As the US congress passed an historic US$52-billion federal programme to boost domestic chip-making capabilities, it included one significant caveat: companies that receive the funding have to promise not to increase their production of advanced chips in China.

It’s a condition that will certainly add to escalating tensions between Washington and Beijing. The curbs will hit companies like Intel and Taiwan’s TSMC, leading chip makers that have tried to build their businesses in China. TSMC won’t be able to substantially upgrade or expand its existing facilities, effectively losing some growth opportunities in the world’s biggest semiconductor market.

Specifically, the US Chips and Science Act bars companies that get federal funding from materially expanding production of chips more advanced than 28 nanometres in China — or a country of concern like Russia — for 10 years. While 28nm chips are several generations behind the most cutting-edge semiconductors available now, they are still used in a wide range of products including cars. The ban covers both logic and memory chips.

An exception can be made if the chip makers concerned are adding production of 28nm semiconductors or older generations to serve the China market predominately or the foreign country of concern involved. Recipients who violate the restrictions and fail to remedy the breach may need to pay back the federal subsidies in full.

The White House, which is expected to sign the act shortly, has voiced its support for the measure.

Intel has been lobbying hard against the move to curb US investments in China’s chip sector. In late 2021, the American chip maker wanted to increase production in China but that plan was spurned by the White House.

Intel ended up selling its wafer plant in Dalian to South Korea’s SK Hynix as part of a broader deal for the American company’s NAND memory business. Intel still has chip packaging and testing facilities in China.

Six years behind

“Legislation this complex and important requires input from all stakeholders. Intel and many companies in our industry have come together with our trade association to provide input to policymakers in order to ensure that we have the best legislation possible and don’t inadvertently undermine the global competitiveness of companies that receive Chips funds,” Intel spokeswoman Nancy Sanchez said.

While China’s chip-making champion, Semiconductor Manufacturing International (SMIC), can make chips that are more advanced than 28nm, its technology is still at least six years behind industry leader TSMC.

SMIC has been facing virtually insurmountable challenges in catching up with TSMC after the Trump administration pressured the Dutch government to prevent ASML from selling its most cutting-edge extreme ultraviolet lithography systems to China. The Chinese chip industry encountered a further setback in recent days as Washington had quietly tightened China’s access to relatively advanced chip equipment, sending stocks tumbling.

A large chunk of the federal grant is expected to go to Intel, TSMC and South Korea’s Samsung Electronics, all of which are now building new chip fabrication facilities worth tens of billions in the US.

Among potential recipients of the federal grant, only TSMC is making relatively advanced chips in China at the moment. Its facility in the southern Chinese city of Nanjing makes 28nm and more advanced 16nm chips, roughly the equivalent of the most sophisticated product SMIC can make.