Taiwan Semiconductor Manufacturing Company (TSMC) stands at the epicenter of a complex geopolitical triangle involving the United States and China. As the world’s leading chipmaker, TSMC’s operations are deeply intertwined with both nations: it supplies advanced semiconductors to Chinese tech giants like Huawei and relies heavily on U.S. technology and equipment for its manufacturing processes.
The United States has implemented stringent export controls to curb China’s access to cutting-edge semiconductor technologies, citing national security concerns. Central to these measures is the Foreign Direct Product Rule (FDPR), which extends U.S. export restrictions to foreign-produced items that are the direct product of U.S. technology or software. Given that TSMC utilizes U.S.-origin equipment and software in its chip fabrication, it falls under the purview of these regulations .
The Foreign Direct Product Rule is a critical tool in the U.S. export control regime, enabling the U.S. government to exert control over certain foreign-produced items that are the direct product of U.S.-origin technology or software. Its extraterritorial application underscores the importance for global companies to understand and comply with U.S. export control laws, especially when dealing with sensitive technologies and restricted entities.
In a notable enforcement action, the U.S. Department of Commerce ordered TSMC to halt shipments of advanced chips—specifically those of 7 nanometers or more advanced—to Chinese companies, including Sophgo, after discovering that these chips were being used in Huawei’s AI applications . This move underscores the extraterritorial reach of U.S. export controls and their impact on global supply chains.
TSMC has expressed challenges in ensuring that its chips do not end up with restricted entities, highlighting the complexities of monitoring end-use in a globalized supply network . The company is currently under investigation and could face substantial fines for potential violations of U.S. export regulations .
This situation illustrates the intricate balance TSMC must maintain between complying with U.S. regulations and serving its Chinese clientele. It also reflects the broader tensions in the semiconductor industry, where technological leadership, national security, and international trade intersect.
The Foreign Direct Product Rule (FDPR)
is a U.S. export control regulation that extends the jurisdiction of U.S. export laws to certain foreign-produced items, even if they are manufactured entirely outside the United States and do not contain any U.S.-origin components. This rule is particularly relevant in the context of semiconductor manufacturing and has significant implications for companies like TSMC, which utilize U.S.-origin technology or software in their production processes.
Key Aspects of the FDPR:
- Scope of Application: The FDPR applies to foreign-produced items that are the direct product of certain U.S.-origin technology or software, or are produced by a plant or major component of a plant that itself is a direct product of U.S.-origin technology or software. This means that if a foreign company uses U.S.-origin technology or software in the production of an item, that item may be subject to U.S. export controls, regardless of where it is manufactured.
- Extraterritorial Reach: The FDPR exemplifies the extraterritorial application of U.S. export control laws. It allows the U.S. government to regulate the export, reexport, or transfer of certain foreign-produced items that are the direct product of U.S.-origin technology or software, even if these items are produced and sold entirely outside the United States. This broad reach is designed to prevent foreign entities from circumventing U.S. export controls by producing sensitive items abroad using U.S. technology.
- Implications for Companies: Companies like TSMC, which rely on U.S.-origin technology or software in their manufacturing processes, must comply with U.S. export control regulations, including the FDPR. This compliance may involve obtaining export licenses from the U.S. government before exporting certain items to specific countries or entities, particularly those on the U.S. Entity List.
- Recent Developments: In recent years, the U.S. has expanded the FDPR to target specific foreign entities, notably Chinese companies such as Huawei. By adding these entities to the Entity List and applying the FDPR, the U.S. aims to restrict their access to advanced technologies and items produced using U.S.-origin technology or software, thereby impacting their ability to develop and produce advanced semiconductors and related technologies.