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Reflecting the intensifying strategic competition between the United States and China, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) recently announced new export control regulations aimed at restricting China’s ability to obtain, design, and manufacture certain high-end semiconductor devices used in artificial intelligence (AI), supercomputing, and related defense applications. The new regulations reflect a dramatic shift in U.S. policy in that they prohibit the export of semiconductor manufacturing equipment containing U.S. components that would enable Chinese firms to produce advanced semiconductors smaller than 14 nanometers in size. By imposing strict controls on a narrow list of technologies—often referred to as a "small yard, high fence" strategy—the U.S. government seeks to halt or at least delay the development of an advanced semiconductor industry in China.
Given the distributed character of the global semiconductor industry, support from U.S. allies and partners will be essential if these measures are to succeed. At a public briefing on November 14—the day after the new export control regulations went into effect—BIS announced that it intends to propose that other countries that make semiconductor equipment, materials, and chips adopt the same specific requirements and export controls that the United States has just put in place.
While recognizing the strategic concerns behind the BIS actions, allies as well as a number of semiconductor firms are calling for a new and more effective international export control regime—one that better coordinates policy action and allows firms to manage investments and plan activities over the long term. These measures are expected to replace the prevailing Wassenaar Arrangement—widely seen as outdated and ineffectual in controlling the export of sensitive technologies.
Following the end of the Cold War, a collection of former Warsaw Pact countries, newly independent states such as Ukraine and Russia, NATO allies, as well as nonaligned European countries came together to form a comprehensive multilateral export control regime. The Wassenaar Arrangement, signed near The Hague, Netherlands, in 1996, became the world's first multilateral agreement on export controls for conventional arms and sensitive “dual-use” products, software, and technologies—i.e., those with both civilian and military applications. Since 1996, the number of Wassenaar member countries has expanded from the 33 original signatories to 42.
The WA is a voluntary system that calls on member states to agree on a list of items that should be subject to export controls. For items on the list, each country is obliged to control exports via national law. Twice a year, member countries are called on to report on transfers of certain regulated dual-use items and share information on potential transfers with other Wassenaar member countries. The Wassenaar General Assembly also meets annually in December in Vienna to review the Wassenaar Regulation List, exchange information, and adopt new regulations to strengthen export control enforcement.
The current international environment, however, poses major obstacles to applying the Wassenaar framework. Notably, Russia is unlikely to join in any new consensus with the West on revising the Wassenaar Agreement’s list of controlled items. Further, in the wake of its invasion of Ukraine, Western nations targeted Russia with broad economic sanctions and strict export controls that were developed outside Wassenaar. This included a limit on exports of semiconductors critical to many of Russia’s advanced weapon systems. While it is too early to say definitively just how effective these measures have been in degrading Russia’s offensive operations, the breadth of cooperation on initial enforcement efforts are impressive.
In addition, Wassenaar, like many international arrangements, suffers from inadequate enforcement mechanisms. Member states do not have tools within Wassenaar with which to force other Wassenaar countries to conform to export control arrangements. In part, this difficulty arises because the definition of dual-use technology is itself ambiguous, as many seemingly benign technologies can have military applications. Consequently, countries are hesitant to regulate their own exports on intangible national security grounds. As William Reinsch, Scholl Chair in International Business at CSIS, has testified: when countries try to negotiate beyond a few items, such as fissile material and stealth technology, it becomes difficult for them to reach agreement on what items are important to control.
In addition to limiting Russia’s war-making capabilities, concerns about China’s fusion of civil and military technology development have led many in the United States and elsewhere to dramatically extend the notion of export control. U.S. policy measures to limit China’s ability to produce leading-edge chips also pose a challenge to the global supply chain that underpins this key, highly globalized industry. For these measures to be effective over time in limiting China’s military capabilities, cooperation from U.S. trading partners and allies will be essential.
History shows that such coordination is difficult to realize. William Reinsch points out that when China launched Project 909 in the 1990s to develop semiconductor chips domestically, manufacturers from Japan, the Netherlands, and Germany were quick to sell sensitive semiconductor manufacturing equipment to China—even before U.S. regulators could finish discussing whether to approve their own commercial licensing applications.
Without mutual agreement on export controls today, Japanese, Korean, and European companies may adopt a “design-out" option that would substitute U.S.-sourced technology, now subject to the new export controls, in favor of equivalent technology developed by foreign companies. If so, U.S. materials and equipment companies such as Applied Materials, Lam Research, and KLA will expect their markets to be usurped in due course by foreign companies able to provide reasonable-quality substitutes As Peter Wennick, CEO of Dutch semiconductor manufacturer ASML,: observed:
When we talk to our Chinese customers, and you have to understand that when they look at some of the other process tools, there are some alternatives here or there. There are alternatives in Japan when you talk about ALD or you talk about deposition tools. There's a European company, which is in Singapore, that can be an alternative. So, on metrology, there are alternatives, both in the Netherlands and outside the U.S., in Japan and even increasingly in other parts of the world.
Already the new export control rules have caused U.S. semiconductor equipment and materials firms to lose business. For example, shares of Applied Materials, KLA, and Lam Research have all fallen more than 18 percent since the controls were announced. Applied Materials lowered its sales forecast for the quarter by about $400 million, citing the BIS regulations of October 12–13. These companies note that the expected loss of revenues poses a long-term threat to their capacity to conduct the research and development needed to maintain their lead over their competitors.
Despite past difficulties in multilateral coordination on export controls, Alan Estevez, under secretary for industry and security at the U.S. Department of Commerce, is optimistic that allies today will follow through with similar controls. U.S. commerce secretary Gina Raimondo has indicated that she expects to reach a new agreement with U.S. trading partners within nine months. Chinese firms may yet attempt to develop equivalent alternatives to U.S. technology, but the breadth of the U.S. lead and the underlying complexity of the technologies and the supply chains will make this effort very difficult.
The United States' first priority for coordinating multilateral export controls targeting Chinese technological progress in the design and manufacture of advanced semiconductors should be close consultations with foreign suppliers and their government representatives. These discussions should include steps to do the following:
Halting Chinese progress in achieving advanced semiconductor capabilities calls for moving past the limitations of the Wassenaar Arrangement. Moreover, any new export control policy will require a clear articulation of shared objectives and regular consultations with allied countries and companies. These consultations need to be genuine exchanges, not formalistic, and take into account the perspectives of other members of the supply chain.
The stakes are significant. If the United States is not successful in securing the support of other major producers, the newly announced export controls run the risk of disadvantaging U.S. companies while only temporarily slowing Chinese advanced chip design and manufacturing capabilities. The Biden administration’s approach to date suggests it is aware of these risks and is taking active measures to ensure support and compliance with this strategy. Implementing this strategy will not be without pain but, if effectively implemented, will be worth the effort and provide a new model for effective cooperation on shared security interests.
Sujai Shivakumar is a senior fellow and the director of the Renewing American Innovation project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Charles Wessner is a non-resident senior adviser with the Renewing American Innovation project. Hideki Tomoshige is a former research intern with the Renewing American Innovation project.
