How US Chip Policy Squeezes Key Allies

The U.S. government is reportedly considering a move that would make it significantly harder for some of its closest international partners—including South Korea’s Samsung and SK Hynix, and Taiwan’s TSMC—to operate their advanced chip factories inside China. The policy under consideration, which would revoke special authorizations for receiving U.S. technology and equipment, highlights a growing dilemma for America's allies: they are increasingly caught in the crossfire of the escalating US-China tech war, forced to navigate the conflicting demands of their most important security partner and their largest market.

Why are US allies building chips in China?

For decades, the global semiconductor supply chain has been a model of interdependence. Companies like Samsung, SK Hynix, and TSMC built massive, multi-billion-dollar fabrication plants, or "fabs," in China for sound business reasons. China represents a colossal market for everything from smartphones to automobiles, and having local production reduces costs and streamlines logistics.

These fabs are not just for serving Chinese customers. They are integral nodes in a global network, producing vast quantities of memory chips (from Samsung and SK Hynix) and logic chips (from TSMC) that are essential components in products assembled and sold worldwide, including back in the U.S. It's a deeply integrated system that has, until recently, powered the global tech economy.

What is the new US policy and why the change?

The policy being considered would revoke the "Validated End User" (VEU) status for these allied-run fabs in China. VEU status acts as a trusted-partner "fast pass," allowing these facilities to receive US-origin goods—like highly specialized manufacturing and testing equipment from American firms such as KLA Corp. and Lam Research—without needing to apply for a license for every single shipment.

Revoking this status would entangle these advanced fabs in a web of bureaucratic red tape, creating significant operational delays and uncertainty. The rationale behind this potential move is Washington's desire to tighten its technological blockade against Beijing. Even though these fabs are run by allies, US hawks worry about the risk of advanced American technology or manufacturing know-how "leaking" to Chinese entities, thereby aiding China's military and technological ambitions. As a White House official noted, the move is being considered as "another tool in our toolbox" should the current trade truce with China falter.

What is the dilemma for Samsung, SK Hynix, and TSMC?

These companies are now in a nearly impossible position. Their most advanced manufacturing processes are completely dependent on American-designed software and sophisticated US-made equipment. Without access to these tools, their multi-billion dollar Chinese facilities would eventually become obsolete, unable to be maintained or upgraded. The US market also remains a critical source of revenue.

At the same time, pulling back from China is not a simple option. It would mean abandoning massive capital investments, disrupting established supply chains, and ceding a huge and lucrative market directly to domestic Chinese competitors. As one industry source told Reuters, making it harder for these multinationals to operate in China is simply a "gift" to their local rivals like Huawei.

The irony is that this pressure comes as these same companies are investing tens of billions of dollars to build new fabs on US soil, in places like Arizona, at the explicit encouragement of Washington to onshore manufacturing and create a more "resilient" supply chain. They are being asked to simultaneously invest more in the US while their existing global operations are being targeted by US policy.

How does this fit into the broader tech rivalry?

This move marks a significant escalation in the "weaponization of the supply chain." The US is no longer just restricting the sale of its most advanced chips (like high-end Nvidia GPUs) to China. It is now using its control over critical chokepoints—namely, the manufacturing and testing equipment that only a handful of US firms make—to exert control over the actions of third-country companies operating within China.

This strategy effectively turns allies into geopolitical pawns. Their commercial decisions and factory locations are no longer just business matters; they are levers in the great power competition between Washington and Beijing. The policy forces a choice: align completely with US strategic objectives, potentially at great economic cost, or risk being cut off from the technology that underpins their entire business. This dilemma is reshaping the landscape for global tech manufacturing, forcing a worldwide rethink of supply chain vulnerabilities in an era of intensifying rivalry.

Reference Shelf:

US may target Samsung, Hynix, TSMC operations in China, sources say (Reuters)

Why ASML and TSMC Are the Chokepoints in Global Chipmaking (ARPU)

What Huawei's Comeback Says About US-China Tech War (Bloomberg)

Nvidia CEO Urges US to Ease AI Curbs After China ‘Failure’ (Bloomberg)