Alliance Against Beijing: A Milestone In Containing China

 "The US, Japan and the Netherlands join forces to cut off China's access to advanced semiconductors. Beijing's retaliatory options are limited.

When the United States announced unprecedented export restrictions to hit China's chip industry last October, it went it alone. Joe Biden's chief export controller at the Department of Commerce, Alan Estevez, said at the time that it was adapting to the evolving threat from Beijing - and continued efforts "to outreach and coordinate with allies and partners".

What Estevez didn't say at the time, however, was that Washington had been negotiating behind the scenes for months with the Netherlands and Japan to bring two of the most important locations for chip machine manufacturers on board. But the talks were extremely tough. Almost four months later, the three countries now seem to have reached an agreement.

The USA, the Netherlands and Japan have not yet announced much about the deal which, according to media reports, they made last Friday in Washington. 

But one thing seems clear: China will be cut off from one of the most important high-tech products from Western production, machines for manufacturing the most powerful computer chips in the world. They are built in the Netherlands by market leader ASML and its Japanese competitors Nikon and Canon.

ASML said, "To our understanding, steps have been taken towards an intergovernmental agreement related to advanced chip manufacturing technology." Nikon and Tokyo Electron initially did not comment. This is considered an indication that details of the government agreements are still open.

Politically, the agreement is a milestone. Washington had already started to put pressure on the Netherlands to stop selling chip manufacturing technologies during the Trump administration in 2018 - apparently successfully. 

Shortly after a visit by Prime Minister Mark Rutte to the White House, the Dutch government decided not to renew the export license to China for so-called EUV machines, on which ASML has a monopoly. Using extreme ultraviolet light, these machines can burn billions of transistors onto microchips, the distance between the lines being only three to seven millionths of a meter.

Fragile Supply Chains

A year ago, Washington wanted to extend the ban from the most modern to the predecessor model, the so-called DUV machines. The Biden administration justified this with a threat to national security - with possible military applications, from drones to ICBMs. However, such semiconductors are also used in cars, computers and mobile phones and are already in short supply, which is reflected in longer delivery times for cars. A blanket export ban to China would also have severely restricted the business of the Dutch group ASML, each individual machine costs 160 million euros.

Prime Minister Rutte therefore formulated three conditions for the negotiations. "We agree with everyone who says that Western high technology in semiconductors should not be used everywhere in the world," he said last week in an interview with the F.A.Z. and some other international media. "Secondly, we must maintain the technological leadership of the West, Europe, America and Asia." Thirdly, however, one must "think of the supply chains, because many chips are used in refrigerators, cars, televisions that are not high-tech". There was a struggle for this third point.

Even if the details are still uncertain, only some of the DUV machines seem to be affected by the export ban. The chip sanctions unilaterally imposed on China by the United States in October anyway only block the export of machines and technology for chips of the latest technology generation. Older chips, which are widely used in cars, are not affected by the October sanctions.

The bold action taken by the Americans against China in the struggle for technological leadership initially caused concern among other chip manufacturers such as Taiwan, Singapore and South Korea. The corona pandemic has shown how fragile the highly complex supply chains are. In addition, China's threats against Taiwan have fueled concerns that a military conflict could cut off the global economy from leading semiconductor maker TSMC, which makes a quarter of the world's most advanced chips. America has therefore set itself the goal of becoming more independent: In August, President Joe Biden signed a bill that provides more than fifty billion dollars for the domestic semiconductor industry.

Since last year, his government has been making intensive efforts to ensure that the Netherlands and Japan on America's side in the technology dispute with China. After numerous talks with senior officials, the bosses themselves, Prime Minister Rutte and Japanese Prime Minister Fumio Kishida, were with Biden in January. From the USA's point of view, the Netherlands and Japan not only have to be included under the sanctions umbrella because they are leaders in the construction of machines for state-of-the-art chips, but also so that American companies are not disadvantaged when exporting simple machines.

Fear of industrial espionage

According to the Americans, Beijing wants to use technological progress for "military modernization" - such as artificial intelligence in military technology and improved control of weapons, including weapons of mass destruction. In addition, modern technologies are used in China without regard to human rights, including to monitor its own citizens. The White House has not yet commented on the details of the current deal. According to media reports, this could remain the case because of the sensitive topic; Accordingly, Tokyo and The Hague fear retaliatory measures from Beijing.

So far, China has hardly reacted to the American export bans of October, although they have considerable consequences for Beijing, especially after the agreement reached at the weekend. "If the restrictions take effect, they will prevent China from catching up in advanced semiconductors in the long term," says an industry expert in Beijing. Nevertheless, China has not announced any substantial new semiconductor policy within the past year and a half. The government has only bad options to choose from. "They can mobilize the whole country to develop cutting-edge semiconductor technology themselves, but that would arguably destroy the globalization goals of their leading companies."

The range of retaliatory measures is also limited. In 2021, China passed a law to ward off foreign sanctions. However, it has not yet been used against technology companies. "You need as many friends as possible in the technology sector," says the industry expert. Nevertheless, he expects measures against Japan. "It will become more difficult for Japanese companies to operate in China."

Why have the Netherlands and Japan now sided with Washington? Emily Benson, an export control expert at the Washington think tank Center for Strategic and International Studies, sees various reasons for the two countries' complacency. On the one hand, they feared industrial espionage, the theft of intellectual property by China. "Many companies have grown tired of this behavior on the part of the Chinese." In addition to economic considerations, multilateralism also plays a role, "the question of what rules we set for technologies and trade," says Benson of the F.A.Z. Countries wanted control over fields they saw as vital to their national security.

A new "Iron Curtain"?

For the Dutch and Japanese, that means taking a similar approach to America - "namely, taking a harder line on China." But "we need to know more details first to say if that was a victory for the Americans." Benson believes it could be months before concrete measures take effect, partly because the Netherlands would have to adapt its export laws. ASML also said it does not expect the measures to have "a significant impact" on estimates for 2023.

Japan stands with the United States in assessing the risks of a technologically empowering China. It was only this year that the country put the topic on the agenda of companies with a view to China with new rules and requirements for economic security. The concerns in Tokyo about far-reaching export restrictions come from the economy. The country plays a major role in machinery and materials used in semiconductor manufacturing, with companies such as Tokyo Electron and Nikon.

China is also Japan's most important trading partner, ahead of the United States, and could respond to the export restrictions with trade sanctions. 

Political relations between the two countries are strained. A summit between Xi Jinping and Kishida, which Tokyo had hoped for, did not take place before the 50th anniversary of the establishment of diplomatic relations. 

Trying not to irritate Beijing unduly is one reason why Tokyo is keeping to a minimum about the deal with the United States.

The Dutch newspaper "de Volkskrant" compared the agreement to a new "Iron Curtain", now made of silicon. Of course, the picture is flawed, because the West is pulling up this curtain, not the East, and it is supposed to shield China – since the recent sanctions on Russia, no machines for semiconductor production have been allowed to be exported to Russia anyway. 

However, it describes quite well that it is actually about geopolitics: namely containing China's rise, economically and militarily. 

Experts say that without Western help, it will take decades for Beijing to be able to build today's best microchips itself - and they would then be obsolete."

 

These sanctions are huge mistake. Does anybody believe that China will switch to production of technologically obsolete junk for the world? China is big. They do not need to direct all country's efforts for production of some stupid UV machines. The West just lost half of the world as a market for their technology.