(Bloomberg) -- The US is preparing to exclude semiconductor-equipment makers in the Netherlands and Japan from its latest round of restrictions targeting China, people familiar with the situation said, while warning the plans are fluid and may change.
The Biden administration is working on a sweeping new trade restriction — known as the foreign direct product rule, or FDPR — to keep specific firms in China and other countries of concern from accessing advanced semiconductor technology. But Tokyo Electron Ltd., ASML Holding NV and other chip companies in the Netherlands and Japan are expected to be exempt, said the people, asking not to be identified discussing private negotiations.
The US has tried for years to implement rules that would restrict China’s rise, including repeated rounds of export controls limiting the sale of advanced chips and chipmaking equipment. The new measures, being drafted as part of a larger package, come as Washington, Tokyo and the Hague negotiate whether Dutch and Japanese firms can keep servicing restricted gear already in China — something US firms are barred from doing.
The US has indicated to allies that it may invoke the FDPR, which allows Washington to regulate foreign products made with even the tiniest amounts of American technology, to prevent ASML and Tokyo Electron from repairing their advanced gear in the Asian country, Bloomberg reported earlier.
The rules are also expected to add more than 120 additional Chinese companies to the so-called entity list, a designation that indicates a group has been deemed a US national security concern and includes businesses like Huawei Technologies Co. It’s possible that the FDPR measures will be aimed at those firms, some of the people said, though it remains unclear exactly what technology and which buyers will be restricted.
Through a spokesperson, the Commerce Department said in a statement that it’s “continually assessing the evolving threat environment and updating our export controls, as necessary, to protect U.S. national security and safeguard our technological ecosystem. We remain committed to working closely with our allies who share our values.”
ASML and Tokyo Electron shares soared on the prospects of a carve out that would allow them to keep selling to China. The news was reported earlier by Reuters. ASML jumped as much as 11%, while Tokyo Electron’s stock rose 7.4%. Other chip-equipment stocks in Europe and Asia, including ASM International NV and Disco Corp., also gained.
The only reason why the US would exclude semiconductor equipment made in the Netherlands, and Japan “is that those countries will likely conform to its demands for stricter export policies to China without the US needing to resort to invoking the Foreign Direct Product rule,” said Amir Anvarzadeh of Asymmetric Advisors. “The market may be mistaken to bid these stocks higher with the view that companies domiciled in these countries are free to export chip making tools that US wants restricted to China.”
Biden is under pressure to take additional steps to slow Beijing’s technological advances, and the semiconductor-production equipment companies may still face constraints on selling to China, some of the people said. Foreign firms and governments will have to tread carefully and keep the US policy goals in mind as they do business with China, they said.
Japan and the Netherlands, the two most important countries for chip-making equipment besides the US, have resisted additional controls out of concern they will hurt their own companies and damage relations with China. ASML, the most valuable technology company in Europe, is the world’s leader in the lithography technology used to make the industry most sophisticated chips.
Representatives for ASML and the Dutch foreign trade ministry declined to comment on the reports. The Netherlands is always in close and confidential contact with various partners on export controls, said one spokesperson for the Dutch ministry. The Netherlands ultimately bases its policy on its national security, the spokesperson said.
Tokyo Electron didn’t respond to a request for comment.
US policymakers have focused on exports of semiconductor production equipment as a means to rein in China’s technological capabilities in areas such as artificial intelligence and quantum computing, and Washington persuaded Tokyo and the Hague to impose some of their own controls. But American companies such as Applied Materials Inc., Lam Research Corp. and KLA Corp., have long complained they shoulder the greatest burden, and have urged Washington to pursue a more multilateral strategy.
While the US government can impose restrictions on its own companies directly, the FDPR gives it influence over companies abroad. Essentially, the rule would grant Washington the ability to impose its policies on companies that use a certain percentage of American inputs in their products.
That’s why Japanese and Dutch companies remain concerned about the US strategy, even if they win an exemption for now. Washington will still hold a powerful tool to punish companies in the future and that threat will affect their actions, said one person directly involved in the situation.
Specifically, the US plans to exempt a certain category of countries — known as the A5 group — from FDPR measures in the new rule, some of the people said. That means that while Japan, the Netherlands and South Korea would be exempted from the provision, countries such as Israel, Taiwan, Singapore and Malaysia would be affected.
--With assistance from Mayumi Negishi, Liau Y-Sing and Abhishek Vishnoi.
(Updates with additional details on controls throughout)
