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The US will apply the FDPR rule to Chinese buyers of AI and supercomputer chips

The Biden administration is drafting new rules aimed at curbing China’s advanced computing and chip-making capabilities – the US government’s most significant effort to date to limit China’s development of technologies vital to its military progress.

The rules, which are scheduled to be announced as soon as this week, will be more sweeping than a draconian export control previously applied to Chinese tech giant Huawei.

The use of the so-called foreign direct product rule would prevent companies anywhere in the world from selling certain advanced computer chips to Chinese buyers without a U.S. government license if the companies use U.S. technology to make the chips, according to several people briefed on the measures, who spoke on condition of anonymity to discuss the still-unannounced plans.

The rule will apply to semiconductor chips used in supercomputers and certain artificial intelligence applications.

Such advanced computer systems could be used to develop nuclear weapons, hypersonic missiles and missile defense, officials said. A loss of U.S. leadership here would “compromise”[ads1]; national security and “undermine profitable parts of the U.S. economy,” according to a 2016 report by the National Security Agency and the Department of Energy.

The foreign direct product rule is a particularly stringent trade measure because the rule imposes restrictions not only on US chip makers, but on any company or factory in the world that relies on US equipment or software to make chips. There is hardly a semiconductor on the planet today that is not made with American tools or designed with software that originated in the United States.

The administration also wants to limit exports to China of chip-making tools used by Chinese companies such as the country’s leading memory chip maker, YMTC, and the leading Chinese processor maker, SMIC. If enacted as currently envisioned, the rule would cut off access to U.S. manufacturing and design tools for chips 14 nanometers in size or smaller.

“What they’re doing is a stark departure from 30 years of policy,” said Eric Sayers, managing director of Beacon Global Strategies, a national security consulting firm. “It is a form of technology containment. Not just to stay ahead of China, but to degrade their ability to try to catch up with us.”

Restrictions on China’s biggest chipmakers could have a significant impact, said Dan Wang, technology analyst at Shanghai-based research firm Gavekal Dragonomics. “They would hurt these companies and their customers, which include leading Chinese electronics manufacturers and internet platforms,” ​​he said.

The Biden administration also plans to place several Chinese organizations on an export blacklist called the Entity List.

The White House and the Commerce Department declined to comment.

Reuters has previously reported on some of these measures.

A slew of Chinese companies that use high-end AI chips made with American tools or designs are likely to be affected by that rule, analysts said.

Some U.S. chip makers and vendors of manufacturing equipment have publicly said in recent weeks that they have received government notices about the new restrictions, including equipment makers Lam Research, KLA Corp. and Applied Materials, as well as chip manufacturers Nvidia and AMD.

The administration has signaled its intention to use more of its powers to curb Beijing’s efforts to harness technology to gain a global advantage militarily and economically.

“When it comes to export controls, we need to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies,” National Security Adviser Jake Sullivan said in a speech last month, referring to China.

The approach of being just “a couple of generations ahead” is no longer tenable, he said.

When the US used the Foreign Direct Product Rule, or FDPR, to strip Huawei of chips, it crippled Huawei’s production and sales.

After Russia invaded Ukraine, the U.S. also used the FDPR to block companies from selling certain semiconductors to buyers in Russia, a ban that U.S. officials say hurts Russia’s military.

One industry executive, who was not authorized to speak, said the new rules and the administration’s general concerns about China will increasingly make it “really difficult” to do business there.

“We’ve heard from the administration that they want us to find customers outside of China,” the executive said.

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