Instıtut Montaigne : Europe in the New World of Export Controls ANALYSES - 15 FEBRUARY 2023 By Mathieu Duchâtel

 

Europe in the New World of Export Controls

ANALYSES - 15 FEBRUARY 2023

By Mathieu Duchâtel

DIRECTOR OF THE ASIA PROGRAM

When Japan and the Netherlands struck a deal with the US to align with restrictions the Biden administration imposed in October on semiconductor technology transfers to China, the trilateral agreement drew sharp criticism in certain European circles. Details of the agreement have not been made public. The Netherlands has been accused of acting outside the framework of the European Union given that the bloc has exclusive competence in external trade. The Dutch were also slammed for undermining the legitimate objective of export controls — which are only intended to target products used for military purposes — by backing a US policy that goes much further than military applications. Indeed, Washington has made it clear that its goal is to turn the screws on China’s ability to catch up in the chip race and establish itself as a global tech leader. Both criticisms are unfounded.

Let's start by debunking the simpler of the two. EU member states have several prerogatives in the sphere of export controls. The granting of export licenses is a national competence, including for items on the EU’s common list of dual-use items and technologies (i.e. goods that can be used for both military and civilian applications). Even more significantly, according to Article 4 of European Regulation No. 428/2009 (setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items), "Member State[s] may adopt or maintain national legislation imposing an authorisation requirement on the export of dual-use items" that are not included in the EU's common list if there are grounds for suspecting that those items may be used for military purposes (the only caveat being that the member state must notify the European Commission and other member states of the dual-use items in question). The Hague is therefore not required to coordinate with the rest of the Union to establish sovereign export controls on technologies that are built into goods produced on Dutch soil. 

The question is whether the semiconductor technologies targeted by the latest US restrictions are about military competition with China or about more than that. Political noise has led to some confusion on this matter. According to US National Security Advisor Jake Sullivan, the newly announced rules are necessary to achieve Washington's goal of maintaining "as large of a lead as possible" over the Chinese semiconductor industry.

The controls were not just designed to weaken China's defense industry but also seek to hobble the country's digital transformation across all civilian commercial applications. 

This suggests that the controls were not just designed to weaken China's defense industry but also seek to hobble the country's digital transformation across all civilian commercial applications. Through the lens of European industry, Washington's use of export controls often disguises an attempt to gain a commercial advantage over competitors (in Europe and elsewhere) as being necessary to slow Beijing's military modernization. There is a strong case to be made for this interpretation given Mr. Sullivan's recent statement coupled with the nature of some of the new measures which, for example, now target memory chips for the first time.

The statements made by Dutch Prime Minister Mark Rutte suggest an endorsement of this US strategy to maintain a technological edge over China. This would be problematic given that export control mechanisms in Europe are designed to only be imposed for dual-use items and target military end-users.

Yet, military competition with China is by no means a secondary consideration for the US. It lies at the heart of its measures. Above all, there is nothing to suggest that the Netherlands will not slap controls on semiconductor technology exports to China from a dual-use perspective. Quite the contrary, this is by far the most likely scenario...so likely that it is a virtual certainty. In reality, the entire semiconductor industry could potentially play a part in advancing military programs. Although the most advanced generations of logic chips are not currently built into weapons systems, they are used by supercomputers to design these weapons. And while chips with artificial intelligence capabilities are essential for Alibaba Cloud's servers, they also allow supercomputers to process enough data to simulate-and therefore plan-military action in any given theater of operations. Accordingly, the trilateral deal can be summed up as an agreement that takes aim at the military applications of artificial intelligence. And owing to the specificities of Chinese state capitalism and the country's national strategy of "civil-military integration", Beijing's end use of a technology is neither guaranteed nor verifiable. Thus, even if military applications represented only 5% of the artificial intelligence sector in China, the risk would still exist that the remaining 95% of civilian applications of the AI sector could be repurposed for military ambitions. 

Will the Dutch attempt to Europeanize this facet of their export controls policy? They certainly have the legal wherewithal to do so ever since the European regulation on dual-use items was amended in 2020. EU member states may now initiate a procedure to update the common list of dual-use items to include an item that they control at the national level.

To not Europeanize export controls would leave the Dutch vulnerable to retaliation from China, a risk that they would have to face alone. In addition, taking extreme ultraviolet lithography as an example (a key European strength in the semiconductor value chain, for which the Netherlands is the world’s leader), it is difficult to imagine an exclusively national approach since the supply chain for this technology is predominantly European and backed by a network of subcontractors on the continent, notably in Germany. Will the Netherlands choose to go down this path? At this stage, nothing seems to indicate that they will.

Most importantly for Europe, the trilateral agreement between the US, Japan and the Netherlands signals the dawn of a new world for export controls. 

On the contrary, the Netherlands behave as if their main consideration was to remain as low-key as possible on this matter. In that respect, it is notable that all the leaks regarding the negotiations come from the US. 

Most importantly for Europe, the trilateral agreement between the US, Japan and the Netherlands signals the dawn of a new world for export controls. They have become the weapon of choice in US policy towards China, in a larger toolbox targeting Chinese access to foreign technology. In turn, they have also risen in importance in Europe's foreign policy, as demonstrated in the response to Russia’s war against Ukraine. The fact remains, however, that Europe finds itself on the sidelines of the tech war between the US and China. It is constantly forced to react and adjust rather than pursuing its own initiatives in the era of technology security. Europe needs a strategic perspective on the use of export controls for foreign policy purposes. Going forward, it is vital to build awareness on this critical issue and take action. The importance of export controls in international relations will continue to grow, including for chips used in quantum computing and artificial intelligence, two fields for which the ambiguity surrounding dual use is absolute given how much scientific advances and breakthroughs can drive defense innovation. 

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