How the CHIPS Act Impacts Foreign Suppliers and International Partnerships

The CHIPS and Science Act, signed into law in August 2022, marks a significant investment in the U.S. semiconductor industry, aiming to bolster domestic manufacturing, secure supply chains, and maintain U.S. leadership in critical technologies. However, the Act also has substantial implications for foreign suppliers and international partnerships in the semiconductor sector, especially due to its alignment with U.S. export control policies. As the U.S. continues to restrict exports of sensitive technologies to “countries of concern,” such as China, international suppliers and third-party exporters are navigating a more complex regulatory landscape.

This article will explore the objectives of the CHIPS Act, its intersection with U.S. export control laws, and how these policies affect global semiconductor partnerships and foreign suppliers.

CHIPS Act Objectives and Export Control Alignment

The CHIPS Act is primarily focused on reducing the U.S. dependency on foreign semiconductor production by investing $52.7 billion in domestic semiconductor manufacturing, research, and workforce development. It also includes tax incentives to encourage private-sector investment in American semiconductor facilities. Beyond its funding, the Act contains provisions aimed at national security.

Among its guardrails, the CHIPS Act prevents recipients of U.S. funding from expanding semiconductor manufacturing capabilities in “countries of concern” for at least ten years. This provision complements U.S. export controls under the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR), which restrict U.S. companies from exporting certain technologies to countries like China without a license. The Act aligns with these regulations by explicitly preventing companies benefiting from U.S. subsidies from expanding operations in countries that may pose a national security risk.

Impact on Foreign Semiconductor Suppliers

The CHIPS Act and accompanying export controls present unique challenges for foreign semiconductor suppliers, particularly those with ties to both U.S. and Chinese markets. Many semiconductor manufacturing facilities outside the U.S., especially in countries like South Korea, Japan, and Taiwan, rely on American semiconductor manufacturing equipment (SME) and technologies to produce chips. These suppliers must now navigate restrictions under the Foreign Direct Product Rule (FDPR), which requires foreign-made items using U.S. technology to comply with U.S. export controls if they are sold to restricted countries.

For instance, non-U.S. companies that produce semiconductors using U.S. technology must ensure that their products do not violate U.S. export restrictions when they engage in trade with designated “countries of concern,” like China. The FDPR has already impacted companies such as Taiwan Semiconductor Manufacturing Company (TSMC), which has had to adjust its operations to comply with U.S. regulations. With the CHIPS Act incentivizing TSMC and others to expand production in the U.S., these companies face pressure to balance their relationships with U.S. entities while limiting exports to China to avoid running afoul of export control laws.

Restricted Technology Sharing

Under the CHIPS Act, companies that receive federal funding are prohibited from sharing certain technologies or expanding advanced semiconductor manufacturing operations in restricted countries. This limitation complicates partnerships between U.S. and foreign semiconductor companies, especially where shared technology and resources have historically flowed across borders.

For example, ASML, a Dutch company and the sole manufacturer of extreme ultraviolet lithography (EUV) machines, has faced U.S. pressure to restrict sales of its advanced technology to China. The CHIPS Act, by encouraging U.S.-based semiconductor production, may lead to further U.S. government leverage on ASML and other foreign firms involved in strategic partnerships.

Supply Chain Constraints

The CHIPS Act, by incentivizing domestic production, aims to reduce reliance on foreign suppliers. However, many of the materials and components necessary for chip production come from outside the U.S., requiring a coordinated approach to ensure uninterrupted supply chains. For example, essential materials such as rare earth elements and specialized gases are often sourced from countries outside the U.S., making international suppliers a crucial part of the semiconductor ecosystem.

Foreign companies that wish to continue supplying U.S.-based semiconductor manufacturers need to ensure compliance with both the CHIPS Act’s restrictions and the EAR’s licensing requirements. This dual compliance obligation adds complexity to supply chain management, potentially driving up costs and causing delays.

Impact on Foreign Investment

The CHIPS Act’s incentives for U.S.-based production have led companies like TSMC and Samsung to expand their manufacturing presence in the U.S. However, this shift raises questions about foreign investment in semiconductor facilities outside the U.S. as companies reassess their strategies.

For foreign governments, the U.S. emphasis on reshoring semiconductor manufacturing could lead to adjustments in their own policies. For example, countries in the European Union, Japan, and South Korea may respond with incentives to retain semiconductor investments, potentially leading to competing strategies for localizing production.

Compliance Strategies for Foreign Suppliers and Exporters

For foreign suppliers, understanding and navigating the CHIPS Act and U.S. export control laws are crucial to maintaining access to the U.S. semiconductor market. Key compliance strategies include:

Conducting Thorough Supply Chain Audits

Foreign suppliers should regularly audit their supply chains to identify U.S.-origin technologies or components that may trigger export control restrictions.

Investing in Compliance Training

Third-party exporters and foreign suppliers should ensure that their staff is trained on both U.S. export controls and the specific provisions of the CHIPS Act. This helps reduce the risk of unintentional violations and enhances collaboration with U.S. partners.

Consulting with Legal and Trade Experts

Given the complexity of the CHIPS Act and U.S. export control laws, foreign suppliers can benefit from consulting with legal and trade experts who specialize in export compliance. These advisors can help companies navigate compliance obligations and develop risk mitigation strategies.

Conclusion

The CHIPS Act represents a transformative step in U.S. semiconductor policy, aimed at boosting domestic production while restricting technology transfer to countries of concern. For foreign suppliers and third-party exporters, the Act introduces new compliance challenges and reshapes the global semiconductor supply chain. As U.S. export controls intersect with the CHIPS Act’s provisions, global semiconductor partnerships will need to adapt to these changes, balancing innovation with heightened regulatory scrutiny.

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Sources Cited

• White House Briefing Room. "FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China." White House

• Public Law 117-167 [H.R. 4346]. 117th Congress. "CHIPS and Science Act of 2022." U.S. Congress