Chip curbs: Biden has outdone Trump in forcing the world to align on China

President Joe Biden came to office pledging to abandon Donald Trump’s with-us-or-against-us approach to China. Instead, he’s forcing US partners to pick sides in a deepening global technology standoff.
 

Sweeping US curbs announced last month on the sale of semiconductors and chipmaking equipment to China mark a step change in the Biden administration’s approach to its chief geopolitical rival. That’s not just a challenge to Beijing, but also asks tough questions of allies — and presents Washington with a dilemma over how far it’s willing to squeeze them to comply.

As Biden prepares to hold his first face-to-face meeting as president with Xi Jinping, the export controls loom large as a declaration that the US isn’t prepared to let China advance in a range of cutting-edge technologies that could threaten America’s status as the world’s pre-eminent power. That new reality spells more trouble ahead for US-China relations, which are already veering into dangerous territory over Taiwan: Beijing denounced the measures as US overstretch to “wantonly hobble Chinese enterprises.”  

But the chip controls are also causing friction with key allies.

In the Netherlands, home of ASML Holding NV, which has a virtual monopoly on a type of machine needed to make the most advanced chips, people familiar with the talks described the US as acting like a bully. Given ASML’s role as a linchpin of the $580 billion global chip industry, Dutch Prime Minister Mark Rutte is due to visit semiconductor giant South Korea this week, when he’s said export controls will be high on the agenda.

The mood in Japan’s government, meanwhile, was said by an official to be one of bemusement that its sovereignty could be so disregarded. All the people asked not to be named as the discussions are ongoing.

“This package is replete with unilateral measures with very big assumptions that partners will follow the US’s lead,” said Reva Goujon, director of China corporate advisory at Rhodium Group. The “game changer” controls send an unmistakable signal of intent to Beijing while containing an implicit threat for partners, she said, since “the US is willing to go extra-territorial if they consider it important enough.”

The new export controls leave American chip companies at the mercy of the US Commerce Department’s Bureau of Industry and Security to grant a license to sell certain advanced products in China. Since early October, American officials have repeatedly said that if allies do not align with Washington on the latest rules, they could ban sales of foreign chip equipment that contains even the smallest amount of US technology.

The real test for the US is whether its allies and security partners around the globe will play along, particularly as the Biden administration considers expanding the restrictions — and that kind of acquiescence isn’t guaranteed, according to interviews with government and industry officials who asked not to be named to be able to speak freely about a matter that is still under discussion.

US officials have repeatedly said export control rules will lose their effectiveness over time if partners don’t join in, but by effectively forcing governments to comply or face potential penalties, the US is alienating swing nations in Europe and Asia that are less willing to confront Beijing, whether for political or economic reasons. Consequently, there’s no sign of an imminent agreement.

US Secretary of Commerce Gina Raimondo told American firms that they will have to wait as long as nine months before Washington can seal a multilateral deal and level the playing field for them. Senior US officials including National Security Council Senior Director for Technology and National Security Tarun Chhabra are visiting the Netherlands for related talks this month, but an accord isn’t expected to come out of it. 

The Biden administration believes it will be able to persuade the Netherlands and Japan because they share the US’s concern for national security, according to a person familiar with the talks. The negotiations will be difficult but the administration is optimistic it can reach a deal, though the timeline is unclear, according to the person. The tone of the talks have shifted since Oct. 7, after the White House made clear it’s willing to disadvantage American companies in the short term to further the countries’ joint national security interest.

A spokeswoman for the National Security Council declined to comment.

Aside from actual chips, five companies dominate the global market for the equipment needed to produce them: Applied Materials Inc., Lam Research Corp. and KLA Corp., all of the US; Japan’s Tokyo Electron Ltd.; and ASML.

The Netherlands is coordinating with South Korea, Japan and the US, Rutte told Bloomberg Television this month when asked about US pressure to halt sales of ASML’s older machines to China. An effective ban is already in place on its cutting-edge “extreme ultraviolet lithography,” or EUV, machines, since the Dutch government has not granted ASML a license to ship to China. 

While the Netherlands has concerns about many aspects of doing business in China, there’s a need to maintain dialogue with the world’s No. 2 economy, Rutte said. “We should not be naïve,” he added. “Discussing the issue of tech and also the export of the latest technology itself is a legitimate debate which we have amongst our partners.”

The countries the U.S. needs cooperation from the most have largely stayed mum on the issue except for acknowledging ongoing communications with Washington and other stakeholders.

But behind the scenes, frustrations are palpable. People familiar with the Dutch government’s thinking said it was easy for the US to implement controls on China, but they leave the Netherlands squeezed between the two and having to navigate an extremely sensitive path. ASML hinted at resistance in an October earnings call, when Chief Executive Officer Peter Wennink said that “as a European based company with limited US technology in our systems, ASML can continue to ship all non-EUV lithography systems to China out of the Netherlands.”

In fact, early this year Washington almost got allies to agree to a deal, albeit with looser restrictions than were announced last month, only for Dutch and Japanese officials to walk away. Japan and the Netherlands were ready to formalize multilateral controls through the so-called Wassenaar arrangement that would ban China’s access to equipment capable of making 5-nanometer chips, or one generation behind the current most advanced technologies, but the US then wanted to raise that threshold to more mature technologies that would lead to a bigger impact on chip companies’ China sales. That’s when talks collapsed.

Since then, Japan and the Netherlands have resisted the US demand on chip curbs and tried to convince others not to give in. ASML and Tokyo Electron have been lobbying their respective governments to stand firm.

ASML declined to comment for this story, while a Tokyo Electron spokeswoman said that as a private company it is not in a position to comment on government actions. Rutte’s office declined to comment. 

In Japan, there is strong opposition within Tokyo Electron and other equipment makers to caving in to US pressure that would hurt their lucrative business in China, where they compete with Applied Materials and Lam Research. Rather than giving a blunt refusal, the government in Tokyo is simply not acting on the US request, relying on Japan’s reputation for time-consuming bureaucracy.

Japan has long implemented strict export controls through international coordination, and “we will continue to take appropriate measures, taking into account trends in regulations in other countries, including the US,” the Ministry of Foreign Affairs said in response to questions on the government’s stance.  

There’s a sense in Japan that US companies will manage to continue to do business with China while others suffer. One complaint was the controls will spur Beijing to advance its chip technology, leaving the US and China strengthened and everyone else at a disadvantage.

Yet American equipment suppliers are livid. 

Applied Materials, Lam Research and KLA helped Washington craft a detailed list of very targeted items that they identified as choke points for Beijing’s development of chip technologies after meeting with Raimondo in July to talk about how to limit China’s capabilities without hurting the US companies’ market shares. 

They were promised the government wouldn’t move ahead with the controls before having allies onboard. However, the government officials failed to convince partners or inform the chip firms of their plans to implement the measures in October. Just days before the announcement, they were no longer picking up calls from the companies concerned. The firms are now skeptical of a deal within the nine-month timeframe cited by Raimondo. All three companies declined to comment for this story.

For the China hawks within the Biden administration, early October was seen as the only window they had to unveil new restrictions before it got too close to the meeting between Biden and Xi at the G-20 summit in Indonesia. The two leaders will meet with the chip curbs still reverberating worldwide: Singapore’s Foreign Minister Vivian Balakrishnan said Nov. 9 that Washington’s export controls amount to “all but a declaration of a technology war.”

The measures are all the more striking given the extent to which Biden had sought to reassure nations that his administration would avoid the kind of pressure Trump had exerted on them to steer clear of Chinese products, notably by calling for bans on Huawei Technologies Co. in 5G mobile networks. 

The early talk from Biden officials of outcompeting China now extends to looking to use the US’s dominant economic position to actively weaken adversaries. That’s a toughening of its stance that is unlikely to be diluted even if the Republicans take control of the House, since a hard line on China is one of few areas of bipartisan agreement in Washington.

 The chip measures fire the gun on what US National Security Advisor Jake Sullivan has termed a “decisive decade” in competition with China, with a focus on computing, biotechnology and clean energy tech. That raises the prospect of further export controls in the future. For his part, Xi has vowed to “resolutely win the battle in key core technologies.”

All of which means life will become harder for nations like South Korea, India, Singapore and Malaysia that are already treading a precarious line balancing constructive relations with Washington and Beijing, said Ja Ian Chong, an associate political science professor at the National University of Singapore.

 “It’s very difficult for countries caught in this crossfire to extricate themselves, whether they’d like to choose sides or not,” Chong said.