Towards a Chip-Alliance?

Photo: Fabricio Sciami / Flickr / CC BY-SA 2.0

On January 27^th, news agencies reported that the Netherlands and Japan had agreed to join the US in common efforts to restrict China’s access to key technologies in the semiconductor supply chain.

The decision came after long-lasting high-level meetings between national security officials, securing a symbolic win for the Biden Administration. The current set of US export controls on advanced technologies, including the interim final rule approved on October 7^th, signals its commitment to preserving US’ technological edge over China no matter the economic or political price. In the words of National Security Advisor Jake Sullivan, “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we [the US] must maintain as large of a lead as possible.”

The decision of the US to unilaterally escalate the technological dispute with China was not well received, which lamented that the enforcement of the export controls did not follow previous consultations with private actors and allied countries. Rather, it originated from the perceived urgency to contain China’s rise in the technological domain and halting China’s ability to use cutting-edge microchips to produce advanced military systems. The position was further reinforced by the Commerce Department’s Bureau of Industry and Security (BIS), which framed the adoption of the export controls as a matter of national security .

The decision of the Dutch and Japanese policymakers to join the export controls partially alleviates concerns about America’s inward-looking techno-nationalism.

The importance of the Netherlands and Japan

In practical terms, the forming of a trilateral “Chip-Alliance” would certainly further impede China’s technological rise. The Netherlands and Japan are home to some of the most advanced enterprises in the semiconductor industry. The Dutch ASML Holding NV and the Japanese Tokyo Electron Limited represent vital nodes of the semiconductor global supply chain and China relies on them and a handful of other companies in its efforts to scale up its own domestic capabilities. Preventing these tech companies from selling their machines and products to China would substantially compromise its supply chain and, according to some, its ability to produce competitive semiconductors domestically in the short term.

From the perspective of the military applications of semiconductors, there is some skepticism that these measures will have any immediate impact on China’s defense industrial base. But, in the longer term, not being able to access the most high-end semiconductors might impact China’s supercomputing power, which is an important element in building weapons.

Further negotiations remain

Neither the Netherlands nor Japan have released detailed information about the terms of the agreement yet, and their representatives have so far refrained from further commenting on the issue. Such prudence signals the high sensitivity of the matter and suggests that further negotiations concerning the implementation of the restrictions could last months, if not years. Since “the Devil is in the details”, the scope and significance of the agreement will indeed be determined by these future negotiations, which are faced with some key challenges.

Firstly, the three countries will need to agree on the terms of the agreement. Certain aspects of the controls, such as the export of chip-making equipment, remain highly contested. For instance, the Netherlands already prevented ASML from selling to China its most advanced printing machines, the extreme ultraviolet lithography systems. The US is allegedly advocating for further restrictions targeting deep ultraviolet lithography, a less advanced technology that nonetheless serves to produce high-level chips. The Dutch government has already stressed its agency by arguing that it will not simply transpose the US rules. Intense discussions on this and similar issues are expected before the actual implementation of the restrictions, which will determine whether a “Chip-Alliance” is truly born or not.

How will China respond?

Secondly, the Dutch and Japanese governments will need to make considerations about their long-term strategic interests as both countries have strong economic interests in China. For instance, some report that the Semiconductor Equipment Association of Japan estimated China to account for about 33% of the total Japanese-made manufacturing equipment. Overall, access to China’s internal market remains appealing to international companies. Both the Netherlands and Japan will be forced to decide to what extent they intend to decouple from China, potentially leaving their market shares to other competitors.

Thirdly, the enforcement of trade restrictions is likely to face Chinese countermeasures. China already announced that it would initiate a lawsuit against the US restrictions with the World Trade Organization. China’s response is likely to interest the diplomatic level as well, with the risk of further compromising the already difficult relationships with the US and its allies. As China’s presence in the Global South grows, the Netherlands and Japan will also need to mitigate the risk of being partially excluded in other markets, where China might better leverage its geopolitical influence. Furthermore, China has since announced a USD 143 billion package to boost its domestic semiconductor industry.

The role of the EU

Lastly, other relevant actors remain so far excluded from the agreement, such as Taiwan and South Korea, which are crucial actors in the semiconductor supply chain. Similarly, the European Union recently signaled its intention to play a role in the Chip-War. EU Internal Markets Commissioner Thierry Breton urged a closer EU-US alignment and called for the reduction of collective reliance on Asia. The Commissioner stated that the EU and the US need to work hand in hand to ensure their “common security in technology”. The EU’s push towards a regional decoupling from Asia points to the internal division of like-minded states, which risks impeding an effective and coordinated move to counter China’s assertiveness. A multilateral “alliance”, rather than fragmented bilateral and trilateral agreements, remains the preferable solution.

• This text was published in Norwegian by Morgenbladet 5 February 2023: Nye akser i databrikke-krigen.