China hits back at US chip sanctions with WTO dispute

China has hit back against sweeping US export controls on chips, filing a dispute with the World Trade Organization and escalating the tech war between the two countries.

China’s commerce ministry said on Monday its WTO complaint was a legal and necessary measure to defend its “legitimate rights and interests”, after the US Department of Commerce introduced sanctions in early October to make it harder for China to buy or develop advanced semiconductors.

“At a minimum, the case is about China pushing back on how it’s perceived as an unfair actor in the global trading world,” said Ben Kostrzewa, an expert on US-China trade relations at Hogan Lovells.

The complaint is the first step in a WTO mediation process, in which the case would normally be put before the Appellate Body. But that body has been suspended due to disagreements among member states, and Kostrzewa said China’s complaint was unlikely to “create any legal effect” unless the group resumed its work.

The move comes just weeks after US president Joe Biden and his Chinese counterpart Xi Jinping used their first in-person meeting as leaders to signal a joint desire to improve ties between the world’s two biggest economies after relations plunged to a multi-decade low.

China’s complaint also comes days after a landmark ruling in which a WTO panel backed Beijing against Washington. In a report published on December 9, the WTO said the US was not justified in arguing the Trump administration’s 2018 tariffs — on steel and aluminium from China and other countries — were necessary to protect its national security.

“The Chinese government knew this was coming, and they almost certainly waited for this to strengthen their hand on the export control issue,” said a western trade official.

The export controls were aimed at hampering China’s ability to use high-end US technology for military applications such as nuclear warhead modelling and hypersonic weapons production.

The measures prevent US companies from exporting technology to Chinese groups engaged in producing high-end chips in almost every modern device, including the latest electric vehicles, smartphones and artificial intelligence.

A US Trade Representative spokesperson said: “As we have already communicated to the PRC [People’s Republic of China], these targeted actions relate to national security, and the WTO is not the appropriate forum to discuss issues related to national security.”

The export controls rocked the global semiconductor supply chain when they were unveiled, threatening to derail decades of investment in China by the world’s biggest tech groups.

Since taking power in 2012, Xi has put freeing China from its dependence on foreign chips at the heart of his economic agenda. Following the announcement of the export controls, Beijing increased spending on research and development to counter what it has described as a “blockade” on its technology industry.

Domestic tech giants Alibaba and Tencent have been enlisted alongside state-backed groups such as the Chinese Academy of Sciences to create semiconductor intellectual property that will bolster the country’s capabilities.

Chinese chipmaking champions such as Semiconductor Manufacturing International, Yangtze Memory Technology and Hua Hong Semiconductor have also grown rapidly in recent years. However, the groups are dependent on foreign companies for some core elements of underlying chip design and the equipment to make them.

In another sign of the effects of the export controls, Lam Research, the California-based supplier of chipmaking equipment, has begun cutting staff in China, according to two people with direct knowledge of the matter.
Teams in the field providing services for Chinese manufacturing facilities were probably the most affected, said one person familiar with the situation.

The US has also been negotiating with Japan and the Netherlands on an export controls agreement that would see the countries bar their companies from selling chipmaking tools for advanced Chinese semiconductors. The White House national security adviser Jake Sullivan said on Monday that the US had been talking to its partners about a “broad alignment” on China.

Additional reporting by Kathrin Hille in Taipei and Qianer Liu in Hong Kong