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Earlier this week, the Trump administration narrowed export regulations on advanced semiconductors prior to US-China trade discussions. The administration is progressively depending on export licenses to enable American semiconductor companies to distribute their products to Chinese clients while securing the most potent of them from our military competitors. These chips power the artificial intelligence research propelling China’s technological ascendance, as well as the sophisticated military gear supporting Russia’s attack on Ukraine.
The US government relies on private-sector companies to enforce these export regulations. It’s proving ineffective. US-manufactured semiconductors have been discovered in Russian armaments. Furthermore, China is evading American export regulations to expedite AI research and innovation, with a clear ambition to bolster its military capabilities.
American semiconductor firms are either hesitant or incapable of limiting the distribution of semiconductors. Rather than focusing on creating effective compliance frameworks, these companies have consistently favored their profit margins—a logical move, considering the inherently precarious nature of the semiconductor sector.
We cannot afford to postpone while semiconductor companies gradually adapt. To establish a strong regulatory framework in the semiconductor sector, both the US government and chip manufacturers must engage in straightforward and decisive actions now and continually over time.
Take the financial services sector as an example. These entities are also heavily overseen, applying US government regulations that range from international sanctions to anti-money laundering. For numerous years, these companies have heavily invested in compliance technologies. Major banks maintain compliance teams, often numbering in the thousands.
The firms comprehend that by entering the financial services domain, they undertake the responsibility to verify their clients’ identities and activities, deny services to those involved in illicit actions, and notify authorities about specific activities. They regard these responsibilities seriously as they understand they will incur hefty fines upon failure. Throughout the financial sector, the Securities and Exchange Commission imposed a staggering $6.4 billion in penalties in 2022. For instance, TD Bank recently incurred nearly $2 billion in penalties due to its inadequate anti-money laundering measures.
An executive order issued earlier this year applied a comparable regulatory framework to potential “know your customer” responsibilities for specific cloud service providers.
If Trump’s new license-based export regulations are to be effective, the administration must amplify penalties for noncompliance. The Commerce Department’s Bureau of Industry and Security (BIS) should more vigorously enforce its regulations by significantly increasing penalties for violations of export controls.
BIS has been striving to enhance enforcement, demonstrated by this week’s announcement of a $95 million penalty against Cadence Design Systems for contravening export regulations regarding its chip design technology. Regrettably, BIS lacks the personnel, technology, and financial resources to enforce these controls comprehensively.
The Trump administration should also leverage its platform, publicly identifying companies that violate regulations and encouraging American firms and consumers to seek alternatives. Regulatory threats and negative publicity are the most effective means to compel the semiconductor sector to take export control regulations earnestly and invest in compliance.
With these threats established, American semiconductor companies must recognize their duty to adhere to regulations and collaborate. They need to invest in fortifying their compliance teams and execute proactive audits of their affiliates, clients, and their clients’ clients.
Companies should elevate risk and compliance perspectives to their executive leadership teams, akin to the chief risk officer position prevalent in banks. Senior executives must dedicate time to regular reviews focused on substantial, proactive compliance with export controls and other vital regulations, thereby directing their organizations to prioritize compliance.
As the global landscape becomes increasingly perilous and America’s adversaries grow bolder, we must ensure stronger oversight of our supply of critical semiconductors. Should Russia and China gain unrestricted access to advanced American chips for their AI initiatives and military apparatus, we risk losing our military superiority and our capacity to deter conflicts worldwide. The geopolitical significance of semiconductors will only rise as the world grows more dangerous and reliant on advanced technologies—American security hinges on curtailing their distribution.
This essay was crafted with Andrew Kidd and Celine Lee, and originally appeared in The National Interest.
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