China Will ‘Exploit’ Chip Controls Absent Substantial Buy-In From US Allies, Former Official Says

The Biden administration’s implementation of its new China chip export controls (see 2210070049) has been “mixed,” and it remains unclear how far allies will go to impose similar restrictions, said Clete Willems, who was a National Security Council official during the Trump administration. Willems, in written testimony this week to the House Financial Services Committee, said he doesn’t understand why the administration didn’t initially coordinate the October export control rule with allies, a shortcoming that could be hurting U.S. companies now.

Although the U.S. reportedly concluded talks with Japan and the Netherlands last month on new semiconductor export restrictions against China (see 2301270002), the deal may be a “Pyrrhic victory,” Willems said. “A key open question is whether these allies will include key features of the U.S. rule in their regulations, including controls on persons, the broad end-use catch-all control on semiconductor technology, and prohibitions on re-exportation for those tools outside of the Netherlands and Japan.” He added that “nothing short of parity with the U.S. rules will level the playing field or meet the administration’s national security objectives.”

If the Japanese and Dutch controls aren’t substantially similar to the U.S. restrictions, Willems said, China “will find ways to exploit the gaps.” If Japan and the Netherlands don’t impose U.S. persons controls, for example, China “can lure talent away” from both countries to “aid in their advancement,” he said. Without a “catch-all control, the rule will not keep up with an evolution in the tools used for advanced node manufacturing,” he added, and “without restrictions on re-exportation, Chinese companies can find ways to obtain foreign tools and technology via third countries' manufacturing.”

He also said China’s “indigenous equipment makers” can “freely obtain critical sub-systems and components” from Asian and European companies, and can integrate those components into their “indigenous semiconductor manufacturing equipment -- all outside the purview of the U.S. export control system.”

The U.S. also should have issued the October export controls as a proposed rule instead of an interim final rule, said Willems, an Akin Gump lawyer, which would have given U.S. companies, who have a “deeper understanding of supply chains” than the Commerce Department, a “chance to opine on the rule before it went into effect.” The Bureau of Industry and Security gave its technical advisory committees a brief window to review the rule before it was published, but a semiconductor industry executive last year said more time could have helped the agency mitigate unintended consequences for a dense and complex set of restrictions (see 2212140038).

“Due to this unforced error, there were widespread and unnecessary disruptions in production, fraying the already strained semiconductor supply chain,” Willems said. “In response,” he said, the administration “backpedaled” on the controls “through ‘interpretations’ and ‘waivers’ for certain companies. It was also forced to fine-tune parts of the rule to prevent multinational companies from shutting down manufacturing operations -- the ramifications of which would have been felt by downstream consumers.”

In comments to BIS released last month, trade groups and technology firms said the new restrictions are among the most complex export regulatory provisions ever published and have caused significant uncertainty in the semiconductor industry (see 2302020034).

Willems said Congress should “pressure” the administration to issue future rules for public comment before they take effect. “Rule of law and due process begets predictability and stability, which are hallmarks of the U.S. legal system, and that will ultimately help U.S. businesses and U.S. allies.”