Days before President Joe Biden’s term nears its conclusion, the US has once again unleashed semiconductor-related sanctions against China. In the latest sanctions, the third in three years, the US Government is further tightening restrictions on China's ability to develop advanced semiconductor manufacturing capabilities and artificial intelligence chips.

On December 2, 2024, the Bureau of Industry and Security (BIS) under the US Department of Commerce, finalised a rule adding 140 new entities, spanning China, Japan, South Korea, and Singapore, to the US Entity List, alongside significant revisions to 14 existing entries. It also includes fresh export controls on 24 types of semiconductor manufacturing equipment, 3 types of EDA software tools, and high-bandwidth memory (HBM).

“The latest round of U.S. sanctions broadens the scope of restrictions to include additional semiconductor manufacturing equipment such as etch, deposition, lithography, ion implantation, annealing, and metrology tools. High-bandwidth memory (HBM), critical for advanced AI applications, also falls under these new restrictions. Furthermore, updates to the Foreign Direct Product (FDP) Rule now include tools containing any amount of U.S.-origin integrated circuits, making it harder for China to source essential technologies even indirectly. These measures are poised to impact China's ability to develop advanced semiconductor manufacturing capabilities,” explains Ashwath Rao, senior analyst at Counterpoint Research.

What’s Entity List

According to the US Department of Commerce, the Entity List identifies entities for which there is reasonable cause to believe, based on specific and articulable facts, that the entities have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States. Now both these definitions, national security and foreign policy interest, in the tech diplomacy have become collective national security and collective foreign policy interest of US and allied nations. Hence, the entity list has widened as well.

Danish Faruqui, CEO of US-based Fab Economics explains, “Entity List is part of Export Administration Regulations (EAR), which is administered by the US Department of Commerce, Bureau of Industries and Security. So the Department of Commerce actually develops the Entity List as a part of EARs and these entity lists include specific organizations, specific companies, and even specific individuals, that are imposed with Entity List Rules (ELR), a subcategory of EAR. Entity List Rules are assigned to each entity in the Entity List. These rules define the export restrictions and the restrictions for sale of end products or licensing requirements for the sale of end products to companies in the entity list.”

For instance, Huawei is one of the prominent entities in the Entity List since 2019 time, where it achieved concurrence with the semiconductor technology on the logic semiconductor technology with the US players, and hence it had close ties with military capability development in China, and hence Huawei was put on the Entity List. 

Strongest Sanctions Ever

This is the Biden administration’s third major crackdown against China’s semiconductor industry and its technological ambitions. In the last 3 years (October 2022, October 2023, Dec 2024), US has introduced sanctions against China to deter its progress and procurement of leading-edge semiconductor technologies. Industry experts believe in this third round, the Biden administration has introduced strongest ever semiconductor sanctions and export controls leveraging the support of allied nations after long negotiations with countries like Netherlands, Japan and Korea.

Faruqui explains, “The new rules cover both leading edge Logic and Memory technologies thus creating both Compute and Memory Walls for China, which have significant military applications. It’s all about plugging loopholes with Sanction revision. While the October 2023 US sanctions attempted to plug the loopholes of October 2022 sanctions, with 2023 sanctions and controls focused on end product controls with a component of export controls on Wafer Fab Equipment. The December 2024 sanctions have taken a value chain deterrence approach focusing on Advanced Logic and Memory WFE with an allied approach and largest ever entity list additions.”

However, experts believe the technology that the US is trying to protect is immensely complex and thus not easy to define rules to block it permanently. Also, on the other hand, over the last two years, it is being continuously reported that there has been advancement in leading edge technologies though not at scale.  For instance, the 3nm SoC from Xiaomi, 5nm SoC from SMIC, CXMT’s LPDDR5 DRAM and CXMT’s IEEE presentation indicating Gate All Around Design capability. However, the US has certainly succeeded in deterring China for High Volume Manufacturing and procurement at scale of the AI hardware.

Counterpoint Rao believes, “Despite these setbacks, Chinese companies are prioritising advanced node development with cost-effective tools to support domestic chip designers. This strategy aligns with China's broader goal of achieving semiconductor self-sufficiency and mitigates some of the adverse effects of the sanctions. While the path to scaling advanced chipmaking processes sustainably remains filled with challenges, increased localisation and strategic investments in domestic equipment manufacturing indicate a concerted effort to build resilience against future restrictions.”

Prabhu Ram, VP - Industry Research Group (IRG), CyberMedia Research (CMR) echoes the sentiment. He says while these measures pose significant hurdles for China, they may also spur accelerated efforts in domestic innovation and lead to the establishment of alternative supply chains.

Implementation will be the key

While the sanctions imposed by the US on China are significant, it needs to be seen how seriously these are taken considering these are the last orders by the outgoing President Biden. Faisal Kawoosa, chief analyst & founder, Techarc says, “Right now these orders are aimed to control two things. One is of course limiting access to semiconductors that essentially go into deep tech areas like AI where the US wants to curtail China's progress. The other fact is that semiconductor is now an important ingredient that will define the warfare capabilities of any country. So, in today's time it could be more harmful to supply semiconductors to unfriendly nations than supplying traditional warfare arms and ammunition. I think the US is looking at it from that perspective.”

Kawoosa also highlights that while the restrictions are also imposed on supply of equipment to the semiconductor ecosystem in China, at the same it does make an exception of under-construction Chinese semiconductor facilities. Obviously, that would have meant immediate business loss to US suppliers. “In all I see it is still a double-edged sword for the US, where it wants to curtail China's prowess but at the same safeguard its business interests. Both going hand in hand is difficult.”

Also, what will matter and shape the future of US-China trade relations is how President elect Donald Trump looks at them once he enters the Oval office in some time.

China’s Hits Back

The sanctions imposed by the US, and threats to impose tariffs by President elect Donald Trump, has provoked retaliatory measures by China. A day after the new sanctions were imposed, the Chinese Commerce Ministry has announced a ban on export of gallium, germanium, antimony and other key high-tech materials to start with.  In July last year, Beijing has imposed export controls on two critical rare elements necessary for semiconductor manufacturing. This could lead to disruption in the chip supply chain, and jack up prices of semiconductors and end products in the short term as China accounts for more than 90% of gallium and 80% of germanium supply.

“In last year alone, we have seen policy implementations to deter US company products including the likes of Apple, Nvidia, and cybersecurity investigations against Micron. Tightening export controls from China across key semiconductor materials like Germanium and Dysprosium – is also not off the table and this time like the US approach – China measures could be not only against US but also allied nations,” says Faruqui.

Going forward, Beijing’s response would potentially include targeted actions against US technology companies as well. This could also see retaliation escalating from the Chinese side, largely affecting areas like the smartphone value chain, where US companies are benefiting as a supplier as well as customers of the ecosystem.

The US and China are now in a gunfight, and both parties will be wounded. China has already banned exports of critical minerals such as gallium, germanium, and antimony, which are essential in semiconductor manufacturing and military applications. In addition to these export bans, China may implement further countermeasures, including restricting exports of rare earth elements vital for various high-tech industries. Beijing might also target U.S. companies by placing them on its "Unreliable Entities List," subjecting them to sanctions or operational restrictions within China, says Jeffery Cooper, a U.S.-based semiconductor veteran and consultant.