China this past fall imposed an additional series of trade and other measures to counter actual and prospective trade measures by the United States with particular impact on semiconductors and raw materials, challenging the ability of the United States and its allies and partners to restrict China’s ability to manufacture advanced semiconductors. Such semiconductors are crucial for the next generation of advanced weapons systems, artificial intelligence, and advanced computing, as well as other military applications. China’s measures reportedly include the following:
- New measures related to government procurement policies for technology products, including computers, operating systems, and semiconductors, imposing stricter requirements on the grounds of ‘security and reliability.' These measures may reduce procurement from US and other foreign companies, even if the products are manufactured by their subsidiaries in China.
- Restrictions on the export to the United States of minerals and other products for which China is the world’s largest source.
- Revisiting merger clearance of a US semiconductor manufacturer because US export restrictions are inconsistent with pre-merger approval commitments to be a reliable supplier to Chinese customers.
- Designation of an increased number of US companies and their executives as ‘unreliable entities’ because such companies supply weapons and defense materials to Taiwan.
- Revision of standards for certain products to favor domestic products over imports.
China’s Ministry of Commerce (MOFCOM) on December 3 issued the Announcement on Strengthening Export Controls on Certain Dual-Use Items to the United States (2024 No. 46)1 which imposed a ban on the export of gallium, germanium, antimony and “superhard” metals critical to the manufacture of semiconductors and many kinds of munitions, including for the first time a prohibition on export to third countries intended for transshipment to the United States.
That same day, the Internet Society of China (ISC), China Association of Automobile Manufacturers (CAAM), China Semiconductor Industry Association (CSIA), and China Association of Communications Enterprises (CACE) issued statements urging domestic companies to exercise caution in procuring US chips. ISC condemned the US for expanding semiconductor export restrictions under the pretext of national security, accusing it of violating international trade norms and harming the stability of China’s internet industry. ISC called for domestic companies to seek alternatives, enhance collaboration with chipmakers from other countries, and prioritize chips made locally or by joint ventures within China. CAAM criticized the US for disrupting global supply chains with arbitrary regulatory changes and undermining trust in US chip reliability. CAAM recommended that Chinese automobile companies exercise caution when procuring US chips to protect the stability of their supply chains. CSIA voiced strong opposition to the latest US restrictions, which added over 140 Chinese entities to a trade restriction list, including semiconductor manufacturing equipment and design tools. CSIA emphasized that such unilateral measures disrupt global supply chains, increase costs, and harm the interests of both Chinese and American businesses. CSIA warned that US chips are no longer reliable or secure and encouraged the industry to proceed with caution. CACE also condemned the new US restrictions targeting 140 Chinese semiconductor companies, calling for greater collaboration with non-US chipmakers and advocating equal treatment for locally produced and foreign-manufactured chips within China to maintain stable supply chains in the information and communications sector.
The actions by the industry associations followed decisions made by China a year earlier on December 26, 2023 to introduce new government procurement measures, including in particular the Desktop Computer Government Procurement Standards (2023 ed.),2 Portable Computer Government Procurement Standards (2023 ed.),3 and General Server Government Procurement Standards (2023 ed.).4 These measures require that Party and government organizations at the township level and above, i.e., all levels above village-level so effectively all Party and government organizations, as well as public institutions and departments directly affiliated with township and higher level Party committees and governments that provide support and services to these organizations, must include central processing units (CPUs), operating systems and databases that pass “security and reliability” evaluations as part of their procurement requirements. The foreign business community believes that these new measures create practical barriers to the procurement of microprocessors from US companies like Intel and AMD and other international companies. This was likely a countermeasure to US restrictions on the export of advanced microprocessors and the electronic lithography machines used to manufacture them, despite both Intel and AMD producing other types of microprocessors in China. Such companies may face the prospect of having major investments stranded in China even though they were intended in part to serve the China market. The beneficiaries are likely domestic Chinese competitors which will, in addition to benefitting from extensive Chinese central and local government subsidies, presumably capitalize on the increased demand for their products to expand their capacity and move up the product ladder more quickly.
The Ministry of Foreign Affairs (MOFA) on December 5 also sanctioned a new set of entities and individuals for sales of defense-related products to Taiwan under China’s Anti-Foreign Sanctions Law.5 Unlike previous designations which were confined to (i) defense industry subsidiaries of major industrial companies which would not be permitted under United States law to engage in sales to Chinese customers and (ii) officials in other countries who had prominently criticized China’s policies particularly with respect to Taiwan, the new designees consist largely of smaller manufacturers engaged in defense sales which are heavily dependent on the import of parts and components from China.
China’s Ministry of Finance (MOF) on December 5 relatedly published for public comment the draft Domestic Product Standards and Implementation Policies6 for “domestic product” for purposes of government procurement by more clearly defining “Made in China” predicated upon meeting such criteria as manufactured in China, the proportion of domestic processing, and the proportion of criticality of components and processes meeting threshold requirements to be established by MOF together with other departments to determine that a product is manufactured in China. The government procurement criteria establishes up to a 20% preference for domestic products with respect to government procurement. The document comes in advance of any commitment by China to join the WTO’s plurilateral Agreement on Government Procurement or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which the United States walked away from early in the first Trump Administration.
Separately but related to the restriction on procurement of semiconductors, China’s competition regulator, the Anti-Monopoly Bureau of the State Administration for Market Regulation (SAMR), announced that it would revisit its clearance of Nvidia’s acquisition of Mellanox Technologies in 2020 because Nvidia allegedly was in violation of its commitment to continue to supply Chinese customers, even though Nvidia’s failure to do so was likely in response to recently imposed US Government restrictions on the sale of semiconductors to China. The Bureau’s previous clearance of the merger had provided for a lengthy six-year conditional review period forcing Nvidia to address this conflict of laws dilemma.
Taken together, these actions constitute an intensifying set of actions by China to counter the ability of the United States as an instrument of foreign and defense policy. Their effectiveness remains to be seen, however:
Companies from the United States and other countries may face more challenges to the conduct of business in China if they have reason to believe that their customer base will be eroded not just by local competitors, but also by Chinese opposition to their home country’s policies over which they have limited if any control, potentially reducing incentives to invest in China.
While China has been recognized as one of the world’s three most significant jurisdictions alongside the United States and the European Union for merger review, the possibility that a merger may be suspended or unwound because of a conflict of laws with another country outside the acquirer’s control may have a chilling effect on M&A in many industries, particularly given China’s tendency for clearing mergers subject to conditions.
Dependence on China for critical materials likely presents risks for the United States and other countries in the near term, particularly given China’s advances in mining and processing technology, but will intensify trade friction and encourage sourcing from alternative jurisdictions.
On the other hand, should the United States maintain its opposition to the CPTPP, effectively preventing it from coming into force, China may be able to secure bilateral or plurilateral agreements on government procurement as well as other trade matters, isolating the United States. Taken together, these actions appear in part to be a preemptive effort to deter the incoming Trump Administration from imposing additional trade restrictions against China.
