U.S. Chip Alliance Could Spook Beijing

The Biden administration's successful effort to bring Japan and the Netherlands on board with its chip-sector export restrictions to China is a victory for U.S. diplomacy. But sustaining the strategy will require serious work. The administration will need to continue to engage with key allies and partners to ensure that the export restrictions are effective in curbing China's chip-sector development.

Japan and the Netherlands have agreed to join the United States in limiting exports of advanced chip-manufacturing equipment to China. The three countries dominate the manufacturing of equipment for advanced semiconductors, so the plan could make it even harder for China to develop its own chip industry.

Japan and the Netherlands are particularly dominant in a manufacturing process called lithography. This process uses light to print tiny circuits on silicon wafers. Dutch manufacturer ASML essentially monopolizes the production of equipment needed for the process called extreme ultraviolet lithography, or EUV. This type of lithography is used to make the most cutting-edge chips. ASML has already stopped shipping EUV machines to China.

The Biden administration's expanded chip-related curbs on China may require restrictions on older Dutch and Japanese technologies to be effective, and to avoid forcing U.S. companies to absorb the impact alone. Japan's Nikon competes with ASML in supplying parts for a technological process called deep ultraviolet lithography, or DUV, which is one step less advanced than EUV. Friday's agreement may restrict Japanese and Dutch companies from shipping at least some models of DUV machines.

The lack of information from the Dutch and Japanese governments about the details of the deal is telling. The two countries are probably worried about negative reaction from China, which has been a major customer of chipmaking tools. Even though it hasn’t shipped its $150 million EUV machines to China, around 14% of ASML’s system sales in 2022 came from the country. There may also be some disagreements with the U.S. on how far restrictions should go.

The initial effect of the U.S. chip sanctions on China is likely to be limited. However, it could seriously complicate efforts to build facilities near the cutting edge, and might also pose a challenge for servicing some existing parts. Unlike previous unilateral fusillades, the U.S. has finally managed to persuade its allies to sign up for its strategy to contain China’s chip ambitions. That in itself is notable, especially as Europe and the U.S. are embroiled in a separate dispute over the Biden administration’s green-technology subsidies.

There could be more levers to pull if the U.S. and its allies agree to step up their restrictions on China even further. Some analysts say the current curbs might not go far enough. Blocking the shipment of new tools to China won’t be sufficient because the country can still use its existing machines, said SemiAnalysis chief analyst Dylan Patel in a newsletter. He suggests limiting shipments of photoresist, a light-sensitive material used in lithography, for example. Japanese companies are leaders in manufacturing the material. Japan’s Tokyo Electron is dominant in making equipment that coats and develops photoresist on silicon wafers.

The United States is wise to ask its allies for help instead of fighting a unilateral technology Cold War with China. These latest restrictions won’t completely hamstring China’s chip industry, but they send a strong signal of allied unity. This might be the most worrying aspect of this latest salvo for Beijing and China’s chip aspirants.