U.S. lawmakers ease proposed curbs on Chinese chips amid corporate pushback

WASHINGTON  -U.S. senators have scaled back a proposal that placed new curbs on the use of Chinese-made chips by the U.S. government and its contractors, according to a recent draft seen by Reuters, amid pushback from trade groups like the U.S. Chamber of Commerce.

The move is the latest example of industry’s efforts to weaken proposals aimed at crimping China’s burgeoning tech sector, by pointing out how such measures will raise costs.

Top Senate Democrat Chuck Schumer and John Cornyn, a prominent Republican China hawk, unveiled a measure in September that would have required U.S. federal agencies and their contractors to stop using semiconductors manufactured at China’s SMIC, as well as chips made by Chinese memory chip leaders YMTC and CXMT.

The text of a new version of the measure, dated Dec. 1, no longer forbids contractors from “using” the targeted chips and pushes the compliance deadline back to 5 years from the immediate or 2 year implementation deadlines included in the first version.

“This does not clearly prohibit contractors from themselves using covered semiconductor products,” said Robyn Burrows, a lawyer at Blank Rome specializing in federal contracting, when asked to read excerpts of the new draft.

Chips made by SMIC are commissioned by companies all over the world and can be found in products as diverse as cell phones and cars. They are difficult to identify because chips are not typically labeled with the names of the companies that manufacture them.

The measure, which was pitched as an amendment to the National Defense Authorization Act (NDAA), drew fire from the Chamber of Commerce and other trade groups, who said in a letter last month that it would be costly and difficult for companies to determine whether SMIC manufactured the chips contained in a vast array of electronics.

The powerful U.S. business group argued in a letter signed by telecommunications and defense industry groups that rooting out such chips from common appliances like toasters or forcing federal contractors like paper suppliers to take on such a monumental task would not further U.S. national security.

The letter was first reported by Politico.

Lawmakers are expected to announce final language for the final package later this week, which may include the revised measure.

Schumer’s office, SMIC, YMTC, CXMT and the Chamber of Commerce did not respond to requests for comment.

A spokesperson for Cornyn said the five-year implementation deadline was designed to dovetail with the CHIPS Act, approved earlier this year to provide $52 billion in grants for chipmakers to expand operations in the United States.

“That funding will allow U.S. and western-allied production to come online to replace the production lost to these Chinese companies,” the spokesperson said.

The Chinese Embassy in Washington said it “firmly” rejects the inclusion of negative language about China in the legislation and said that the Chamber of Commerce letter “shows that arbitrary disruption and damage to the global industrial… supply chains serves no one’s interest.”

The provision was modeled on the 2019 NDAA, which barred the U.S. government and its contractors from using telecoms or video surveillance equipment from China’s Huawei, ZTE, Dahua, Hytera or Hikvision.

Companies are still struggling to comply with the law, as regulators have yet to finalize rules fleshing out the curbs, a problem referenced by the Chamber of Commerce in its letter.

The latest draft also narrows the scope of the restrictions, noting they only apply to items destined for the government’s “critical systems,” which includes telecoms or information networks involving intelligence activities or command of military forces or weapons, among others.

SMIC was blacklisted by the Trump administration over concerns the company aids the Chinese military. YMTC is under investigation by the Commerce Department over whether it violated U.S. export controls by selling chips to blacklisted Chinese telecommunications company Huawei Technologies Co Ltd and could be blacklisted in short order.

The Commerce Department in October announced new export controls to curb Chinese chipmakers’ access to U.S. chipmaking tools to make the most advanced chips, in a bid to hamstring China’s bid to supercharge its chip industry and ratcheting up tensions with Beijing.