Poster: ‘Strengthen the modernization of our army’, 加强我军现代化建设, Jiaqiang wojun xiandaihua jianshe, designer Liu Yaping, 1980, refer https://chineseposters.net/posters/g2-60 © No copyright infringement intended. All rights belong to their respective copyright owners
Over the past 4 years mijngroeve.nl has described in multiple posts how we have slided into a post Cold War world in which an intense competition is on-going between the US and China to shape what comes next. At the heart of that competition lies technology: already back in 2019 mijngroeve.nl stated that the socalled ‘US-China trade war’ had better be called a geopolitical technology war, which would in particular affect the foreign and economic policies of countries that occupy a unique position in the semiconductor supply chain, such as the Netherlands and Taiwan.
Mijngroeve.nl also mentioned that the rapid advances in technology would require fast policy responses, especially in the eyes of the US. “If the EU isn’t able to quickly agree on a new control regime, Washington will keep on trying to secure on a bilateral basis the support of allies such as the Netherlands for its emerging technology controls. Hence Dutch political parties had better discuss and review with the respective Dutch ministers what the Netherlands themselves would like to protect in the exchange with China in terms of know-how and technology instead of wasting too much time complaining about the effects of unilateral American actions” I wrote in September 2020. https://www.mijngroeve.nl/history/holland-china-predictions-about-the-new-relationship/
Export control regime
In the EU, export controls are usually linked to the Wassenaar Arrangement (WA), a 42-member multilateral export control regime that governs international transfers of weapons and dual-use items: unfortunately, it insufficiently covers new emerging technologies that could have a dual-use character. Additional complicating factor is that war monger Russia is still a member of the WA and in a position to defuse or disable new export control proposals.
The US CCL ( Commerce Control List) broadly aligns with the WA. Yet the US maintains broad unilateral authorities under the 2018 Export Control Reform Act (ECRA), which allows the U.S. Department of Commerce to implement controls on items not found in the WA. Under the EU dual-use export control regulations, EU member states do also have the authority to impose national security policies, including investment screening and export controls. Thus, member states are entitled to adopt export control restrictions that go beyond the WA.
On October 7, 2022, the Biden administration announced far reaching new regulations on U.S. exports to the PRC of advanced artificial intelligence (AI) and semiconductor technology. These measures mean that highly advanced ICs (in particular GPUs/graphics processing units that play a key role in deep learning methods that are the main driver of the current AI boom) and advanced American semiconductor technology and tools may in principle no longer be exported to China by American companies. Also, “US persons”, which includes US citizens and residents, are apparently no longer allowed to be involved in advanced semiconductor manufacturing in China.
On March 8, 2023, Dutch trade minister Schreinemacher informed Dutch parliament about the new ‘country neutral’ export controls on semiconductor technology. The Dutch announcement followed an arrangement struck in January with the U.S. and Japan to choke off the supply of cutting-edge chips to China, especially targeting chips built on 16nm and smaller technology nodes.
Though many details are still unknown, the Dutch restrictions appear to align with the latest U.S. controls towards China, even if the Hague – like Tokyo- did not explicitly refer to the PRC in its announcements. It is believed that the agreement between the US and the Netherlands will restrict not only the sales of EUV but also of ArF immersion lithography (= advanced Deep Ultraviolet -DUV-) equipment, related components, and possibly expertise to China.
The Dutch government has since informed the European Commission’s Directorate General for Trade about the additional controls, signaling a strong wish to include the new national controls into EU-wide export control regulations. Clearly The Hague would like to mitigate as much as possible the risks of eventual Chinese retaliation by having in place an updated EU-wide export control scheme along the lines of the agreement reached by the Netherlands with the US.
Rutte’s changing perception
In February 2023, Dutch Prime Minister Rutte wrote an op-ed indicating that in the new superpower rivalry, he was on Washington’s side. “I cannot see how this will be China’s century,” wrote Mark Rutte, in the NRC, a Dutch newspaper. “The 21st century will be the century of democracy and thus the century of America,” he claimed. It was quite a statement from a premier who during his various cabinets over the past decade had been pre-dominantly silent about the China challenge.
His op-ed as well as the new Dutch export control announcement consolidated a paradigm shift by of one of the biggest European champions of global free trade. China has been one the Netherlands top trading partners. The export control measures symbolized the formal acknowledgement of the Rutte government of the overhaul of the traditional Dutch free trade approach in the relationship with the PRC. Xi Jinping’s personal warning to Rutte in November 2022 on the sidelines of the G20 summit in Bali to avoid ‘decoupling’, amid the well-publicized US pressures to stop selling high-end semiconductor equipment to China, apparently had fallen on deaf ears…
Though the Netherlands had held a cautious line on export controls in the past, a gradual shift in the Dutch perception of China has contributed to the paradigm shift. While publicly sticking to the EU mantra of treating the PRC as a partner, competitor and systemic rival, the latter began to take precedence in various government and parliamentary circles in The Hague from 2020 onward, even though the different interests of the various ministries may have obfuscated this fundamental change.
It would be wrong to solely attribute this Dutch shift to the relentless American pressure by the Trump and Biden administrations to prevent the export of ASML EUV & advanced DUV tools to the PRC. Dutch officials have also been keen to stress the Dutch government went through its own, independent process of re-considering, judging and weighing its ties with China. Dutch cabinet members have repeatedly stated that the alignment with the US on the semiconductor export control scheme “was not a tit-for-tat-deal”. At the moment it’s hard to say if those Dutch statements are fully correct.
The year on year deterioration of diplomatic relations between the Hague and Beijing since 2020 may have been shrouded by the typical, re-assuring public statements by the Dutch foreign ministry that the Dutch government was upholding the balance in the holy trinity relationship with China, in line with the overall EU policy.
China’s superiority claims in its Covid approach as well as the poor quality of the major part of the paid for batches of masks in Spring 2020 led to irritation in many European countries, including the Netherlands. Dutch media critical of the Chinese “donations” and propaganda were reprimanded by angry Chinese embassy officials. The Chinese global campaign to hide or re-write the origins of the virus, -still on-going until this very day- didn’t go down well in the Hague either. The introduction of the National Security Law in the summer of that same year and the immediate trampling of the few remaining freedoms in Hong Kong by the CCP as well as the horrific practices in Xinjiang shocked a lot of Dutch MPs, who started to call for a much more assertive Dutch foreign policy towards Beijing, implying Rutte’s previous coalition cabinets had been far too timid and lenient towards China.
The March 2021 sanctioning of MP and China-critic Sjoerd Sjoerdsma put the Sino-Dutch relationship under further stress. Sjoerdsma’s party D66 has been part of the Dutch coalition governments led by Rutte. The Chinese sanctioning of the Dutch MP made the separation of politics and economics, so much cherished by our Prime Minister, extremely difficult in the exchange with Beijing. A Dutch ratification of the CAI, the investment agreement with China pushed through by Merkel and Macron (presumably with the blessing of Rutte) at the end of 2020, looked impossible as long as Sjoerdsma (and other European MPs) would be under Chinese sanctions.
A first sign of a somewhat more assertive Dutch policy was the decision to have the frigate Zr. Ms Evertsen sail through the South China sea as part of a British fleet squadron on its visit to the Far East in the late summer of 2021. The Dutch government (Rutte?) had originally hesitated to even let the frigate sail the South China sea out of fear of upsetting Beijing, but compromised by not having it pass through the Taiwan Strait, the narrow (international) sea lane separating the democratic island from China. https://www.mijngroeve.nl/history/the-hague-beijing-watershed-moment/
In Spring 2021 the Dutch newspaper ‘De Volkskrant’ reported that Huawei had had free access to the network of KPN in 2009-2010, including to the phone number of the then Prime Minister Balkenende, which forced the Dutch government to launch an official investigation. As a result more MPs questioned the Dutch government’s wisdom in still allowing Huawei’s equipment in the periphery of the Dutch 5G telecom network, while the Dutch intelligence sounded greater alarms about the involvement of Chinese equipment vendors and suppliers in critical Dutch infrastructure and about the growing risks of espionage at Dutch universities.
The Dutch government’s China policies got much more scrutinized by the media and parliament, making it politically risky for Rutte and his (conservative) liberal party, the VVD (Volkspartij voor Vrijheid en Democratie/ People’s Party for Freedom and Democracy) to ignore the changing public sentiments and leave the impression to always prefer business over principles. In the increasingly negative public mood towards the Chinese communist government and under the constant American pressure there was little political gain for Rutte and the VVD in appearing too soft on the PRC and on questions related to national and economic security.
China’s bullying of Lithuania in late 2021 in response to its decision to allow Taiwan to open an unofficial embassy using its own name, rather than “Chinese Taipei” triggered further worries in the Hague about the PRC’s wolf warrior diplomacy, Beijing’s threat to the cohesion of the European single market and its increasingly aggressive position on the Taiwan issue. But above all the announcement of the ‘Sino-Russian partnership without limits’ just ahead of the Russian attack on Ukraine in February 2022 as well as the ‘pro-Russian neutrality’ by the Chinese government in the war must have given Rutte the final push to (belatedly) acknowledge that his free-trade approach in the relationship with the PRC had hit the ceiling.
Formal Dutch re-assessment
The growing Sino-Russian military cooperation, Xi’s military-civilian fusion policies, the war in Ukraine in addition to Chinese belligerence towards Taiwan must have fed already existing fears in Dutch defense and intelligence circles that civilian technology and know-how shared with Chinese companies could easily end up in military hands, either in the PRC or even in Russia.
Rutte and other cabinet members (in particular D66 minister of Defense Mrs. Ollongren) must have begun to fear the same, especially after the Biden administration kept on making the case that the security threat would exactly be made possible by the supply of advanced ASML tools that fabricate leading edge AI chips ostensibly solely for commercial applications that then make their way into the (super)computers which in the end are used to design or control advanced weapon systems.
Both Beijing and Washington believe that leadership in AI is foundational to the future of military, economic, and geopolitical power and superiority. In the context of this escalating geopolitical technology war, The Hague defined three strategic goals at the end of 2022 with national security as a starting point, according the Dutch Foreign Trade Minister in a letter to Dutch parliament:
1. Preventing Dutch goods from contributing to undesirable end-use, such as military deployment or in weapons of mass destruction 2. Prevent unwanted strategic dependencies 3. Maintaining Dutch technological leadership and Western standards
Mijngroeve.nl suspects Dutch military and intelligence circles meanwhile not only consider the PRC a systemic rival and threat to economic security, but even a long term military peril to our common European security. Clearly NATO’s view is moving into this direction too.
The decisions by Japan and the Netherlands to join the US in adopting new semiconductor export controls once more underline that the global semiconductor market has entered a new era in which geopolitical and national security concerns will outweigh market forces.
It’s however important to point out that China has been aggressively pursuing semiconductor technology independence since the introduction of the ‘Made in China 2025’ economic development policy in 2015. Beijing has wanted to free itself from technological dependence of the West, and the US in particular. Its stated policy goal has been to replace foreign companies with domestic ones wherever possible. That policy already undermined the free market notion and implied that foreign tech firms that would not be irreplaceable would face an increasingly unfavorable Chinese business environment irrespective of any Western export control regime.
Whether the new Dutch stance will be left unpunished by the Chinese government is currently unclear. The Chinese ambassador to the Netherlands, Tan Jian, has stated that “the Dutch capitulation to the US pressure will not be without consequences”. He vehemently rejected the Dutch argument that chip machines in Chinese hands could one day pose a military threat to the West.
Chinese foreign ministry spokesperson Mao Ning has also said that the Dutch rules would “limit normal economic and trade exchanges between Chinese and Dutch companies”. The Netherlands’ Trade Minister has countered that Chinese protest over the Dutch decision to impose restrictions on chip technology exports was “understandable”, but said that she expected diplomatic relations would remain good…
The events of 2018
For China’s leadership, a crucial moment in solidifying its semiconductor strategy was not October 2022 or March 2023, but the year 2018, when:
1) the US imposed extremely strict export controls on Chinese telecommunications company, ZTE, that nearly resulted in its total demise 2) sued UMC & Fujian Jinhua for IP infringement and 3) had Huawei’s CFO arrested in Canada as part of the a bigger campaign to expose the unreliability and fraud of the Chinese telecom giant (see https://www.mijngroeve.nl/history/america-first-vs-china-first/).
It confirmed Xi in his belief that Washington’s only goal was to block China’s rise and technological advances, reinforcing the Chinese president’s conviction that self-reliance was the PRC’s only policy choice. Beefing up its position in strategic technologies turned into an extremely urgent Chinese national security priority after 2018.
The new export controls by the American, Dutch and Japanese governments surely have not come as a total surprise to Beijing. Chinese private tech companies began stockpiling foreign chips and chip-making equipment several years ago, buying far in excess of their needs as a hedge against potential future restrictions. The Chinese government has also continued to pump billions of dollars into the development of its own semiconductor industry, including into fabs, design houses and equipment manufacturers, in the hope of being able to mitigate the risks of disruptions in foreign supplies. Mijngroeve.nl suspects that the PRC has also built up an extensive network of shell companies around the world that can help it evade export controls or future sanctions. It will surely also seek the assistance of third parties to circumvent these export controls.
China is nevertheless almost entirely dependent on foreign sources for the types of semiconductor manufacturing equipment necessary to produce those advanced node semiconductors. Companies based in the Netherlands, Japan, and the US are the key producers of semiconductor manufacturing software tools and equipment and contribute ~90 percent of global supply of these essential machines. These firms comprise a major technology chokepoint in Beijing’s efforts to develop a world-class domestic chip industry, providing the US and allies with enormous leverage. The Chinese authorities can not simply solve this problem by throwing more money at it. The PRC’s shortfall in leading edge technology, advanced components and knowledge will likely be exacerbated by the new export controls agreed by the US, Japan and the Netherlands.
In spite of China’s self sufficiency mission, Beijing at the same time would like to ensure continued access to those crucial foreign companies’ products, equipment and technologies for as long as possible: no wonder that China’s response to the latest export control measures so-far appears to be rather muted.
The odds for China
If and how China will hit back against the new export control rules will partially depend on when and how the new export control rules are implemented and executed by the respective governments. But it will mostly be decided by a Chinese cost and benefit analysis of such retaliation measures.
The coming weeks/months Beijing will continue to probe if it can drive any wedge between the US, Japan and the Netherlands regarding the implementation or scope of the new export control regime. It will also attempt to wean South Korea off from joining any of these American export control initiatives and pressurize Taiwanese companies to not abide by the US rules.
Yet the odds look not be in the PRC’s favor. It is the price China is paying for a quite disastrous foreign policy towards the democratic world under Xi Jinping. There recently seems to be some Chinese awareness things are heading into the wrong direction: the latest charm offensives to European leaders and “peace initiative” for Ukraine could be interpreted as a desire for normalization of ties with the EU. But they could also turn out to be mostly window dressing, a bid to win time and just another attempt to weaken the growing transatlantic cooperation.
Preparing for the storm
Even though ‘Made in China 2025’ is no longer openly discussed in Chinese government leadership speeches, it no doubt remains the cornerstone of China’s industrial policy. Xi’s statements at the 20th Congress in November 2022 shouldn’t be taken lightly. The CCP no longer rules out the possibility of major war in the future. Xi sees a “severe and complex international situation” where the Party must be “prepared for dangers in peacetime” as well as “preparing for the storm.” Xi also referred to the next five years as “critical” for the continued building of a powerful Chinese nation. As mijngroeve.nl has written before, since his rise to power, Xi Jinping has been trying to mobilize -in the footsteps of his big inspirator Mao Zedong- the CCP and Chinese society, including the private sector, for a “long struggle” with the West.
In the coming five years the Chinese leadership will further prioritize the central role and revitalization of state-owned enterprises and large-scale industrial policies. Restrictions on the private sector are not likely to be loosened, while the political assault on the tech-, property, and private education industries will continue unabated. Xi’s mercantilist doctrine of the “dual circulation economy,” national self-sufficiency, and the re-securing of China’s own global supply lines will remain the core of his policies.
We will witness a continuing drift away from market principles back towards the old-fashioned communist leitmotif of state direction and control, leaving no room for fundamental economic reform or genuine reciprocity in business relations with the Western world. Foreign companies will have to operate in an increasingly hostile domestic Chinese environment, in which abiding to new Chinese (extraterritorial) laws will be crucial for survival. Xi’s obsession with national security and control risks isolating the country economically and stifle China’s business environment.
At the same time a further increase of Chinese cybersecurity threats, espionage and theft of crucial Western know-how is to be anticipated in the PRC’s quest for its rejuvenation. Not surprisingly the head of the Dutch national intelligence agency very recently said “We see that every day they [China] try to steal [technology] from the Netherlands.”
The Dutch government must have arrived at the same sad conclusions too. Rutte saw little other choice than to adapt the Dutch China approach to the new geopolitical realities, also due to the absence of any intra-European consensus on the preferred China strategy and export controls. The German cabinet, in particular Scholz and his SPD, still hasn’t made up its mind about China. Macron appears to be mostly pre-occupied with his strategic autonomy dream, making it sometimes sound as if it is a project of equidistance — of having sort of the same distance to the US and to China.
The EU is bound to take a new look at its China strategy in May/June. ‘De-risking’ instead of ‘de-coupling’ is the new buzzword in the European discussion. It will be interesting to watch if there will be any push inside the EU to end to the bloc’s holy trinity approach (partner, competitor, systemic rival) on China. However, France, Germany, Spain and especially Orban’s Hungary could be reluctant to change anything.
Tellingly, Europe’s Airbus confirmed to double capacity in China and strengthen access to the world’s second-largest aviation market by agreeing to build a second Chinese assembly line, in Tianjin, during Macron’s recent trip to China. The France-based company also proudly announced the sales of 50 H160 helicopters to a Chinese leasing company. The H160 is a multifunctional helicopter that can be used for roles ranging from VIP travel to… military missions! So much for the French concerns about dual usage….https://www.lemonde.fr/en/economy/article/2023/04/07/airbus-announces-helicopter-deal-with-chinese-firm-during-macron-visit_6022044_19.html
Yet irrespective of the outcome of the upcoming deliberations in Brussels, the recent Chinese charm offensive will not stop the Netherlands from introducing an investment screening law (Vifo law: “Security Test Act for Investment, Mergers and Acquisitions”) as well as broad legal framework of criteria to assess academic cooperation in sensitive technologies & RD with non-free countries such as China (“Screening Knowledge Security Act”) and to protect crucial know-how. Together with the new export control rules, these Dutch measures have become irreversible.
Once the new export rules are fully known, executed and adhered to, it’s unlikely that Beijing won’t retaliate at all. The Dutch government must have made an assessment of the potential impact on the Dutch economy, the price we risk to pay for the paradigm shift. The impact will be less severe for ASML than for Dutch companies that are not unique and depending for their survival and growth on the Chinese market. This latter category of enterprises is the most easy target for eventual Chinese repercussions. Dutch exporters of agricultural products come to mind too. The PRC could also consider to restrict the export of specific products to the Netherlands: think of solar panels, wind turbine magnets, organic chemicals or even pharmaceuticals.
There has been mounting concern in Western circles that China will use its dominance in the field of rare earth elements and metals or minerals (f.e lithium, germanium, gallium, cobalt, tungsten) to retaliate. China appears so far to have calculated that such measures would do more harm than good. For any such Chinese move to cut off the rare earth metals supply would spark a Western race to develop new mines and new refining capacity elsewhere. Such a crisis situation would foster all the necessary political will in the West to quickly address this problem, just as Europe managed to rapidly reduce its dependency on Russian gas after the outbreak of the war in Ukraine.
China’s vulnerability in semiconductors, however, is not a matter of lack of political will, but the result of a lack of technology, know-how and now -crucially- the absence of any credible way to obtain it. The new export controls will severely impact China’s complete semiconductor supply chain, from design & design software to fabrication, materials and from chemicals to manufacturing equipment. It will obstruct Xi’s dreams of self-sufficiency and thwart his ambition to have a domestic production of the most advanced chips any time soon.
Will the people around Xi be able to make him realize this and bring him to his senses? Mijngroeve.nl is pessimistic as the Chinese president has surrounded himself with a bunch of loyalists and yea-sayers, who are too afraid to contradict the almighty leader. For all that China has been saying about wanting to be open to the outside world, it has progressively closed up. Xi is convinced he is on the right track with his China Dream. Perhaps Xi is even under the impression that China has already overtaken the West in the development of AI, a claim that can also frequently be found in Western media.
Chinese AI challenge
China’s military view AI as a leapfrog technology pertaining to national security applications that offers the PRC a historic opportunity to overtake the US. The PRC has indeed made great strides in the development of AI, in particular with respect to domestic surveillance applications such as data collection for facial recognition, for consumer finance and payments applications and for media control. Elements of the AI-enabled surveillance and censor programs developed in Xinjiang are now deployed all across China. The PRC can rely on its vast domestic market and huge population to collect a lot of data. But these data sets have very limited relevance for military applications.
The CCP doesn’t shy away from linking private tech companies and universities with the military under its military-civilian fusion strategy in order to achieve AI supremacy. The depth and intensity of this cooperation and interaction has reached a level unseen in the West. Yet it is hard to believe that for military AI applications (i.e. missile targeting, autonomous drone navigation, combat simulation etc) China does already have a data advantage over the US, the more so since the PRC has not been involved in any war using very modern technology.
Moreover, AI software has to usually run on semiconductor hardware somewhere: as described above, many aspects of that hardware ecosystem are controlled by the US (think Qualcomm, AMD, NVIDIA for GPUs) and its allies. The most advanced AI chips in production are currently manufactured in 4-12nm nodes at TSMC and Samsung. Those nodes are in principle no longer accessible for the PRC.
The export controls on semiconductors are meant to ensure that the security of the US and its allies is not threatened by the Chinese advances in AI. The West is currently still militarily ahead of the PRC and naturally would like to stay ahead. The export control policy seeks to set back and slowdown China’s semiconductor enterprises in their AI development and implementation for military applications. It aims to prevent the country from reaching the most advanced performance thresholds in semiconductor technology development.
The coming months and years will tell if this approach can be successfully executed, maintained and monitored. Time will tell if it will produce all the desired effects, keep all involved parties united in execution and gain the support of other key players such as South Korea, Taiwan, Germany and France.
Whereas a few years ago the Dutch government’s intention probably was to just try to discourage the PRC from following a self sufficiency strategy, the Netherlands has now decided to join the US and Japan in their effort to guarantee such a strategy will never fully succeed. Though the U.S. has branded the latest export controls as a very narrow ban, applying only to military technology or items that could be repurposed for military use, the Chinese will view the ban as part of a broader strategy to restrict the country’s overall development
We don’t need any AI to understand that the feelings of the Great Helmsman Xi have been seriously hurt. Surely that’s the message China’s Vice-President Han Zheng is going to personally deliver to Rutte on Thu May 11 2023 in The Hague! Ai!
Noah Barkin, Watching China in Europe – May 2023, german marshall fund