Europe risks getting entangled in U.S.- China chip war

Editor's Note: On Friday, China made history by securing an agreement that will restore diplomatic relations between Saudi Arabia and Iran. This significant peacemaking effort would be applauded by the business community, and we certainly need more. This edition of the CCCEU Weekly Update, on the other hand, focuses on an upcoming trade dispute between the Netherlands and China, which has the potential to escalate into issues of contention between the EU and its second-largest trading partner, China: export control of advanced Dutch chip printers.

The United States, Japan, and the Netherlands reached an agreement in late January to restrict the export of high-end chips and their manufacturing equipment to China. As part of the agreement, the Dutch government announced on March 8 that it would relax export restrictions on advanced semiconductor production equipment.

Before exporting relevant equipment, an export licence must be obtained, and the government will evaluate each case individually in order to prevent the export equipment from being used for undesirable purposes, avoid long-term strategic dependence, and maintain the Netherlands' technological leadership.

Although the specific scope of the restrictions has not yet been disclosed, ASML, a global lithography giant headquartered in the Netherlands, announced on the same day that, given that the most advanced lithography machine, the EUV, was subject to export restrictions in 2019, this round of export restrictions is likely to affect the DUV lithography machine TWINSCAN NXT: 2000i and its subsequent immersion systems.

ASML, the world's largest chipmaker, stated in its annual report that the Chinese Mainland remains its third largest trading partner after South Korea and China's Taiwan, with net sales in the Chinese mainland reaching 2916 million euros in 2022. As a result of previous export restrictions, the Chinese mainland's share of the global market has continued to fall, from 16.8% in 2018 to 13.7% in 2022.

Since last October, the US has unilaterally imposed chip sanctions on China in order to stifle the development of the Chinese semiconductor industry. To ensure the effectiveness of sanctions and to prevent other countries from supplanting the US in China's high-end chip market, the US has gone to great lengths to persuade Japan, the Netherlands, and other allies to jointly restrict the export of high-end chips and manufacturing equipment to China.

Dutch Prime Minister Rutte visited the US in mid-late January and later claimed that "it was important for Western countries to not lose their leading position in advanced semiconductor technologies."

Washington is set to continue to press South Korea, Germany, and even the European Union to join the chip export restriction alliance. On January 27, Thierry Breton, the EU's internal-market commissioner, stated that the EU would stand with the US in "depriving China of the most advanced chips".

To maintain and expand its dominant position in the semiconductor industry, the United States is not only urging its allies to impose export restrictions on China, but it is also making every effort to promote chip manufacturing localization. On February 28, the US Department of Commerce launched the First CHIPS for America Funding Opportunity, which included $39 billion in semiconductor incentives as part of the CHIPS and Science Act, as well as lower taxes for investors in the semiconductor manufacturing industry, in order to entice global chip giants to build factories in the US.

The plan requires subsidised enterprises to fulfil a number of obligations, such as disclosing semiconductor facilities to the US government, sharing excess profits, and prohibiting further investment in China within ten years. 

After all, the U.S. aims to be the only country in the world where every company capable of producing cutting-edge chips has a significant R&D and high-volume manufacturing presence. While the allies must accept the loss of sales to China, they must also contend with subsidy competition from the US semiconductor industry.

However, for the US, it may be difficult to succeed in chip sanctions against China, as Bill Gates reportedly pointed out that the US will not be successful in preventing China from having great chips.

On Friday, the daily press conference of China's Foreign Ministry was flooded with questions about China's reaction towards the Dutch move. The Ministry's spokeswoman Mao Ning stated that "We disapprove of the Dutch side's interference through administrative means in the normal trade between Dutch and Chinese businesses and have made démarches to the Netherlands."

"In recent years, the US, in an attempt to deprive China of its right to development and maintain its hegemony, has overstretched the concept of national security, politicized and instrumentalized trade and tech issues, and coerced or courted some countries to adopt export restrictions against China," she noted. 

Ms. Mao continued: "Such bullying acts seriously violate market principles and the international trade order. They not only harm Chinese companies' lawful rights and interests, but also seriously undermine the stability of the global industrial and supply chains as well as global economic growth. China firmly opposes them."

EU to set up central buying agency for critical minerals-draft law

According to Reuters, the European Union aims to set up a central purchasing agency for critical materials such as lithium and rare earths and force member states to speed up permitting for new mines and processing plants, according to draft legislation.

The Critical Raw Materials Act (CRMA), which is due to be publicly released on March 14 and was seen by Reuters on Tuesday, aims to ensure the EU has access to materials needed to meet the bloc's target of moving to net zero greenhouse gas emissions by 2050.

EU postpones vote to ban combustion engines due to meddling from Germany

According to Electrive, the EU states will not vote as planned on Tuesday on the ban of combustion engines in new cars from 2035. The vote was taken off the agenda of the Council of Ministers and postponed indefinitely.

On Tuesday, the already-decided ban in the EU on new passenger cars and light commercial vehicles with combustion engines from 2035 onward was to be formally sealed by the EU states. But Germany's Transport Minister Volker Wissing (FDP) revoked his approval of the decision. His party insists on seeing a proposal for the integration of e-fuels before the EU vote. Since there is thus no unity within the federal government, Germany would have had to abstain from the EU vote.

EU loosens subsidy rules for green tech

According to Euractiv, the European Commission on Thursday (9 March) relaxed state aid rules for green technology that helps reduce carbon emissions in its bid to counter the threat to European industry from US and Chinese subsidies.

The Commission, the EU's executive arm, said the new rules will apply until the end of 2025 and, in "exceptional cases," allow members to match subsidies provided in other countries "where there is a real risk of investments being diverted away from Europe."

US, EU to launch talks on free-trade-like agreement

According to euractiv, US President Joe Biden and European Commission President Ursula von der Leyen are expected to agree on Friday to begin negotiations on ensuring free-trade agreement-like status for the European Union, two sources familiar with the plans said on Wednesday.

What are experts talking about?

"The New Phase of NATO-EU Strategic Cooperation May Not Be a Straight Path", published by the Institute of European Studies of the Chinese Academy of Social Sciences and written by Ruojie Xu. The article points out that on January 10, 2023, NATO Secretary General Jens Stoltenberg, European Council President Michels and European Commission President von der Leyen, signed and released the Joint Declaration on EU-NATO Cooperation. Unlike the previous version, China is included in the declaration for the first time as a common threat by both sides, which is an important "novelty". The author argues that the current deployment of cooperation between the two sides is essentially a "NATO-led, EU-supported" framework of cooperation that does not fully match the EU's interests. The EU's tolerance and durability of such "asymmetric" cooperation is, to a certain extent, a litmus test for the resilience of EU-NATO cooperation.

"The fiscal side of Europe's energy crisis: the facts, problems and prospects" published by Brugel. The authors are Giovanni Sgaravatti Simone and Tagliapietra Cecilia Trasi. The article points out that only a third of the massive fiscal interventions put in place by European governments to shield consumers from rising energy prices have been targeted at vulnerable categories. The author believes that Europe needs to move beyond emergency fiscal responses and focus on structural changes to allow the EU to accelerate its decoupling from fossil fuels.

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.