In 1947, then President Harry Truman pledged that the United States would support any nation in its efforts to resist Communism and prevent its spread. The policy was commonly called, "Containment," capturing the concept that countries aligned with U.S. policy would surround the Soviet Union and its allies, containing the spread of their ideologies. The policy was maintained as doctrine and a guiding principle in U.S. policy throughout the Cold War era.
The Policy
In 2023, the U.S. Government has not made such a sweeping declaration, but we can see a sort of "Technological Containment" in its technology security policy—particularly with respect to semiconductors—an echo of the original containment policy.
The Background
The seeds of this Technological Containment policy were planted in a March 2021 Final Report from the National Security Commission on Artificial Intelligence. The 756-page tome is not exactly light reading, but it fascinating. The Report provides a roadmap for U.S. policy in a geopolitical framework under which the U.S. views China as its competitor in a zero-sum competition for global technological dominance. The Report outlines the essentials of what would become the CHIPS Act and recommends that the United States align with the Netherlands and Japan to deny China the EUV lithography machines that China would require to produce the next generation of semiconductors.
Indications that the U.S. was adopting the policy followed, in the summer of 2022, when U.S. diplomats pressed the Dutch government to prohibit a proposed sale of EUV machines to a Chinese chip fabricator. The diplomatic effort was successful and the sale did not go through, but the U.S. push did not stop there.
Present Status
Throughout 2022, the United States worked with Netherlands and Japan to align those countries' export control policies with the United States with respect to sharing semiconductor and semiconductor manufacturing tehcnology with China. In early 2023, Japan and the Netherlands announced plans to align their export policies with those of the United States. However, the Netherlands hesitated to go as far as the United States in controlling memory chips, even though it was apparently in agreement with U.S. controls on processing chips.
Two Elements of Containment in The October (2023) Regulations
As we reported here, the U.S. Commerce Department released 430 more pages of semiconductor regulation in October 2023. The continuation of Technological Containment policy manifests in that regulation in two ways: both as positive inducement (the carrot) and as disincentive (the stick).
The Carrot
The new restrictions on semiconductors include a 0% de minimis control on certain foreign-made semiconductor manufacturing equipment (the same control that applies to military and security items!) However, if the country where that equipment is manufactured maintains the same export controls as the United States, the 0% de minimis does not apply.
There it is. As simply as it can be put: You're on one side of the line or the other. Arrange your export controls to match our foreign and security policy goals, and we give you this preferred status! It is apparent in the regulations which allies are on which side of that line.
Japan, which agreed with the United States to make changes on its semiconductor technology export controls to China, is not subject to the 0% de minimis rule. By contrast, the Netherlands, which went some way toward the U.S. semiconductor restrictions, but hesitated to implement U.S.-level controls on chip manufacturing technology, will be lumped in with the rest of the countries subject to the 0% de minimis rule (to which the U.S. government added, peering over its spectacles, "I mean, unless, of course, the Dutch Ministry of Foreign Affairs changes its mind? Ahem.")1
The Stick
At the same time as it is spoiling its friends in the containment effort, the U.S. is not sparing the rod for countries it views as sitting on the other side of its containment wall. The October 2022 semiconductor regulations targeted China and companies in China. The 2023 update broadens that target. The regulations prohibit or restrict certain exports to countries in categories D:1 D:2 and D:5—more than forty countries—including substantial international business hubs such as Saudi Arabia, and the United Arab Emirates.
The reasoning behind such broad restrictions is diversion risk. The diversion risk would be a company, formed in one of the listed countries, lawfully obtaining U.S. technology and then unlawfully reporting that technology to China or a Chinese company. The U.S. views the diversion risk as sufficiently significant that it is cordoning off dozens of countries. Effectively, the policy widens the perimeter around which the U.S. Technological Containment wall will built.
The Takeaway
The posture between the United States and China is constantly shifting. In fact, on the date of publication, Chinese President Xi Jinping will sit down with U.S. President Biden for a face-to-face meeting. It is unlikely that meeting will bring about sweeping changes to U.S. trade policy, but it will give an indication of the near-term trend of Sino-American relations. As we watch those interchanges play out we can understand from these U.S. policy measures a bit about the lens through which regulators are viewing developments. That understanding helps attentive companies maintain a critical advantage: better understanding the regulations that may arise from the geopolitical changes happening every day.
We will continue to monitor and report here.
Footnote
1. Obviously the U.S. Government made no such statement and this is a hyperbolic personification employed for effect, illustration, and, one hopes, humor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
