U.S. restricts technology exports to China’s biggest semiconductor manufacturer in new escalation of trade tensions

The Trump administration has issued new restrictions on U.S. technology exports to China’s biggest semiconductor manufacturer, warning that the exports could benefit China’s military.

The Commerce Department on Friday notified U.S. companies that they will now need a license to export certain technology to Semiconductor Manufacturing International Corp., or SMIC, according to a copy of the Commerce Department letter reviewed by The Washington Post.

The letter said the licensing regime will be in place "pending the U.S. government's review of SMIC and its subsidiaries."

The Pentagon earlier this month said the Trump administration was considering adding SMIC to the Entity List, a trade blacklist that would block U.S. technology sales unless companies receive a license.

The Commerce Department "has determined that exports to SMIC or its subsidiaries, including those listed above, may pose an unacceptable risk of diversion to a military end use in the People's Republic of China pending the U.S. government's review of SMIC and its subsidiaries," said the letter, which was reported earlier by the Financial Times and The Wall Street Journal.

SMIC and other chip manufacturers depend on U.S. software and chip-making machinery to produce semiconductors.

The Commerce Department declined to comment on the letter but said it is "constantly monitoring and assessing any potential threats to U.S. national security and foreign policy interests" and "will take appropriate action as warranted."

Zoe Zheng, a spokeswoman for SMIC, said the company has "no relationship with the Chinese military and does not manufacture for any military end-users or end-uses."

A report last month by SOS International, a defense contractor in Reston, Va., said that SMIC has a variety of ties to China's defense sector, including an ongoing relationship with CETC, a state-owned developer of military electronics.

SMIC has helped CETC test new manufacturing technologies, and has used CETC technologies in its own manufacturing, according to the report. SOS also said Chinese military researchers have disclosed in research papers using SMIC technology to manufacture chips.

Restricting U.S. tech exports has become a favorite Trump administration tool to counter China's rise as a technology and military power, and to punish Chinese entities for alleged human-rights abuses.

The Entity List, overseen by the Commerce Department, now includes more than 300 Chinese companies. The Trump administration has previously used it against Chinese telecom company Huawei, companies engaged in alleged human rights violations in China's Xinjiang region, and most recently against Chinese entities allegedly involved in building controversial islands in the South China Sea.

Founded in 2000 in Shanghai, SMIC ranks among the top five semiconductor manufacturers in the world, according to a report from the United States International Trade Commission, or USITC.

Industry experts say that SMIC's technology lags behind that of chip manufacturers in Taiwan and the United States but that Beijing is pouring billions into the industry to help SMIC and other Chinese companies catch up.

SMIC has enjoyed generous government financial support, including low-interest loans, tax breaks and investments to help build manufacturing facilities, the Organization for Economic Cooperation and Development in Paris said in a report last year.

SMIC started as a private company, but state investment has grown over time, and the state owned more than 45 percent of SMIC stock as of 2018, according to the OECD report.