EU Should Prepare for New ‘Era’ of Chinese Export Control Retaliation, Researchers Say

EU countries need to do more to track China’s progress in semiconductors, electric vehicles, solar panels and other technologies, European researchers said last week, warning that Beijing is increasingly turning to export controls to test where it can best “exploit dependencies” by other major economies that are imposing their own technology trade restrictions against China. They added that China’s export licensing decisions have so far been “highly opaque” and sometimes appear biased, generating fear among western countries that the controls are solely being used as a trade retaliation tool.

The report by the Mercator Institute for China Studies called on the EU to be better prepared as China sharpens and tests its tools for “controlling technology-related outflows,” which include new export licensing requirements. Beijing “seeks to present itself as a responsible stakeholder contributing to non-proliferation,” researchers with MERICS said, but they stressed that the controls also are being designed to bolster China’s own technology companies and hone a tool it can use to retaliate against semiconductor restrictions imposed by other countries, such as the U.S. and nations in Europe.

“European governments and firms must prepare for an era where China may be more willing and able to exploit its advantages and leverage along technology value chains, often in a highly opaque manner,” the report said. “After decades of chasing foreign technology, the Chinese government is now intent on managing technology-related outflows and limiting foreign access to favor domestic champions while hindering Western de-risking.”

MERICS, which is based in Germany, called on European governments to pour more investments into tracking China’s technological progress, “especially in areas where [China] is already a frontrunner,” including in EVs, solar panels, lithium-ion batteries, third-generation semiconductors and quantum communications. EU authorities also should improve communication with industry to encourage companies to share information “about their on-the-ground experiences” in China.

That could include calling on EU companies to report to their governments on Chinese export licensing decisions, which would help European countries “monitor and respond to instances where Beijing uses discriminatory licensing to orchestrate Chinese supply chains overseas,” the report said.

The EU also should work with other “like-minded” partners to share information to “counteract China’s habit of trying to drive wedges,” the researchers said, adding that Beijing has shown it’s willing to apply “discriminatory, opaque and at times overtly coercive” export controls.

The report mentioned China’s restrictions on exports of gallium and germanium -- two key metals used in semiconductor production (see 2307050018 and 2310030035) -- which Beijing announced last year months after the U.S., Japan and the Netherlands increased export controls on advanced computing chips and chipmaking equipment.

Chinese exports of unwrought gallium and germanium to the U.S., Japan and the Netherlands “disappeared completely once the new controls were enforced,” MERICS said. “Exports to [Organisation for Economic Co-operation and Development] countries have since rebounded to slightly below pre-control levels, but not for the United States, Japan and the Netherlands.”

The report also warned that China’s approach to export controls could backfire by leading foreign companies to continue “derisking” their supply chains, including by minimizing their exposure to the Chinese market. But the researchers also said Chinese policymakers “seem aware” that this is a risk and are studying ways to prevent this. “They are testing different ideas,” MERICS said, “likely to see where China can exploit dependencies without scoring an own goal.”

The researchers said China has been experimenting with export controls. They pointed to December controls imposed by Beijing on certain 3D laser scanning technology, also known as lidar, which has uses in drones and self-driving cars (see 2401090033 and 2312210020). But because Chinese lidar company Hensai and other similar firms “mainly compete on price,” MERICS said “there is uncertainty whether controls would strengthen their competitive position or rather hamper overseas expansion and cooperation.”

These discussions “have influenced export control decisions in some cases, leading to more restraint” by China, the report said. It pointed to one early draft of a recent set of Chinese export controls that proposed banning exports of key technologies used to make solar panels, but Beijing dropped the control from the final version after Chinese experts said European and American companies were restarting production of those technologies.

“Nevertheless, the advantages Chinese authorities can gain from improving their ability to monitor technology-related outflows should not be discounted,” the report said. “This benefit is strong when [China] introduces a licensing requirement rather than a blanket ban.”

The researchers specifically recommend the U.S. and the EU continue working closely together to share information on China-related supply chain issues. They pointed to the semiconductor supply chain early-warning mechanism that the two sides announced in 2022 and renewed in April as part of the Trade and Technology Council (see 2404050030 and 2205160033), which was designed to help them address chip supply chain issues before they snowball.

That mechanism could be “extended to manage disruptions beyond the semiconductor supply chain,” the report said. “Whether such coordination would even be possible in the event of a reelection of Donald Trump as US president, though, is a big question mark.”