American Toolmakers Viewed as 'Biggest Losers' in US-China Chip War

Although U.S. officials say export controls on advanced semiconductors and related equipment are designed to slow Chinese technological innovation, those controls have so far hurt American toolmakers the most, a technology policy expert said.

Paul Triolo, partner for China and technology policy lead at Albright Stonebridge Group, said American chip equipment manufacturers have been subject to certain export restrictions that their competitors don’t face, allowing those foreign firms to gain more market share in China.

“I think the biggest losers, right now, if you put a gun to my head, are U.S. toolmakers,” Triolo said last week on Sinica, a podcast about Chinese current affairs. He said “U.S. toolmakers are subject to these controls, in a way that, for example, the Dutch and the Japanese are not.”

The Biden administration convinced Japan and the Netherlands last year to impose some new export controls on chip equipment destined to China (see 2303310031 and 2303090032) and has been pushing them to impose more. That has included asking them to stop their semiconductor companies from servicing certain advanced chip tools under preexisting contracts with Chinese customers (see 2403270038).

As the U.S. has rolled out new chip controls, American companies have had to “pull all their people out of facilities” in China, Triolo said. “And guess what? The Chinese toolmakers can [still] get access to that equipment, as do other companies, like from Japan, that are competitors,” he said. “And so actually, those competitors have gained tremendously in China market share, and then eventually will be able to compete with U.S. companies outside of China.”

He said American companies have argued that the controls "undercut their business model for very little clear national security gain.” Fewer profits means less money to spend on research and development, Triolo said.

Some of those firms "believe, for example, that in 10 years, they'll be out of the market in China and will be facing Chinese competition globally,” he said. “If you're a U.S. toolmaker, you're not happy about this.”

Asked to present an argument about how U.S. export controls on China have worked, Triolo said the chip restrictions have caused China to spend more time and resources developing more advanced chips.

He pointed to Huawei’s semiconductor breakthrough last year when it announced its new Mate 60 Pro+ smartphone using a 7 nanometer chip (see 2309190052 and 2309120005), saying it took "considerable effort on the part of Chinese engineers to engineer that chip, to produce it in quantity and quality, and they still have a lot of challenges there."

Researchers have also said Huawei faces large production hurdles despite the breakthrough (see 2406280036).

The U.S. could have paused its export controls there, Triolo said, but noted that the Biden administration instead ratcheted up its restrictions after the Huawei announcement partly due to pressure from Congress (see 2407290032 and 2405230051). The Commerce Department has also said it plans to continually update its chips restrictions, possibly annually.

“There's some sort of payback here that's coming,” he said. “I call it the Huawei revenge rule.”

Kevin Xu, a former Commerce official, said during the podcast that he has a more “neutral take” on U.S. export controls against China. He expects the U.S. to reach “somewhat of a steady state when it comes to this U.S.-China competition” in the next three to four years, where the government “feels comfortable” with the technological lead it has built over Beijing.

“I think that will hopefully calm down the continuous ratcheting up of export control or other measures,” Xu said.

He said U.S. export controls on China are “actually working reasonably well.” Some critics of export controls note that Huawei survived being subject to strict license requirements, but Xu suggested that’s not a good argument.

“I don't think anybody in D.C., at least the folks that I talk to, expected Huawei to proactively lie flat,” he said. If Huawei went bankrupt, that would be a “nice icing on the cake,” Xu said, “but kind of pushing them to the side and making them recreate the wheel in a lot of ways, is perhaps enough of a policy victory.”

"It's just that we haven't seen that yet," he added, "and we may need a little bit more time to have that be proclaimed publicly, that we can say, ‘Hey, mission accomplished, we have comfortably established a three- to four-year lead even vis-a-vis the most advanced companies in China.’”