Multilateral export controls: The trade tug-of-war

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  Quantumrun Foresight
• August 4, 2023

Insight highlights

The US Department of Commerce's Bureau of Industry and Security (BIS) imposed new export control policies (2023) to restrict China's access to specific high-tech semiconductor devices. Despite financial losses for US companies, these controls are hoped to be adopted by allies. However, the potential long-term implications include hindered economic growth in specific sectors, increased political tension, social unrest due to job losses, slowed global technology diffusion, and increased need for worker retraining.

Multilateral export controls context

Export controls developed by alliances of countries serve to informally regulate the export of certain technologies for shared advantages. However, existing allies show increasing divergences, particularly concerning China's semiconductor sector. As the strategic competition between the US and China escalates, the US Department of Commerce's Bureau of Industry and Security (BIS) launched new export control policies designed to hinder China's access to, and development and production of, specific high-tech semiconductor devices used in AI, supercomputing, and defense applications. 

This move constitutes a significant change in US policy, which previously was more liberal towards trade. The new policies, rolled out in October 2022, ban the export of semiconductor manufacturing equipment that could enable Chinese firms to produce advanced semiconductors smaller than 14 nanometers. The BIS has further plans, proposing that companies establish their own export controls for semiconductor equipment, materials, and chips to present a united front against China.

Media reports from late January 2023 suggested that Japan and the Netherlands were ready to join the US in imposing semiconductor export restrictions on China. In February 2023, the main trade organization for Chinese semiconductor companies, the China Semiconductor Industry Association (CSIA), issued an official statement denouncing these actions. Then, in March 2023, the Dutch government took the first decisive action by declaring export limits on advanced immersion deep ultraviolet (DUV) systems to China. 

Disruptive impact

These export controls are not without financial consequences to those who execute them. There were already business losses for US semiconductor equipment and material companies. Stocks for Applied Materials, KLA, and Lam Research have all seen more than an 18 percent drop since the introduction of these controls. In particular, Applied Materials reduced its quarterly sales forecast by approximately USD $400 million, attributing this adjustment to the BIS regulations. These businesses have pointed out that the anticipated revenue losses could seriously threaten their long-term ability to fund the necessary research and development to stay ahead of their competition.

Despite historical challenges with multilateral coordination on export controls, the US Department of Commerce remains hopeful that allies will implement similar restrictions. While Chinese companies may attempt to develop their versions of US technology, the substantial technological lead and intricate supply chains make such an endeavor exceptionally challenging.

Experts think the US has a high stake in leading these multilateral export controls against China. If the US fails to gain the backing of other major producers, the export controls could inadvertently harm US companies while only briefly impeding China's advanced chip design and manufacturing abilities. However, the Biden administration's actions so far imply an understanding of these potential pitfalls and a proactive approach to secure support and adherence to this strategy. Although implementing this strategy might entail challenges, its successful execution could prove beneficial in the long run and establish a new paradigm for productive collaboration on mutual security concerns.

Implications of multilateral export controls

Wider implications of multilateral export controls may include: 

• Hindered economic growth in some sectors, particularly those reliant on the export of controlled goods or technologies. Over time, these constraints can lead to a structural shift in the economy as businesses adapt and diversify into other sectors.
• Political tension both domestically and internationally. Domestically, sectors affected by the controls may exert pressure on their governments to negotiate more favorable terms. Internationally, disagreements over enforcement or breaches of the agreement can strain relations.
• Job losses and social unrest, especially in regions heavily dependent on these industries. Over the long term, this could exacerbate socioeconomic inequalities.
• Export controls on high-tech goods or advanced technologies slowing down the global diffusion of technology, hindering technological development in certain countries. However, it may spur domestic innovation if companies invest in research and development to bypass controlled foreign technology.
• Regulation of the global trade in environmentally harmful substances or technologies. Over time, this could lead to substantial environmental benefits, such as reduced pollution and better preservation of biodiversity. 
• The prevention of mass-produced weapons and dual-use technologies (which have both civilian and military applications). In the long term, effective multilateral export controls can enhance global security. However, if certain countries feel unfairly targeted or restricted, it could lead to a backlash or increased clandestine activities to circumvent the controls.

Questions to consider

• What are some of the export controls that your country is participating in?
• How might these export controls backfire?