By Bloomberg
October 30, 2018

The Trump administration has slapped restrictions on exports to a Chinese government-backed chipmaker it says threatens U.S. national security, adding pressure to an already fraught relationship between the world’s two largest economies.

The Commerce Department said it’s blocking sales of American components to Fujian Jinhua Integrated Circuit Company Ltd., recalling a similar ban that brought telecoms gear giant ZTE Corp. (ztcoy) to a virtual standstill. Jinhua “poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States,” the agency said.

The development complicates an escalating trade war as Washington and Beijing spar over issues from intellectual property to the openness of Chinese markets. The countries have imposed tariffs on about $360 billion worth of two-way trade. Restrictions on Jinhua threaten to choke off supply of the crucial American components it needs, and jeopardizes a $5.7 billion wafer-making factory it’s begun building on the country’s southeastern coast.

“Placing Jinhua on the Entity List will limit its ability to threaten the supply chain for essential components in our military systems,” Commerce Secretary Wilbur Ross said in the statement. The Chinese company wasn’t available for comment, and calls to the main number listed on its website went unanswered.

Derek Scissors, a China expert at the American Enterprise Institute, said the company was one of the country’s potential national champions and is in a dispute with its main competitor, U.S. chipmaker Micron Technology Inc. While the Commerce decision helps Micron in the short term, the administration is trying to set a precedent for how it treats Chinese state-owned enterprises in the long run, he said.

Micron has accused Jinhua of stealing its intellectual property, something the Chinese firm denies. Accusations that China unfairly acquires technology however are at the heart of U.S.-Chinese tensions, along with a plan by the world’s second largest economy to achieve supremacy in a plethora of future technologies. In July, a court in Jinhua’s home province banned sales of some Micron products, inciting the American firm’s outrage. Micron executive vice president Manish Bhatia said on Friday that technology leaks were “definitely a concern.”

Jinhua, backed by the government of its home province of Fujian, is one of several companies China is trying to mold into a world-class semiconductor industry player. The country is trying to reduce its heavy reliance on chip imports while building capabilities in a technology that underpins everything from computers to smartphones and connected devices in the home.

But it needs American components and manufacturing equipment to fulfill that vision. As a result of the Commerce Department action, a license is now required for all exports, re-exports and transfers of commodities, software and technology, subject to the Export Administration Regulations. Such license applications will be reviewed but with a presumption of denial, the agency said.

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