China hits back at US chip sanctions with WTO dispute

China has hit back against sweeping US export controls on chips, filing a dispute with the World Trade Organization and escalating the tech war between the two countries.

The US Department of Commerce introduced sanctions in early October designed to make it harder for China to buy or develop advanced semiconductors.

In a brief statement on Monday, China’s commerce ministry said its WTO complaint was a legal and necessary measure to defend its “legitimate rights and interests”. It added that Beijing had referred the US export control measures to the WTO dispute settlement mechanism, but did not provide details.

“At a minimum, the case is about China pushing back on how it’s perceived as an unfair actor in the global trading world,” said Ben Kostrzewa, an expert on US-China trade relations at Hogan Lovells.

The complaint is the first step in part of a WTO mediation process between two countries, in which the case would normally be put before the Appellate Body. But that body has been suspended due to disagreements among member states, and Kostrzewa said China’s complaint was unlikely to “create any legal effect” unless the group resumed its work.

The move comes just weeks after US president Joe Biden and his Chinese counterpart Xi Jinping used their first in-person meeting as leaders to signal a joint desire to improve ties between the world’s two biggest economies after relations plunged to a multi-decade low.

The export controls were aimed at hampering China’s ability to use high-end US technology for military applications such as nuclear warhead modelling and hypersonic weapons production.

The measures prevent US companies from exporting technology to Chinese groups engaged in producing high-end chips in almost every modern device, including the latest electric vehicles, smartphones and artificial intelligence.

Kostrzewa added that it was possible the US would invoke a rarely used article of WTO law that allows countries to defend their trade actions based on national security. “In the past, countries have been very cautious not to use this given the disruption it causes. But it is possible Washington goes down that route, given its public statements about the reasons for the new semiconductor policies,” he said.

A US Trade Representative spokesperson said: “We have received a request for consultations from the PRC [People’s Republic of China] related to certain US actions affecting semiconductors. As we have already communicated to the PRC, these targeted actions relate to national security, and the WTO is not the appropriate forum to discuss issues related to national security.”

The export controls rocked the global semiconductor supply chain when they were unveiled, threatening to derail decades of investment in China by the world’s biggest tech groups.

Since taking power in 2012, Xi has prioritised freeing China from its dependence on foreign chipmaking infrastructure at the heart of his economic agenda.

Following the announcement of the export controls, Beijing has increased spending on research and development to counter what it has described as a “blockade” on its technology industry.

Domestic tech giants Alibaba and Tencent have been enlisted alongside state-backed groups such as the Chinese Academy of Sciences to create semiconductor intellectual property that will bolster the country’s capabilities and reduce dependence on foreign-made chips.

Chinese chipmaking champions such as Semiconductor Manufacturing International Corp, Yangtze Memory Technology and Hua Hong Semiconductor have also grown rapidly in recent years. However, the groups are dependent on foreign companies for some core elements of underlying chip design and the equipment to make them.

The US is negotiating with Japan and the Netherlands on an export controls agreement that would see the countries bar domestic companies from selling chipmaking tools for advanced Chinese semiconductors.

Chinese consumers accounted for about $186.5bn of the $510bn global semiconductor market in 2021, according to research group IC Insights. However, factories owned by Chinese companies accounted for just $12.3bn of total production.