The giant sucking sound of China voraciously acquiring semiconductor technology has only gotten louder over the past few months.
A primary cause of this sonic surge is Netherlands-based ASML’s sales to China in the second quarter of 2024, which spiked by 21% from the previous period and accounted for nearly half of its revenue. ASML, the world’s most advanced semiconductor tool manufacturer, is the single company that could do more damage to U.S. national security through the sales of its technology to China than any other company in the world.
The Commerce Department’s unilateral export control rules for advanced semiconductor lithography tools sold to China, now almost two-years old, were widely predicted to be extremely harmful to American semiconductor businesses, especially Applied Materials, Lam Research and KLA.
These export control prohibitions apply only to them and not their two primary foreign competitors, ASML and Japan-based Tokyo Electron, which proceeded to sell in record quantity competing tools to China. The cost to American businesses is estimated at $130 billion in lower market capitalization and billions in lost sales.
By way of context, this lower market capitalization is more than twice the entire amount of the CHIPS Act grants, $53 billion, to be awarded by the Commerce Department to U.S. semiconductor businesses.
An approach that is bad for national security
The damage to the U.S. semiconductor industry is compounded from a national security perspective because of the improved armaments China will now have to menace Taiwan and its other neighbors, such as the Philippines, in addition to the U.S. Also, China will now have a stronger economy upon which to base its military malevolence.
When you dig a hole that is $130 billion deep, a basic rule of statecraft is to stop digging — and consider alternatives, such as a semiconductor export control treaty with key semiconductor allies. Given the Commerce Department’s mission statement is to create the conditions for economic growth, drive U.S. economic competitiveness, and strengthen domestic industry, it has a programmatic duty to consider such an alternative.
None of that is enough for the Commerce Department to stop digging. After the Commerce Department’s extensive badgering of the Netherlands and Japan to follow the U.S.’s unilateral, expansive export controls on advanced semiconductor manufacturing technology to China in 2022, the Netherlands and Japan in 2023 each gave the U.S. one thin slice of the salami by adopting additional, limited export controls on such technology sold to China.
Administration brings out the cudgel
The recent record sales of ASML and Tokyo Electron to China demonstrate just how thin those salami slices were. Both the Netherlands and Japan have subsequently refused to provide any more slices. Now the Commerce Department is considering expanding the scope of the arcane foreign direct product rule (FDPR) to force further concessions.
The FDPR provides the statutory authority for the U.S to implement extraterritorial controls over foreign-made products if they were made using U.S.-origin technology. This new tactic of using the FDPR will force these two countries to adopt export controls on semiconductor lithography tools to China against their will because their semiconductor heavyweights, ASML and Tokyo Electron, use U.S-origin technology.
In short, the Commerce Department has gone from badgering allied countries to potentially bludgeoning them with the FDPR, a virtual sledgehammer at the negotiating table where the U.S. commandeers their foreign policy.
Predictably, the Netherlands and Japan are resentful of such extraterritorial control. The U.S. semiconductor industry, including industry leaders Applied Materials, Lam Research and KLA, does not support this extraterritorial use of the FDPR because of concerns it will backfire by provoking the Netherlands and Japan to become defiant and simply stop cooperating with the U.S. It would also further increase the incentive on businesses throughout the world to remove American-origin technology from their semiconductor supply chain in order to avoid the scope of such an expanded FDPR.
The Commerce Department’s brandishing the FDPR sledgehammer at the negotiating table with the Netherlands and Japan has caused these allies to consider further tightening up their export controls of semiconductor equipment to China. The U.S., in return, would exempt the semiconductor lithography tool companies based in the Netherlands and Japan from the expected expanded FDPR.
These are, however, extremely limited concessions offered up by our allies — because while American companies will still be barred from servicing restricted lithography tools in China, their Dutch and Japanese competitors will continue to be permitted to do so. Other semiconductor countries, such as Taiwan and Singapore, would not be exempted from this newly expanded FDPR.
A classic Pyrrhic victory in the making
Should the Commerce Department proceed with this proposed new FDPR sledgehammer tactic as reported, it will be a proverbial Pyrrhic victory. With one swing of the FDPR sledgehammer, the Commerce Department has likely foreclosed any real solution to the problem it is trying to solve: multilateral cooperation among the key democratic semiconductor countries to limit advanced semiconductor technology to China without disadvantaging American semiconductor businesses.
Even as a short-term tactic, this FDPR sledgehammer falls short by permanently handicapping the American semiconductor lithography tool industry while allowing China to continue operating advanced semiconductor lithography tools. It also precludes critical foreign cooperation with the Netherlands and Japan — in addition to Germany, which are all U.S. allies and key semiconductor heavyweights.
Germany has a dog in this fight because Zeiss is a strategic component supplier of its lithography optics to ASML. So indirectly, the Commerce Department is also trying to commandeer Germany’s foreign policy vis-à-vis China.
Furthermore, this one FDPR sledgehammer swing now dramatically lowers the ability of the U.S. to address the growing number of other critical semiconductor national security challenges.
And all of these challenges require multilateral cooperation: enacting coordinated countermeasures to China’s attempt to wipe out Western legacy semiconductor manufacturers through generic dumping; plugging the recently discovered Singapore and Hong Kong leaks in the semiconductor export control dikes around China; countering the dramatic resurgence of Huawei despite heavy sanctions from the U.S for the last five years; and, restraining Taiwan-based TSMC’s surging semiconductor sales to China.
What a pyrrhic victory results when the Commerce Department keeps digging with the foreign direct product rule.
