Brendan Lugoperez
The ubiquity of semiconductors places the industry at the intersection of trade politics and national security strategies.[1] Currently, the United States has two key mechanisms to navigate the economic confrontation with China over the industry: export controls and outbound investment screening to navigate through the ongoing trade war.[2] China has responded with the creation of a substantial state chip fund, critical minerals restrictions and a WTO challenge, transforming the trade dispute into a long term standoff.[3]
Export Controls
Since 2023, the Commerce Department through the Bureau of Industry and Security (BIS) has restricted China’s access to semiconductor manufacturing equipment (SME) and advanced chips.[4] Additionally, the Foreign Direct Product Rule, which allows the BIS to regulate the transfer of foreign-made items, was expanded to cover foreign-made items using U.S. technology.[5] The updates also added categories and foundry due diligence obligations for companies, creating licensing issues.[6] Chipmakers are immediately impacted as they must split product lines, reorganize tool vendors and ensure they are compliant in the various jurisdictions.[7] Additionally, these controls can follow equipment for the entirety of its service life, to after sales support, parts and software updates, turning after-sale maintenance into a policy discussion. [8]
Outbound-Investment Screening
Effective January 2025, the Treasury’s Outbound Investment Security Program implemented Executive Order 14105, regulating financing in semiconductors in “countries of concern,” due to national security concerns.[9] Substantively, it prohibits U.S. persons from financing Chinese entities working on advanced node logic/memory (the latest generation of microchip manufacturing) or similarly advanced packaging.[10] Overall, the order has rocked markets, term sheets and capital that may have underwritten further investment in the sector.
China’s Response
Beijing offered responses on three different fronts. First, the creation of Big Fund III targeted some of the most sensitive areas, equipment and materials.[11] Second, restrictions were placed on various minerals resulting in soaring prices, production time for wafers, packaging and acute supply squeezes.[12] Finally, China challenged the U.S. semiconductor measures by bringing a WTO case over the national security exception.[13] Together, these steps paired with the measures taken by the United States have added cost and resulted in tremendous uncertainty.
Overall, the tariff war has morphed into regulatory trench warfare. The flow of manufacturing tools and technology is burdened by export controls. Capital investments have been steered by outbound screening and China’s countermoves have ensured the friction isn’t leaving anytime soon. Though this conflict revolves around microchips, its implications and impact are anything but micro.
[1] U.S. Dep’t of Commerce, Bureau of Indus. & Sec, BIS Issues Advanced Computing & Semiconductor Manufacturing Equipment Final Rules (Oct. 17, 2023), https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3355-2023-10-17-bis-press-release-acs-and-sme-rules-final-js/file?utm_source.
[2] Id.; U.S. Dep’t of the Treasury, Outbound Investment Security Program (2025), https://home.treasury.gov/policy-issues/international/outbound-investment-program.
[3] See World Trade Organization, United States—Measures on Certain Semiconductors and Other Products, WT/DS615 (Jan. 10, 2025), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds615_e.htm (on file with author).
[4] See U.S. Dep’t of Commerce, Bureau of Indus. & Sec., Commerce Strengthens Export Controls to Restrict China’s Capability to Produce Advanced Semiconductors for Military Applications (Dec. 2, 2024), https://www.bis.gov/press-release/commerce-strengthens-export-controls-restrict-chinas-capability-produce-advanced-semiconductors-military.
[5] Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections, 88 Fed. Reg. 73458 (Oct. 25, 2023).
[6] See generally U.S. Dep’t of Commerce, Bureau of Indus. & Sec., Commerce Strengthens Restrictions on Advanced Computing Semiconductors to Enhance Foundry Due Diligence and Prevent Diversion to PRC (Jan. 15, 2025), https://www.bis.gov/press-release/commerce-strengthens-restrictions-advanced-computing-semiconductors-enhance-foundry-due-diligence-prevent.
[7] Id.
[8] Id.
[9] See id.; Exec. Order No. 14,105, Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, 88 Fed. Reg. 53,867 (Aug. 11, 2023).; U.S. Dep’t of the Treasury, Press Release: Treasury Issues Regulations to Implement Executive Order Addressing U.S. Investments in Certain National Security Technologies and Products in Countries of Concern (Oct. 28, 2024); see also U.S. Dep’t of the Treasury, supra note 2.
[10] 31 C.F.R. pt. 850 (2025).
[11] China Sets Up Third Fund with $47.5B to Boost Semiconductor Industry, Reuters (May 27, 2024), https://www.reuters.com/technology/china-sets-up-475-bln-state-fund-boost-semiconductor-industry-2024-05-27/.
[12] Amy Lv & Tony Munroe, China Bans Export of Critical Minerals to U.S. as Trade Tensions Rise, Reuters (Dec. 3, 2024), https://www.reuters.com/markets/commodities/china-bans-exports-gallium-germanium-antimony-us-2024-12-03/; Gracelin Baskaran & Meredith Schwartz, China Imposes Its Most Stringent Critical-Minerals Export Restrictions Yet, Center for Strategic & International Studies (Dec. 4, 2024), https://www.csis.org/analysis/china-imposes-its-most-stringent-critical-minerals-export-restrictions-yet-amidst.
[13] See generally World Trade Organization, supra note 3.