Forwards and Goalkeepers: Winning the (Advanced Technology) Game, or Simply Not Losing?

Download Forwards and Goalkeepers: Winning the (Advanced Technology) Game, or Simply Not Losing?

*This paper is derived from a presentation the author gave at a NEXT Alliance Conference workshop on March 1-4, 2024, in Tokyo. Dr. Crystal Pryor wrote in her personal capacity. The view and interpretations expressed by the author are solely her own.

Introduction

The United States is playing the long game when it comes to export controls. In September 2024, the government took concrete steps toward a plurilateral approach to managing emerging and foundational technologies. The latest update builds upon sweeping new controls on advanced semiconductor technology exports to China introduced in October 2022, which were further refined and strengthened one year later. While the 2022 controls were unilateral at first, the United States was able to convince two of the key suppliers in the advanced semiconductor technology supply chain — the Netherlands and Japan — to institute similar controls. This diplomatic success was not predestined and bodes well for the effectiveness of these controls. In addition, the September 2024 update (technically an interim final rule published by the US Commerce Department’s Bureau of Industry and Security (BIS)), appears to have been crafted in broad technical agreement among international partners, including on advanced semiconductor items.[1] The latest rule is a nod to the importance of coordinating with allies and like-minded countries, and it allows license exceptions for countries with similar controls on the books.

History has shown that export controls, when applied only by one party (read: the United States), can have negative consequences for domestic industry. Even when multilateral, export controls have limits and should be understood as a short-term defensive measure, not a long-term solution.

To liken the current state of multilateral export controls to a soccer game — to win, a team requires a strategy, a good goalkeeper, and a strong offensive game. A great goalie (i.e., export controls) can keep a team from losing, but the goalie won’t single handedly win the game.

What can be learned from the United States’ prior experience with export controls, and how do these learnings affect those on “Team US” when they decide whether to institute similar controls on semiconductor or other advanced technologies? We are watching team formation and the tactics for how to play against Team China (and win) in real time.

Novel semiconductor export controls

The export control rules published in the past two years cover advanced computing integrated circuits (ICs), semiconductor manufacturing equipment (SME) essential to producing advanced-node ICs, and items used to further supercomputing capacity. The October 2022 controls are novel in three important ways. First, they include controls on “US persons.” This means that US person entities and individuals cannot engage in activities to support advanced computing and semiconductor manufacturing in China.

Second, the October 2022 controls specifically target China, although in the 2023 update, other “countries of concern” were added. Export controls on so-called dual-use items (goods or technologies with both military and civilian applications) are typically specification, not destination, based. This makes them different from sanctions or embargoes, which generally target activities involving specific countries or entities.

Third, with these rules, the US government has signaled a shift away from concern over weapons of mass destruction (WMD) and conventional military proliferation to capture even purely commercial items that might abet China’s military advancement. These are three major expansions of the post-Cold War approach to export controls; and highlights the degree to which US-China strategic rivalry has become the defining security threat of our time.

Old guard: US satellite export controls

The United States manages the export of dual-use items primarily via the Department of Commerce Control List (CCL). Defense articles, meanwhile, fall under the State Department’s purview, via the International Traffic in Arms Regulations or ITAR control list.

From 1992 to 1996, some communication satellites, an archetypal dual-use technology, were controlled under the CCL, while others more militarily sensitive fell under ITAR. This practice brought the United States into alignment with its partners in the main multilateral export control arrangement during the Cold War, the Coordinating Committee for Multilateral Export Controls (CoCom). By October 1996, all communication satellites were moved to Commerce Department jurisdiction.

Yet a failed Chinese rocket launch of a US intelligence satellites in 1996 reversed the course toward stricter controls (and ultimately was a death knell for US-China outer space cooperation). US policymakers were concerned about American “crown jewel” technology getting into Chinese hands and enhancing the country’s ballistic missile program. US satellites were moved back under ITAR purview, where they remained for nearly two decades. Any US-origin satellite-related technology or components now would require a license from the State Department to be exported as a munition. This included the re-export of US technology and even technical discussions with prospective foreign buyers. In practice, it became extremely difficult for other countries (including US allies) to incorporate US technology into their satellite production. Business pressures led other countries to develop workarounds for US-origin components.

When satellites were first re-classified as munitions in 1998, the United States had 75 percent market share in the satellite market. After a decade of being on the ITAR list, US market share in the satellite industry was down to 41 percent. US satellite companies lost that market share to competitors from other countries who were not subject to the same export controls.^[2] European and Asian satellite manufacturers benefited from the increased demand for satellite technology in markets where US companies faced regulatory barriers. One US government study reported that the value of contracts lost due to ITAR between 2003 and 2006 was $2.35 billion.^[3]

The restrictions imposed by ITAR also limited the ability of US satellite companies to collaborate with foreign partners on research and development projects. The lack of collaboration hindered innovation and technological advancement within the US satellite industry, as companies were unable to access the expertise and resources available internationally.

A major issue with the satellite export controls was that they were unilateral in nature. By the mid-1990s, no other country in the world was treating communication satellites or their parts as military items. Moreover, the controls did not discriminate between friend and foe — even European allies importing satellite-related items from the United States faced a stiff compliance burden.

Reflections on US satellite export controls

In July 2022, Tim Hwang and Emily S. Weinstein wrote an excellent issue brief for Georgetown’s Center for Security and Emerging Technology entitled Decoupling in Strategic Technologies: From Satellites to Artificial Intelligence. It examined the effect of export controls and related trade restrictions on technological decoupling. Their brief used the example of US efforts to decouple satellite technology supply chains starting in the late 1990s and examined the effectiveness of export controls and factors that make decoupling policies more or less successful.

While Hwang and Weinstein find that export controls can help to reshape supply chains and limit access to technology, they also note that controls do not completely prevent rivals’ technological progress. Moreover, decoupling policies are less effective over time as technology develops and diffuses.

Indeed, in the 2023 update to the new semiconductor rules, BIS explicitly responds to the following: “Many commenters agreed with BIS’s objectives but argued that the unilateral controls in the October 7 IFR [Interim Final Rule] have already been, and will be, both damaging and ineffective particularly because they encourage foreign companies to ‘design out’ or avoid products subject to the EAR [Export Administration Regulations]. This ‘design out’ is to the short- and long-term detriment of US-based companies and their technological leadership within the semiconductor industry. Accordingly, commenters argue the controls are, or over time will become, ineffective.”^[4] BIS stresses in response that its 2023 update makes the controls more focused and refined; provides for “more nuanced license review policies” and has made available “new general authorizations to allied-destination companies” to allay this concern.

Another finding from the CSET brief is that “technologies that feature geographically concentrated supply chains appear more amenable to decoupling tactics.” For this reason, they are wary about the effectiveness of AI-related export controls.

While their review of the satellite export control history is instructive for their contemporary case study, artificial intelligence competition, it should also be considered in light of the novel semiconductor export controls. Their analysis is relevant not only to the US-Japan-Netherlands semiconductor export control coordination, but also to other countries coordinating with the United States on advanced technology export controls. Many observers have remarked that the October 2022 rules are only the beginning of technology domains and supply chains to be decoupled or “derisked” away from China.

Old guard to new guard: From satellites to semiconductors

First, the “good” about the new semiconductor rules.

• While the United States initially imposed the new semiconductor rules unilaterally, it pushed hard, and ultimately succeeded, to get Japan and the Netherlands on board. It appears that under US pressure, Japan may further strengthen its controls on semiconductor-related technology to China.[5]
• Supply chain coordination is occurring simultaneously across multiple technology domains, with different groups of countries.
• The October 2022 controls are on specific lithography equipment that can only be produced by the three countries, so the focus is narrow, well-defined, and limited in geographical scope.
• The controls were issued by the Department of Commerce, not State. Semiconductors and related technologies are not being treated as munitions, but rather dual-use items that warrant further scrutiny before export.
• In tandem with the new export controls, there is a greater push to promote innovation in semiconductors. The US CHIPS and Science Act, Japan’s Economic Security Promotion Act, and the European Chips Act are putting extra emphasis on investment and innovation (although controls and restrictions are included).
• The September 2024 interim rule continues to support “deemed export” licensing exceptions to continue working with US-based foreign nationals in light of the relatively small global talent pool in critical technologies.[6] If the United States and partner countries seek to maintain their economic competitiveness and technological advantage, they must continue to engage and retain the best talent where it makes sense to do so.
• Governments, including the US government, are giving due consideration to the effect of new controls on domestic industry, and are actively soliciting stakeholder feedback.
• BIS’ September 2024 interim rule explicitly references strengthening “our international relationships with like-minded countries.”[7] New license exceptions are available for Italy and the UK, while exceptions are available for certain items being exported to Australia, Canada, France, Germany, Japan, and Spain. Given the difficulty the longstanding multilateral export control regimes are facing when it comes to updating control lists, a plurilateral approach makes practical sense. Harmonization among countries’ controls is being encouraged, and we can expect further country and technology additions.

The bad:

• Other “promote” initiatives such as the “Fab 4” or the “Chips 4” alliance between the United States, Japan, Taiwan, and South Korea seem to be stalling. It has proven exceedingly difficult to coordinate on both promotion and protection with third countries, which each have different economic interests as well as perceptions of China’s threat. Moreover, even allied countries can be economic competitors that are wary of protectionist policies in the name of security.
• Even in the niche area of advanced-node ICs, there are differences in the implementation of export controls between the United States, Japan, and the Netherlands. First, the United States was the only country to make China the explicit target of the controls. For the other two, the controls are specification, not destination, based. Second, the US is the only country to place export controls on its persons. Thus, Japanese and Dutch nationals can still carry out activities in China that Americans are banned from doing. As mentioned, Japan may bring its rules into closer alignment with the United States, but the Netherlands appears to be reluctant to do so. Both countries are concerned about Chinese economic retaliation.
• The concerns with any type of export controls are that they are ineffective and damage domestic industry. It can take many years to unwind controls, even once they have been recognized to be ineffective and harming domestic industry, as was the case with satellites. It is somewhat concerning that the United States was willing to impose unilateral controls before the Netherlands and Japan fully signed on.
• There is early evidence that the new advanced semiconductor controls have caused China to double-down on indigenizing production.^[8] Its government continues to incentivize its companies to design-out US chips and chip designs.^[9] Chinese processor chips are now reportedly only a few years behind Taiwan’s.[10]
• The United States does not have the edge in all the technologies of concern to China’s Military-Civil Fusion program for unilateral controls to be effective. But it is also unclear that the United States will be able to convince every relevant group of countries in a given advanced technology domain to enact stringent export controls. The existing multilateral export control regimes, namely the Wassenaar Arrangement, are unsuitable for forging contemporary technological alliances.

The history of export controls on satellites explains why controls are likely to be effective only if they are short term and constantly updated as technologies advance and diffuse. The effects on domestic industry, innovation and cooperation should not be ignored. If the controlling countries cannot maintain a technological edge, they risk getting built out of the ecosystem entirely, export controls or no.

As this competitive game evolves, we should expect more controls in areas that US National Security Advisor Jake Sullivan has called “force multipliers,” such as quantum computers/computing, artificial intelligence, biotechnologies and biomanufacturing, and clean energy technology.^[11] We will also likely see more attention paid to human rights considerations in the export control practices of the United States and its allies, with Europe leading the charge.

But controls will not get very far without the agreement of other advanced producers that the technology in question poses a concern. While the US was effective in applying pressure to the Netherlands and Japan in one well-defined area, it may not have the same results in every technology domain or with other countries, or have enough clout to get everyone onto its team. We must gain more clarity around what the threat is that we’re trying to protect against; and consensus about how we protect ourselves from it.

Effective, multilateral controls are like having a good goalkeeper. To win the game, the team also needs to have good offense. Thus, like-minded countries need to promote innovation much more than protect it, including for resource-intensive domains such as semiconductors. It would behoove us to run faster and be proactive rather than reactive and overly relying on controls. The United States and its close ally Japan are both moving in this direction, but it will take a sustained commitment to issues like workforce development for advanced and critical technologies — a policy commitment and investment that can take years to bear fruit.

The US-Japan NEXT Alliance Initiative is a forum for bilateral dialogue, networking, and the development of joint recommendations involving a wide range of policy and technical specialists (in and out of government) to stimulate new alliance connections across foreign, security, and technology policy areas. Established by Sasakawa Peace Foundation USA with support from the Nippon Foundation, the goal is to help improve the alliance and how it serves shared interests, preparing it for emerging challenges within an increasingly complex and dynamic geostrategic environment. Launched in 2021, the Initiative includes two overlapping lines of effort: 1) Foreign & Security Policy, and 2) Technology & Innovation Connections. The Initiative is led by Sr. Director Jim Schoff.

[1] “Federal Register/Vol. 89, No. 173/Friday, September 6, …” Www.BIS.Gov, Department of Commerce, 6 Sept. 2024, www.bis.doc.gov/index.php/documents/federal-register-notices-1/3521-89-fr-72926-quantum-c-1-ifr-0694-aj60-9-6-2024/file.

^[2] President, Satellite Industry Association (SIA) Patricia Cooper testimony before Congress in 2012, https://sia.org/wp-content/uploads/2019/12/SIA-ITAR-Written-Testimony-for-HFAC-Hearing-2012-02-07.pdf

^[3] US Department of Defense, “Defense Industrial Base Assessment: US Space Industry,” August 31, 2007 http://www.bis.doc.gov/defenseindustrialbaseprograms/osies/defmarketresearchrpts/exportcontrolfinalreport08- 31-07master___3—bis-net-link-version—101707-receipt-from-afrl.pdf, p. 34

^[4] “The Federal Register.” Federal Register : Request Access, Department of Commerce: Bureau of Industry and Security, www.federalregister.gov/documents/2023/10/25/2023-23049/export-controls-on-semiconductor-manufacturing-items

[5] “US and Japan near deal to curb chip technology exports to China,” Financial Times, Sept. 16, 2024, https://www.ft.com/content/3fa44901-33e4-4ab4-9f7b-efe1575a6553?shareType=nongift

[6] Manfredi, Richard. “United States Deploys New Playbook for Plurilateral Export Controls on Advanced and Emerging Technologies.” Gibson Dunn, 18 Sept. 2024, www.gibsondunn.com/us-deploys-new-playbook-for-plurilateral-export-controls-on-advanced-and-emerging-technologies/.

[7] “Department of Commerce Implements Controls on Quantum Computing and Other Advanced Technologies Alongside International Partners,”

https://www.bis.gov/press-release/department-commerce-implements-controls-quantum-computing-and-other-advanced

^[8] Triolo, Paul. “China’s Semiconductor Industry Advances despite US Export Controls.” CSIS, Center for Strategic and International Studies, www.csis.org/analysis/chinas-semiconductor-industry-advances-despite-us-export-controls; Baums, Ansgar. “The ‘Chokepoint’ Fallacy of Tech Export Controls • Stimson Center.” Stimson Center, 24 June 2024, www.stimson.org/2024/the-chokepoint-fallacy-of-tech-export-controls/; Triolo, Paul. “A New Era for the Chinese Semiconductor Industry: Beijing Responds to Export Controls.” American Affairs Journal, 23 Feb. 2024, www.americanaffairsjournal.org/2024/02/a-new-era-for-the-chinese-semiconductor-industry-beijing-responds-to-export-controls/.

^[9] Shivakumar, Sujai, et al. “Balancing the Ledger: Export Controls on US Chip Technology to China.” CSIS, www.csis.org/analysis/balancing-ledger-export-controls-us-chip-technology-china.

[10] “Butts, Dylan. “U.S. Rolls out New Chip-Related Export Controls as China Makes Industry Advances.” CNBC, CNBC, 6 Sept. 2024, www.cnbc.com/2024/09/06/us-china-quantum-chip-related-export-controls.html,”

^[11] Borkovic, Anne E, et al. “Russia, China, Semiconductors and Reimagining National Security: US Export Controls 2022 Year in Review.” Akin Gump Strauss Hauer & Feld LLP – Russia, China, Semiconductors and Reimagining National Security: US Export Controls 2022 Year in Review, www.akingump.com/en/insights/alerts/russia-china-semiconductors-and-reimagining-national-security-us-export-controls-2022-year-in-review.

Download Forwards and Goalkeepers: Winning the (Advanced Technology) Game, or Simply Not Losing?