mitigation plans for each scenario.

Outlook for 2026–2028

The regulatory environment for foreign chip companies in China is expected to remain structurally challenging through 2028. Key trends to monitor include: the US Trusted Foundry / “chiplet-friendly” framework to wall off advanced nodes from Chinese access; potential EU alignment with US semiconductor export controls (the European Chips Act framework includes China-specific investment screening); further Chinese expansion of critical mineral export controls and dual-use restructuring; and the increasing role of “friend-shoring” as a compliance requirement for US government contracts.

Despite these headwinds, China remains the world’s largest semiconductor market at approximately 50% of global consumption. Foreign chip companies that focus on non-restricted product lines (automotive-grade, industrial, analog, power, and legacy-node logic), maintain robust China-specific compliance programs, and invest in local adaptation of mid-range products can still achieve double-digit revenue growth in select segments.

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