The United States has reached an agreement with the Netherlands and Japan to restrict the export of advanced chip manufacturing equipment to China, marking an important step towards implementing the new export control regulations unilaterally enacted by the U.S. in October. The new rules impose sweeping restrictions on technology exports to China, in a bid to contain China’s semiconductor industry and further widen America’s tech lead.
The new regulations introduce a bullying clause in the form of “long-arm jurisdiction,” which empowers the U.S. to control products produced outside of China if they are developed or manufactured using U.S. software or technology. The targeted product will be subject to U.S. export control, and the exporter will have to apply for an export license from the U.S.
Because the U.S. controls the key segments of the semiconductor technology chain, this translates into a dominant position in semiconductor manufacturing equipment, electronic design automation (EDA) and intellectual property, making U.S. technology essential for the entire semiconductor supply chain and gives the U.S. jurisdiction across the whole supply chain, including all types of semiconductor products and semiconductor machinery produced in foreign countries.
Under the trilateral agreement, Japan and the Netherlands will restrict exports of advanced chip manufacturing equipment to China. The Netherlands will restrict the export of deep ultraviolet (DUV) lithography equipment, with the ban extending to Dutch lithography shipments to China — from high-end chip equipment EUV lithography equipment to midrange and low-end chip equipment DUV lithography equipment. This will hit Chinese chip manufacturing companies hard and set back efforts to independently manufacture high-end chips.
The new regulation is 130 pages long, with intricate content. It contains unprecedented restrictions in breadth and depth covering the entire supply chain process, from related technology and equipment to professional personnel. Some key points follow:
First, it restricts the shipment of high-end chips to China. This will hinder China’s R&D in AI, quantum information and supercomputers, which are critical in areas such as bioengineering and aerospace.
Second, it restricts the sale of semiconductor equipment to Chinese companies. A case in point is that the Netherlands will ban the sale of DUV lithography machines to China. As it is difficult for Chinese companies to find a substitutes in the short term, their production and R&D will be hindered. If productions were to grind to a halt, they risk losing market share.
Third, it bans overseas trial production of chips designed in China. When Chinese chip companies come up with high-performance chip designs, they cannot perform trial production overseas, let alone enter mass production.
Fourth, it facilitates the blacklisting of Chinese entities under the UVL. Entities must prove non-military end-use of products within 60 days; otherwise, they will be placed on the entity list.
Fifth, Americans are prohibited from providing assistance to Chinese semiconductor development. The definition of a “U.S. person” is broad and includes not only U.S. citizens and legal entities but also permanent resident aliens and others. At the time the new regulations were enacted, a number of Chinese semiconductor company executives and technical professionals were Chinese-Americans or green card holders.
The new regulations will also have a disruptive effect on the talent pool and technology development in the Chinese semiconductor industry, and will frustrate the production and development process. In addition, the U.S. Chip and Science Act of 2022, which was introduced in August, stipulates that American tech companies that receive funding under the act are barred from building leading-edge chip factories in China for 10 years.
The White House is reportedly working on plans to establish a foreign investment screening system to prevent private U.S. capital from supporting Chinese advanced semiconductor companies. When combined with the new legislation, this will form a control mechanism spanning industrial and supply chains.
In a nutshell, the new regulation is poised to have broad-based and far-reaching repercussions:
First, it will disrupt the global semiconductor supply chain. The global chain is made up of very complex, often overlapping, production networks, forming numerous and complex dependencies in different locations. Some countries have more control over particular parts of the network than others. Yet, no single country dominates the entire network. As a result, the network as a whole operates smoothly under market rules. But the new regulation will upset this balance and will risk disruption.
Second, the new regulations are a double-edged sword. While they are set to hit the Chinese semiconductor industry, they will also take a toll on the U.S. semiconductor industry and beyond. China is the world’s largest market for semiconductor chips, accounting for about one-third of global sales. Restricting sales will not only eat into the revenues of leading chip companies in Taiwan, the U.S., Japan and South Korea, but also hit U.S., Japanese and Dutch semiconductor equipment manufacturers. In the long run, it could also impede R&D.
In the meantime, the new regulations use discriminatory country-specific policies to generalize national security and abuse export control measures. This runs counter to the World Trade Organization’s principles of free trade and non-discrimination. On export controls, the U.S. classifies export destinations based on the proximity of bilateral diplomatic ties, and China belongs to Group D — the one that is subject to strict controls.
In general, the U.S. export controls are spearheaded by country-specific policies in the form of a vast legal system of discriminatory policies against countries and regions that have different values. Export controls are gradually weaponized, as a key tool to flex U.S. hegemonic muscle and a direct and effective means of coercion. Also, the new regulations seek to stall the growth of China’s semiconductor industry.
It all boils down to halting China’s advancement and blocking its pathways upward, through its ban on the sale of advanced chips and high-end semiconductor manufacturing equipment to China. It also restricts the involvement of U.S. professionals and funds for R&D, which will place China in a stagnant situation in the fourth technological revolution represented by artificial intelligence, quantum information, high-end computing, big data and the internet of things.
That said, these U.S. attempts to contain China’s semiconductor development will ultimately fail. In fact, China has thrived in spite of U.S. containment efforts and embargoes. After the People’s Republic of China was founded, the U.S. issued two bills to impose sweeping sanctions and embargoes on China’s aerospace industry to stop its space development. Since then, China has embarked on a path of independent research and development. Chinese scientists have developed and built their own landmark space projects such as the Chinese space station, the BeiDou satellite system and the Tianwen-1 Mars probe.
ASML CEO Peter Wennink once said that the laws of physics in China are the same as everywhere else: The more pressure you put on them, the more likely they are to redouble their efforts to build lithography equipment that can rival ASML. We are confident that China will break the “bottleneck control” of the U.S. and replicate its success in the aerospace sector and in semiconductors, so that China’s semiconductor industry will no longer be at the mercy of others.
