Commerce Department Seeks To Undercut Chinese AI Sector by Targeting Chipmakers

Washington is looking to choke off China’s advanced chip sector.

As reported by Reuters on April 28, the Commerce Department sent letters to several major American chipmaking firms immediately banning them from selling equipment to several facilities owned by major Chinese chipmaker Hua Hong and at least one of its subsidiaries, Huali Microelectronics. Huali is the firm’s contract manufacturing business.

The move represents a concerted effort by Washington to prevent Beijing from accessing the top-end U.S. chipmaking equipment needed to fuel its artificial intelligence (AI) sector.

Restrictions Apply to Key Chinese Chipmaker

The Commerce Department sent “as-informed” letters last week to U.S. firms Lam Research, Applied Materials, and KLA Corporation, a process that the department uses to quickly halt sales to specific foreign clients. Each firm is a major supplier to the Chinese semiconductor foundry market, providing equipment, manufacturing software, and services used to produce chips for solar panels and consumer electronics.

Hua Hong is China’s second-largest contract chipmaker, second only to Semiconductor Manufacturing International Corporation (SMIC), China’s most advanced foundry. Reuters reported in March that Hua Hong had developed the capacity to produce 7-nanometer chips, a major performance benchmark within China’s domestic semiconductor industry. Hua Hong is also reportedly in line to supplant some of SMIC’s contracts to produce advanced AI chips for Huawei, a designated Chinese military company.

It remains unclear whether the Commerce Department has sent letters to other American manufacturers or whether additional Hua Hong facilities may be included in the ban. Neither Hua Hong nor Huali are currently under trade sanctions, though the Pentagon reportedly considered placing Hua Hong on its list of Chinese military companies in November 2025.

China Seeks To Develop Domestic Foundry Sector

China’s domestic chipmaking industry lags the United States due to a series of export controls on key technologies. While Chinese firms have gained market share in more basic semiconductors, including those typically produced by Hua Hong, Chinese foundries have struggled to produce more advanced chips at scale due in part to U.S. restrictions on the sale of key manufacturing equipment imposed in 2022 and further tightened in 2023 and 2024. These export controls also targeted foreign firms that use American technology to produce foundry equipment for the Chinese market, particularly the Dutch firm ASML, which produces the technology used to imprint circuit patterns onto silicon wafers.

China’s efforts to build out its foundries are directly tied to Beijing’s military modernization efforts, and many of its major manufacturers have ties to the People’s Liberation Army (PLA). SMIC, along with ChangXin Memory Technologies and Yangtze Memory Technologies Company, are key suppliers to the PLA, including providing chips for supercomputer clusters used in the design of nuclear weapons, providing computing support for defense universities, and selling “military-grade” components for use in weapons systems. These efforts will likely only accelerate as the PLA seeks to integrate AI across its forces to prepare for the rigors of contemporary combat, further fusing China’s commercial semiconductor industry to its military industrial base.

Washington Should Strengthen Controls on Chipmaking Equipment

While the Commerce Department should continue to target American firms seeking to sell chipmaking equipment to one of China’s national champions, Washington cannot fully prevent Beijing from building out its domestic foundry industry. Even as the United States seeks to restrict sales, both ASML and Japanese firm Tokyo Electron have respectively serviced installed equipment and sold key inputs to Chinese firms.

In response, Washington should work with Tokyo and Amsterdam to close loopholes in their respective export control measures, including raising the possibility of using the Foreign Direct Product Rule to unilaterally impose restrictions on the sale of chipmaking equipment to China that contains American technology. This measure should be combined with additional steps to prevent China from illicitly accessing U.S. chipmaking technology, including restoring public-private reporting mechanisms to counter Chinese cyber-based industrial espionage. 

Jack Burnham is a senior research analyst in the China Program at the Foundation for Defense of Democracies (FDD). For more analysis from Jack and FDD, please subscribe HERE. Follow FDD on X @FDD. Follow Jack on X @JackBurnham802. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.