To say that there’s some confusion about new U.S. rules on semiconductor technology exports to China would be an understatement.
Two companies, ASML and Biren Technology, have already challenged the new rules, in different ways.
ASML, the leader in semiconductor production line technology, said the rules don’t apply because it is a European company and does not use U.S. technology in its products.
It also said it’s still reviewing the rules for clarity and intends to fully abide by relevant laws.
Biren, a graphics chip designer based in China, initially said its chips did not meet the criteria of the U.S. ban and would continue to have its chips made by manufacturing partner, TSMC.
TSMC initially agreed, according to media reports, but after further review, said it would not manufacture the chips for Biren, as they appear to the meet U.S. criteria for a ban.
It’s easy to be confused by new rules. It’s also difficult to tell a customer that you cannot accept their money anymore. It hurts the relationship and the wallet.
Money is a key hurdle the U.S. faces in its quest to deny advanced semiconductor technology to China. The market for semiconductor chips and production line machinery in China is massive, not to mention the chip factories, R&D labs, engineering support centers, supply chains and other investments foreign firms have made there over the past few decades.
China consumed US$186.5 billion of semiconductor chips last year alone, mostly imported. Only 6.6 percent were made domestically, according to IC Insights.
In semiconductor production line machinery, China was the biggest and fastest growing market in the world last year, up 58% year-on-year to $29.6 billion, trade association SEMI reported.
A small but lucrative amount of these markets, certain types of advanced chips and factory machines, are affected by the new regulations. No wonder companies want to be certain they understand the rules before burning bridges and losing sales.
In ASML’s case, its statement that the rules may not apply because it’s a European company with no U.S. technology is a problem.
The U.S. must work with allies on semiconductor export rules, or the rules will fail. Failure would mean China could keep using advanced semiconductor technology to further modernize its military.
Failure to bring allies onboard could also see U.S. companies lose billions of dollars in sales to companies from other places good at semiconductors, including Europe and Japan.
Certainly, ASML, from the Netherlands, should not have to follow U.S. laws. Allies need to work together. The Netherlands will make its own determination on the US-China matter, and create its own export regulations.
There is already an international pact for such cooperation. The U.S. and its allies in 1996 agreed on an export framework aimed at arms control, including items that appear harmless but can be used for military purposes, called ‘dual-use’ goods.
The pact is called the Wassenaar Arrangement because – interestingly enough – it was established in Wassenaar, a town in the Netherlands.
Semiconductors have always been considered dual-use goods because many chips can be used in both peaceful and hostile products: cars and battle tanks, airplanes and missiles, smartphones and military networks, for example.
In the case of China, the U.S. fears supercomputers armed with the latest GPUs and AI chips (graphics processing units and artificial intelligence chips) are helping China model and improve a range of military capabilities, from hypersonic missiles and nuclear blasts, to battlefield operations, and more.
U.S. export controls are aimed at these specific cutting-edge chips and the production line machinery required to make them. Bans on exports of the most cutting-edge chip tools have been in place for decades, in order to ensure China remains a few generations behind in chip production technology.
The new export bans include a wider range of chips and equipment. The U.S now needs to enlist partner members of the Wassenaar Arrangement to work together.
Some key tenets of the Wassenaar Arrangement:
- Prohibit the sale of weapons or sensitive dual-use items to high-risk countries
- Adhere to international nonproliferation norms and guidelines
- Implement fully adequate exports controls
Countries do not always agree on what items should be added to export control lists, and sometimes business interests can interfere with sound policy decisions.
It’s also important to understand that the Arrangement is a voluntary association and there is no formal mechanism to enforce compliance. That said, members usually do work together to reduce the proliferation of biological weapons, chemical weapons, nuclear weapons, missiles and more.
The United States, Netherlands and Japan are all members of the Wassenaar Arrangement.
Should the Netherlands and Japan disagree with the U.S. and determine that China is not a growing threat;
-is not modernizing its military;
-is not going to invade Taiwan;
-is not going to seek more border territory from India;
-is not going to expand to more militarized islands in the South China Sea to claim natural resources there at the expense of neighbors Vietnam, Taiwan, the Philippines, Malaysia, Indonesia and Brunei;
Then they will continue sales of sensitive semiconductor technology to China.
Still, as a purely business consideration, if ASML or Japanese semiconductor production machinery giants like Tokyo Electron are allowed to continue to do business-as-usual in China, while U.S. companies are not, then U.S. companies will lose out.
As the Semiconductor Industry Association put it: “We understand the goal of ensuring national security and urge the U.S. government to implement the rules in a targeted way—and in collaboration with international partners—to help level the playing field and mitigate unintended harm to U.S. innovation.”
And to be clear, the most advanced semiconductor equipment – exclusively made by ASML – has long been banned from China. It doesn’t matter to the company today because the backlog of orders for the equipment already runs years into the future.
But older ASML machines are still sold to China-based companies. Some of it might run afoul of the new U.S. regulations.
There are plenty of reasons to be confused by the new rules.
First and foremost, they’re new, which always causes some confusion as to what’s okay and what’s not. Allies must be brought onboard with a clear understanding of the parameters of the new regulations and their goals.
U.S. chip makers don’t even fully understand the new rules yet.
“We are assessing the impact of the new export controls on the U.S. semiconductor industry and working with our member companies and the U.S. government to ensure compliance,” SIA said.
It takes time to get everyone on the same page. It’s a process. Nobody wants to harm customer relationships built up over decades, or lose sales.
Second, prior U.S. export controls may not have had the teeth allies expected, and while they enforced rigid controls for their own companies, U.S. companies could grab market share.
The Wall Street Journal found that in 2020, out of all U.S. exports to China that required a license, 94% were approved. In 2021, approvals dropped to 88%, but it appears many items still received approval, even some banned items.
Third and finally, foreign companies cannot be expected to understand when a U.S. policy is a political show meant for the home audience, or if it’s serious.
U.S. Midterm elections are Nov. 8, and the ruling Democratic Party faces losing both houses of Congress, the Senate and the House of Representatives. Such a loss would pit Congress against President Biden’s administration, leading to political gridlock.
China bashing can be an issue used to attract voter attention. It is very, very, very likely NOT the case in this instance, but the point here is that politics can cause foreign friends to misread American intentions.
Good communication can help avoid problems.
The fact that there have already been a few challenges to U.S. semiconductor export curbs on China does not need to be treated as odd or sensational as it has been so far. It will take time to work out the details and reach a common understanding among allies.
The political framework for cooperation is already in place, in the Wassenaar Arrangement.
The reasons for confusion about the new regulations early on are simple. They are new, the parameters need to be clear to ensure an even playing field, and to ensure allies understand and accept the reasons for the new rules.
For now, companies will continue to take a wait-and-see approach to the new regulations. It will take time and communication to ensure the semiconductor export controls are implemented globally.
Links to Articles Used in this Note (In case links in text above fail)
Part II – What’s at Stake for Semiconductor Equipment Makers