Biden’s squeezing China on chips: US allies might feel the crunch

Over the last few months, it has become abundantly clear that the Biden administration is committed to containing China’s advances in critical technologies such as semiconductors. The U.S., akin to waking up from a slumber of 20 years, recognized the Chinese government’s intellectual property theft, exploitation of the world trade system and U.S. openness to trade, and under Trump, initiated a trade war. 

While the jury is still out on the net benefits of trade wars, the current administration’s openness to working across the aisle on China could just be what the doctor ordered. The Biden administration’s actions containing China’s ascent of the hierarchical network of technological value chains need to transform into more of an earmarked effort.  

Recently, the U.S. government upped the pressure on its allies Japan and Netherlands. Commerce Secretary Gina Raimondo, speaking to CNBC, said “I think you will see Japan and Netherlands follow our lead”  

The Netherlands’ ASML and Japan’s Tokyo Electron are the second and third largest makers of semiconductor manufacturing equipment behind the United States’s Applied Materials. If China were to make any advancements in its efforts to indigenously manufacture semiconductors, it would require the support of either the U.S., Japan or the Netherlands. So far, U.S. curbs have made it practically impossible for China to leverage American equipment expertise. However, that is not the case with ASML and Tokyo Electron. 

Tokyo’s Electron has a 90 percent share of the global market for equipment and a nearly 40 percent share of “equipment that creates thin films on wafer surfaces.” Moreover, 25 percent of its sales are in China. 

As it is, the U.S. government is facing flak for its Inflation Reduction Act, which undercuts trade deals with several nations. Korea and Japan have expressed reservations about the U.S. government’s full-fledged industrial policy drive. In this case, asking their private corporations to give up large markets may not necessarily bode well for bilateral relations with these countries.  

Alternatively, the Biden administration could consider even more stringent measures at home before they deliver diktats to allies and partners. The U.S. should make sure that no tax dollars or even American corporations assist in China’s technological ambitions. 

If Trump’s action against China got Washington crawling, and the Biden administration’s export controls got it walking, it should begin running by supporting Sen. Majority Leader Chuck Schumer (D-N.Y.) and Sen. John Cornyn’s (R-Texas) amendment to the upcoming National Defense Authorization Act which will supplement the administration’s CHIPS and Science Act. The senators’ amendment, which could be seen as a targeted measure, will prevent the U.S. from buying microchips for national defense from companies that work with the Chinese Communist Party. 

While there is broad support for addressing the China challenge, there has been some discontent amongst tea-party Republicans who are opposed to industrial policies and government subsidies by principle. With regard to China, national security and trade relations intersect at varying points, often making national security policies and trade policies indistinguishable. This amendment could potentially separate the milk from the water — i.e. national security from government handouts to corporations.   

American corporations, particularly, ones that have hit saturation levels in the Western world, have relied on the large Chinese market to export goods and services. With a sizable market and technological advancements, China’s demand for chips has grown exponentially over the course of the last two decades. 

If the U.S. were to court allies through the “Chip 4” alliance — a proposed supply chain agreement between the U.S., South Korea, Japan and Taiwan —  or even on a bilateral basis with the Netherlands for its containment efforts of China, it would need to stand by example and course correct its own corporations. 

Akhil Ramesh is a fellow with the Pacific Forum. He has worked with governments, risk consulting firms and think tanks in the United States and India. Follow him on Twitter: Akhil_oldsoul.