Will allies follow US lead for tighter chip restrictions on China?

United States Commerce Secretary Gina Raimondo recently warned that the country may further tighten its chipmaking restrictions to limit China’s access to sophisticated semiconductor technologies.

These technologies are seen as a major competition frontier between two of the world’s top economies, and Washington fears that sustained Chinese access could accelerate its military advancement.

"We (the United States) will do whatever it takes to protect our people including expanding our controls," Raimondo said earlier this week.

The US relies heavily on the support of its allies to ensure the effectiveness of these export control measures. Their approval is critical to prevent advanced equipment sales to China and tighten curbs on access to sophisticated technology.

This presents a unique challenge for Washington as allies are beginning to question the impact of current US curbs and their long-term effectiveness.

Countries such as Japan and the Netherlands face added pressure from their own chipmaking industries and manufacturers to avoid tighter controls, given their reliance on the Chinese market for significant equipment sales.

Look no further than South Korea. It is home to a series of medium-sized companies, including producers of semiconductor tools and equipment, that form the crux of Seoul’s economy.

South Korea’s approval to limit equipment sales to China could prevent relatively new semiconductor manufacturers from scaling up their operations and weaken their competitiveness in China.

Seoul also remains reluctant to endorse a US-backed export-control blockade agreement on China, which already includes the Netherlands and Japan. Formal inclusion could mean hampering Seoul’s record-setting growth in semiconductor exports, particularly to China, which contributed to a 16 percent shipment surge early this year.

South Korea’s trade-reliant economy is not alone in this dilemma. Netherlands and Japan face constraints of their own: they supported sweeping US export curbs on China last year, but remain unwilling to compromise export growth of chipmaking gear used to make an older generation of semiconductors.

This category of chipmaking gear falls outside the ambit of US-led bans, and is key to sustaining market shares in a highly competitive global semiconductor industry.

"We (Japan) have no plans to take new measures at this time," said Japan’s Minister of Economy, Trade and Industry this month.

The limited impact of Washington’s current semiconductor export controls adds to future challenges.

For instance, the Biden administration’s 2022 measures have so far struggled to insulate China from the global semiconductor industry and haven't slowed its high-tech progress.

Blacklisted Chinese tech companies Huawei and Semiconductor Manufacturing International Corp (SMIC) continue to make advanced computer chip breakthroughs at home as well. A case in point is the advanced 7-nanometer Kirin 9000S chip that these companies were able to produce last year, beating the US expectations.

This is significant because a central objective of the US chipmaking restrictions was to curb China’s ability to produce advanced chips domestically.

Huawei's continued advancement serves as an important indicator of US export control performance, given how the United States spent years trying to cut the company's access to advanced chipmaking tools, and prevent its leap towards advanced 5G technologies.

Disappointing results are at the heart of the Netherlands and Japan's present resistance to expanding US tech curbs on China.

Japanese manufacturers risk losing a critical market share of the semiconductor industry if they agree to implement further US-backed curbs on equipment sales.

This is a big cost for Tokyo, which supported past US tech restrictions on China against the view that China may not be able to source chip making equipment from alternative suppliers.

As the Netherlands continues to resist US pressure to curb its own semiconductor supplier, Tokyo is aware that Beijing could still source chip making equipment from alternative suppliers, marking a major gap in the US export control regime.

"The Chinese don’t have to worry about the efficiency of the process — they can use trailing edge equipment to produce leading edge chips because they can afford to bleed money in a way no one else can," a source familiar with the US government effort recently told the Financial Times.

Without ample support from US allies, Washington will be hard-pressed to bring more countries onboard to back its export control measures. The Biden administration has been pushing hard to enlist Germany’s support in tightening export controls on China. It is keen to secure an agreement with Berlin ahead of this year’s G7 (Group of Seven) summit in June.

But Berlin has not yet taken a clear position on the matter, and is keen to avoid any possible retaliation from China, a top investment market and major trading partner.

China has significant leverage in the supplies of critical and strategic raw materials to Berlin, and potential restrictions on their exports could challenge Germany’s ambitions of powering its own semiconductor industry in the long run.

As a result, growing industrial pressure on US allies and meagre export control gains make it difficult for Washington to broaden tech curbs and establish their long-term effectiveness. If restraining China’s chipmaking progress means hurting semiconductor industries at home, US allies may be forced to think twice about their ironclad support.