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China's SMIC 'Potentially' Violated US Export Controls, BIS Leader Says

China’s Semiconductor Manufacturing International Corp. “potentially” violated U.S. export control laws by producing 7 nanometer computing chips with American equipment it obtained before the Bureau of Industry and Security imposed updated export controls on chip-making tools last year, BIS Undersecretary Alan Estevez said.

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Estevez, speaking during a March 21 House Foreign Affairs Committee hearing, declined to explicitly say whether BIS is investigating SMIC, adding that he can’t reveal details of “investigations that may or may not be” ongoing. But he also said BIS “certainly share[s] those concerns” that SMIC may have violated U.S. export restrictions.

Asked directly by Committee Chair Michael McCaul, R-Texas, whether SMIC violated export rules, Estevez said: “Potentially, yes.”

McCaul replied: “I’m not a scientist, but I would say they did” break the law. He described the 7 nanometer chips as the “gateway” to artificial intelligence.

The hearing was held about seven months after Huawei unveiled a new smartphone that lawmakers said may have been made through means that violated U.S. export restrictions (see 2309120005), sparking congressional calls for increased restrictions against both Huawei and SMIC (see 2309150020).

Estevez said that whatever process SMIC may be using to produce 7 nanometer chips is a “low yield process,” and “it certainly would not be viable [for] any commercial company trying to sustain that process.” He also stressed that SMIC “did access tools before” the agency released its updated chip controls in October (see 2310170055). “Those tools will ossify over time,” Estevez said, “and that process will be degraded.”

Estevez was also asked about the ongoing debate within Congress about whether to impose sector-based outbound investment restrictions on China or instead use individual investment sanctions on specific Chinese entities. The undersecretary said it might be possible to combine the two approaches to get the benefits of both.

“There probably is” a way to merge the two approaches, he said. “I think there’s probably a combination that you could do that gets at the full gamut of what needs to be done.”

Estevez agreed to a request from McCaul to study the matter further and report back to McCaul and Rep. Andy Barr, R-Ky., a Foreign Affairs Committee member who also sits on the House Financial Services Committee. McCaul has been advocating the sector-based approach, while Barr has been pushing individual entity-based sanctions (see 2401180067 and 2402050064).

Earlier in the hearing, Estevez said a sector-based approach would be easier to implement and enforce. Using individual sanctions fosters a “whack-a-mole game,” as companies quickly change their names to evade restrictions. “And then we have to go after the next one, which we’re happy to do, but it’s way more strategic to go after [investments] on a sector, technological basis," he said.

Whatever approach Congress agrees to, it is crucial that the government provide “precision and certainty and clarity for the American private sector,” Barr said. “We don’t want the private sector to be guessing. We want the American private sector to know what is red light and what is green light. That’s what the export control system has achieved largely over the years, and we want that to be the case with outbound capital flows as well.”

Turning to the Biden administration’s FY 2025 budget request, Estevez urged Congress to approve the $32 million increase BIS is seeking to handle a growing workload and replace aging information technology (see 2403110065). The agency's budget for "core export control functions" has remained flat since 2010 after adjusting for inflation.

“We’re using antiquated systems fielded in the mid-2000s using 1990s technology,” Estevez said. To answer pending congressional information requests, “we are doing manual pulls of that data right now because I do not have [a Google-like search system] for answering the questions that I need answered and that I’d like to support the committee with. And I have an enforcement function that also needs to be able to track who's doing what, where, [and] that’s really antiquated."

Estevez also wants to beef up BIS's law enforcement arm, the Office of Export Enforcement, which "employs only 150 agents to counter the threat posed by nation-state actors."