The US Congress is rolling back proposed legislation that would place restrictions on the use of Chinese-made chips by the government and its contractors, after  companies argued that the measures would raise costs.

While the draft legislation still provides for restrictions to be enacted, contractors now have five years to comply with them, rather than the two years stipulated in an earlier version of the proposal, and the language of the new draft leaves room for waivers to the restrictions under certain circumstances.

In September, Senator Chuck Schumer, a Democrat from New York, and Senator John Cornyn, a Republican from Texas, announced a provision in the National Defense Authorization Act (NDAA) for fiscal 2023 that would restrict federal agencies and contractors from using semiconductors and chips from China's Semiconductor Manufacturing International Corporation (SMIC), Yangtze Memory Technologies Corp (YMTC), and ChangXin Memory 703 Technologies (CXMT).

The provision was modelled on the 2019 NDAA, which prohibited the US government and its contractors from using telecommunications or video surveillance equipment from China's Huawei, ZTE, Dahua, Hytera or Hikvision.

The provision on Chinese semiconductor makers, however, was not included in the House of Representatives version of 2023 NDAA. In an explanatory statement issued on Tuesday, the US Senate Armed Services Committee noted that the Senate and House have now negotiated an agreement wherein NDAA restrictions on imports from the Chinese chip makers will not be enforced until 2028. After that time, waivers on those restrictions may still be issued by the US Secretary of Defense, the National Security Director and other top government officials if they deem that waivers are needed for national security interests.

"For the purposes of waivers that may be issued," according to the statement, "critical national security interests of the United States may include protecting the Nation's economic security and its technological competitiveness relative to strategic competitors."

US trade groups protest Chinese chip import restrictions

In November, a coalition of defense, tech and business trade groups had written a letter the Senate Armed Services Committee, arguing that the original Senate restrictions on Chinese chip imports were vague and would ultimately impose "tremendous compliance burdens" on government contractors without any proven benefits to US national security.

Meanwhile, however, the NDAA is not a done deal. The latest version, agreed on by the House and Senate negotiators, still needs to be voted on by all Congressional representatives, after which it goes to President Joe Biden for approval. The congressional vote is expect this week.

The issue of chip manufacturing has been a focal point for the US government in recent months, as geopolitical tensions with China have risen at a time when the US is only producing 12% of the world's supply of chips, down from more than 30% 20 years ago.

In August, President Joe Biden signed into law the CHIPS and Science Act of 2022, providing$52.7 billion for manufacturing incentives in an attempt to increase the percentage of microprocessors produced in the US by closing the cost differential with other countries such as Taiwan, South Korea, and China. In those nations, the governments are already subsidizing semiconductor manufacturers.

Chip manufacturers can begin seeking to use tax breaks and funds to offset construction and other costs beginning next year.

Speaking in October, Gaurav Gupta, Gartner's vice president for Emerging Technologies and Trends, said that although the money, tax breaks, and other incentives in the CHIPS Act is pocket change for leading manufacturers, the incentives do demonstrate that the US government is serious about supporting the industry.

However, Gupta warned that more is needed, saying "this has to be a more consistent policy from the US government through the next decade and beyond if they're really serious about bringing back more chip manufacturing here in the US."