In October 2022, the United States imposed sweeping controls on exports of advanced semiconductors and semiconductor manufacturing equipment to China as part of a new strategy to extend its technological edge, protect its competitiveness, and safeguard its national security – an approach first articulated by U.S. National Security Advisor Jake Sullivan in September 2022. The restrictions — which were imposed unilaterally — represent a paradigm shift in U.S. export control policy toward explicit containment of China’s technological advancement.
The Biden administration, recognizing that unilateral action could potentially undermine the long-term efficacy of the controls, worked to enlist allies in the months that followed. Biden succeeded in late January when the Netherlands and Japan — two critical players in the global semiconductor supply chain — struck an agreement with the U.S. to curb the export of chipmaking equipment to China. The agreement holds both symbolic and substantive value, demonstrating unity among allies and mitigating costs imposed on U.S. companies that lost access to the Chinese market. As controls tighten, questions are growing as to how China might respond.
Why Achieving a Multilateral Deal Was Important
The U.S. used its foreign direct product rule (FDPR) to apply several of the controls in October extraterritorially. The FDPR allows the U.S. government to extend export controls to certain foreign products that are made using American technology, enabling the Biden administration to compel foreign industry leaders to comply with restrictions.
ASML in the Netherlands is currently the sole supplier of advanced extreme ultraviolet lithography (EUV) machines needed for producing the types of advanced chips the U.S. is primarily targeting. Moreover, leading chip manufacturers are now forbidden from fabricating certain Chinese-designed semiconductors. Coupled with American dominance in critical design software and equipment, this instantly severed China’s access to vital segments of the semiconductor supply chain, dealing a major blow to China’s chip industry.
The Biden administration’s decision to act unilaterally, however, came with longer-term risks and costs. First, it generated friction with U.S. allies — chiefly, the Netherlands — which took a critical stance in November, arguing that Washington should not dictate the terms of export controls on China. This undermined Biden’s broader ambition to form a coalition of allies to collectively confront Beijing, which ultimately requires consultation and compromise.
Second, the lack of a comprehensive multilateral agreement also overplayed the United States’ position in the semiconductor supply chain, which posed a risk of incentivizing foreign companies to “design out” U.S. components, replicate its technology, and establish independent supply chains to cater to the Chinese market. Such a scenario playing out over the medium-to-long term would erode the U.S. market share and diminish its leverage over China.
In light of this, the U.S. lobbied major semiconductor-producing countries for months to enact their own China-focused export controls. The Biden administration succeeded on January 27 after Japan and the Netherlands agreed to a deal restricting China’s access to advanced semiconductor manufacturing equipment.
Current State of Play
Japan and the Netherlands are currently preparing their own controls in accordance with the deal. While details of the restrictions remain private, it is apparent that export controls will be imposed on both cutting-edge EUV systems and less advanced deep ultraviolet lithography (DUV) systems, which are often used to produce chips for automobiles and other consumer products.
In March, Dutch Trade Minister Liesje Schreinemacher announced in a letter to parliament that the Netherlands would expand its export control list to include DUV machines by this summer. Three weeks later, Japan announced it would move to restrict exports of 23 types of semiconductor manufacturing equipment. The Biden administration is also reportedly coordinating with both countries to further tighten the controls it imposed last October, with an announcement expected any day.
China has yet to substantively respond to the export controls targeting its chip industry. This is likely for two reasons. First, China understands that responding to the controls with its own punitive measures — such as through boycotts or export controls — would be self-defeating. Doing so risks prompting the U.S. and its allies to double down, further cutting Chinese firms off from key inputs.
Second, current loopholes in U.S. export controls appear to have softened the blow of the controls on some chip-dependent industries in China. Reports indicate that Chinese AI companies are using cloud providers and rental arrangements to access processing power provided by advanced Western chips. Others appear to be utilizing subsidiaries to purchase chips. In the near term, China is likely to continue to look for ways to circumvent restrictions while doubling down on building its own domestic chip design and manufacturing capabilities. It also may begin to target U.S. chip firms where foreign alternatives exist, signaled recently by the launch of a cybersecurity investigation into Idaho-based memory-chip maker Micron. Although China has not reached the tipping point of retaliating in areas where it has significant leverage, such as rare earth mining and processing, the tightening of restrictions and closure of loopholes may eventually push them to do so.