The Discomfort of Extraterritoriality: US Semiconductor Export Controls and why their Chokehold on Dutch Photolithography Machines Matter – EJIL: Talk!
Blog of the European Journal of International Law
In the wake of the US Department of Commerce’s announcement on 17 October 2023 of new sweeping semiconductor export control restrictions, China began stockpiling photolithography machines produced by ASML based in the Netherlands. Why did China scramble towards a Dutch company because of US restrictions?
These regulations were designed to restrict the transfer of critical technologies to China not only from US entities but also any entity – regardless of nexus to US entities – producing technology vital in the semiconductor supply chain, such as ASML’s lithography machines. This is aimed at hampering China’s technological edge in high tech sectors, for which it still relies on foreign exports of advanced chips and equipment.
The US’ employment of extraterritorial economic measures to further (geo)political goals is not new. We have seen this film before in the context of secondary sanctions. In this light, the post will assess the extraterritorial reach of these export controls on Dutch lithography machines under public international law, the WTO framework, and EU instruments. It will conclude on why extraterritoriality matters for the geopoliticised governance of global supply chains of critical technologies.
The big deal with ASML’s photolithography machinery and their capture by US semiconductor export controls regime
Semiconductors (‘chips’) have become ubiquitous in the discourse on the US-China Tech War to control the world’s most critical technology. The usual focus is Taiwan, home to TSMC, producing 90% of the world’s most advanced chips. For TSMC to produce these chips, transistors (electric on/off switches) need to be carved on a silicon wafer, for which ‘photolithography’ machines are need.
ASML, based in the Netherlands, effectively holds a monology on these machines. ASML’s photolithography machines (the size of a double-decker bus) are essential to carving millions of transistors (around 5 nanometres – smaller than the Covid-19 virus at 50-140 nanometres) onto the most advanced microchips. Consequently, it comes as no surprise that these have been swooped up by the 2023 US restrictions (page 72440), tightening the Export Controls on Advanced Computing Semiconductors, Semiconductor Manufacturing Equipment, and Supercomputing Items from 7 October 2022. These are imposed through ‘stringent license requirements’ for any of the semiconductor or equipment destined to PRC entities.
The 2023 updates institute a so-called ‘0% de minimis’ rule, which effectively allows the US to extend its jurisdiction over foreign-made lithography equipment regardless of an actual nexus to US content. These measures tighten US influence on Dutch export policy, after the Dutch government – at the US’ behest – imposed its own national export controls on ASML in September 2023. US influence over ASML did not materialise out of thin air. Back in the 1990s, the US government forged a photolithography R&D partnership with ASML, which was the only alternative remaining after Nikon and Canon fell out of favour with US officials after the US-Japan semiconductor trade war. (Miller, p. 187)
The basis for extraterritorial jurisdiction under international law
Jurisdiction refers to a state’s competence under international law to regulate the conduct of natural and legal persons, with legislative or ‘prescriptive’ jurisdiction referring to the power to make laws, decisions, or rules. From a geopolitical lens on the global semiconductor supply chains, the ability of a state to exercise its (extraterritorial) jurisdiction over important nodes or entities in the supply chain is crucial.
Thus, with the 2023 updated restrictions the US essentially asserts extraterritorial jurisdiction over non-US entities, such as ASML. Whilst this may irk Dutch policymakers, US extraterritorial reach will not be challenged in a meaningful sense (ASML’s official position is to ‘comply fully’ with these regulations) – even if there may not be a clear basis under international law for the US to exercise such extraterritorial jurisdiction. One would have to assess whether a ‘genuine connection between the subject matter of jurisdiction and the territorial base or reasonable interests of the state in question’ (Crawford, referring to ICJ, Nottenbohm; see also ICJ, Lotus [19]).
The discussion on extraterritoriality recently became pertinent in the context of secondary sanctions, which are aimed at restricting third party states and its economic actors’ activities with the sanctioned country, e.g. Iran or Russia, by threatening to cut-off the former’s access to the US financial system. The justification for US secondary sanctions’ extraterritoriality relied on a combination of the protective principle, referring to essential interests, such as national security; the ‘territorial’ use of the US financial system under the territoriality principle; and financial transactions involving US ‘counter-parties’ as an outgrowth of the nationality principle (Ruys/Ryngaert).
In the case of ASML’s lithography machines the US policy sphere put forward that the nexus to regulating ASML is Cymer, a California-based firm acquired by ASML, that produces lasers for the lithography machines. As there are 400 000+ components in ASML’s machines (Miller, p.228), finding components of US origin or relying on US intellectual property may not be challenging in order to establish links with US entities based on some justification under the territoriality or nationality principle. Further, the initial 2022 export controls were aimed at addressing ‘National Security Concerns Posed by PRC Military Modernization,‘ which could also be a basis for arguing extraterritorial prescriptive jurisdiction under the protective principle.
The relevance of the WTO framework for extraterritorial export controls?
When China filed a request for consultation at the WTO’s Dispute Settlement Body over the US 2022 export restrictions it argued that:
‘The United States not only imposes export controls itself on China, but also compels other WTO Members to follow suit by virtue of its extra-territorial control. By overstretching the extent of export controls and by bulling other WTO Members, the United States has caused severe disruption to international trade and risked the disintegration of the global semiconductor supply chain.’
The issue at hand is whether US trade restrictions aimed at the targeted state (China) with extraterritorial effects on a third state (the Netherlands) would be in contravention with the US’ WTO obligations in their bilateral trade relations with the Netherlands. Art. XI(1) GATT prohibits ‘quantitative restrictions’ on the ‘exportation or sale for export of any product destined for the territory of any other Member.’ This means the prohibited export restrictions include not only restrictions on ‘US-origin’ products, but also any foreign product, over which the US purports to assert extraterritorial jurisdiction. However, Art. XI(1) does not say anything on the legality of the extraterritorial effects of export controls on a third state under the WTO framework.
Indeed, these issues have yet to be specifically tested before the DSB (Matsushita et al). In international trade law scholarship issues of extraterritoriality, owing to ‘national security’ rationale of US extraterritorial measures, have been discussed under the General Exceptions of Art. XX GATT or Security Exceptions in Art. XXI (Bartels, Bianchi, Blattner, Voetelink, Vranes). In their recent post Heusel/Wiater, have called into question whether geoeconomics goals of supply chain resilience can be squared with a national security argument that would be accepted under Art. XX. As such, the legal questions as to the lawfulness of extraterritoriality of export controls cannot be conclusively answered under the current WTO regime.
EU ‘symbolic’ defences against the extraterritorial reach of US export controls
Over the past years, the EU has ramped up its economic security and resilience efforts to guarantee the Union’s ‘strategic autonomy,’ and thus has considered solutions to ‘defend’ its ‘economic sovereignty’ through instruments such as the Blocking Statute and the recently adopted Anti-Coercion Instrument (ACI).
According to Art. 1 Blocking Statute, it provides:
‘protection against and counteracts the effects of the extra-territorial application of the laws […] where such application affects the interests of persons […] engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries.’
It prohibits EU entities from complying with US sanctions legislation or allows them to seek authorisation to comply with US measures (Art. 5). Whilst it could be conceivable that the Blocking Statute could be applied to counter the US export controls, policy analysts have bemoaned that the statute is merely ‘symbolic’ or downright ‘dysfunctional,’ having not deterred any US use of extraterritorial economic measures. Thus, challenges to the efficacy of the Blocking Statute are first, the shifting of the geopolitical burden on economic actors to make their own calculations on whether to violate US or EU law; and second the lack of coordinated responses across EU member states, and thus a lack of a critical mass opposing US extraterritorial reach.
In a previous post I highlighted how the ACI is merely deterrent instrument to signal to the EU’s trade partners that it will not tolerate economic ‘blackmail.’ The ACI relies on the notion of economic coercion as prohibited intervention to justify the resort to (trade) countermeasures [Arts. 1(2) and 2(1) ACI]. Neither the Netherlands nor the EU seem inherently opposed to the US’ overall China strategy – besides perhaps the perturbance of having the US unilaterally calling the shots first. But, most crucially the Dutch government is not opposed to the measures. Its consent precludes any wrongfulness in accordance with Art. 20 ARSIWA, even if one were to argue that US extraterritorial export controls constitute an interference in the Netherlands’ domaine réservé, which includes decisions on its foreign policy encompassing trade relations with China.
Conclusion: The spectre of extraterritoriality over supply chain governance
The extraterritorial reach of US export controls will likely go unchallenged. The topic was noticeably absent from the recent Biden-Xi Summit on 15 November 2023, perhaps a sign that China’s back is against the wall in this respect. As for EU counterparts, complying with US export controls is not only a necessary business calculation but also a foregone conclusion given US-EU convergence on their economic security strategies against China. Nonetheless, calls for the EU to be a ‘maker’ and not just a ‘taker’ in economic security policy are growing – an difficult undertaking in a recalcitrant geopolitical reality.
What has become clear is that the US’ strategic use of its extraterritorial jurisdiction will loom large over future governance of critical global value chains of semiconductors. US export controls are undeniably efforts of a ‘weaponized interdependence’ within global supply chains. This strategy is effective when a state can assert control, i.e. its own jurisdiction or mobilise its allies to exercise their jurisdiction, over chokepoints in a network. In this light, ASML seems but another chokepoint to capture. The US had already succeeded ‘diplomatically’ through an intergovernmental agreement, under which the Netherlands committed to instituting Dutch export controls on ASML to align with US interests. Now, US extraterritorial export controls go one step further in locking in these commitments.
The US already has a chokehold over the semiconductor supply chain by virtue of the concentration of semiconductor IP, design, and proprietary know-how in the hands of US tech companies. First, this legally provides a nexus for US export control regulations to sink their teeth into, i.e. for the US to exercise prescriptive jurisdiction over their own legal persons. Second, and more importantly, this geoeconomically translates to the US being the centre of global semiconductor R&D, accounting for 53% value added to the semiconductor global value chain. Quinn Slobodian recently spoke of ‘network imperialism,’ and perhaps this is the most vivid way to understand why it seems so futile to legally challenge the discomforting spectre of extraterritoriality.
In the wake of the US Department of Commerce’s announcement on 17 October 2023 of new sweeping semiconductor export control restrictions, China began stockpiling photolithography machines produced by ASML based in the Netherlands. Why did China scramble towards a Dutch company because of US restrictions?
These regulations were designed to restrict the transfer of critical technologies to China not only from US entities but also any entity – regardless of nexus to US entities – producing technology vital in the semiconductor supply chain, such as ASML’s lithography machines. This is aimed at hampering China’s technological edge in high tech sectors, for which it still relies on foreign exports of advanced chips and equipment.
The US’ employment of extraterritorial economic measures to further (geo)political goals is not new. We have seen this film before in the context of secondary sanctions. In this light, the post will assess the extraterritorial reach of these export controls on Dutch lithography machines under public international law, the WTO framework, and EU instruments. It will conclude on why extraterritoriality matters for the geopoliticised governance of global supply chains of critical technologies.
The big deal with ASML’s photolithography machinery and their capture by US semiconductor export controls regime
Semiconductors (‘chips’) have become ubiquitous in the discourse on the US-China Tech War to control the world’s most critical technology. The usual focus is Taiwan, home to TSMC, producing 90% of the world’s most advanced chips. For TSMC to produce these chips, transistors (electric on/off switches) need to be carved on a silicon wafer, for which ‘photolithography’ machines are need.
ASML, based in the Netherlands, effectively holds a monology on these machines. ASML’s photolithography machines (the size of a double-decker bus) are essential to carving millions of transistors (around 5 nanometres – smaller than the Covid-19 virus at 50-140 nanometres) onto the most advanced microchips. Consequently, it comes as no surprise that these have been swooped up by the 2023 US restrictions (page 72440), tightening the Export Controls on Advanced Computing Semiconductors, Semiconductor Manufacturing Equipment, and Supercomputing Items from 7 October 2022. These are imposed through ‘stringent license requirements’ for any of the semiconductor or equipment destined to PRC entities.
The 2023 updates institute a so-called ‘0% de minimis’ rule, which effectively allows the US to extend its jurisdiction over foreign-made lithography equipment regardless of an actual nexus to US content. These measures tighten US influence on Dutch export policy, after the Dutch government – at the US’ behest – imposed its own national export controls on ASML in September 2023. US influence over ASML did not materialise out of thin air. Back in the 1990s, the US government forged a photolithography R&D partnership with ASML, which was the only alternative remaining after Nikon and Canon fell out of favour with US officials after the US-Japan semiconductor trade war. (Miller, p. 187)
The basis for extraterritorial jurisdiction under international law
Jurisdiction refers to a state’s competence under international law to regulate the conduct of natural and legal persons, with legislative or ‘prescriptive’ jurisdiction referring to the power to make laws, decisions, or rules. From a geopolitical lens on the global semiconductor supply chains, the ability of a state to exercise its (extraterritorial) jurisdiction over important nodes or entities in the supply chain is crucial.
Thus, with the 2023 updated restrictions the US essentially asserts extraterritorial jurisdiction over non-US entities, such as ASML. Whilst this may irk Dutch policymakers, US extraterritorial reach will not be challenged in a meaningful sense (ASML’s official position is to ‘comply fully’ with these regulations) – even if there may not be a clear basis under international law for the US to exercise such extraterritorial jurisdiction. One would have to assess whether a ‘genuine connection between the subject matter of jurisdiction and the territorial base or reasonable interests of the state in question’ (Crawford, referring to ICJ, Nottenbohm; see also ICJ, Lotus [19]).
The discussion on extraterritoriality recently became pertinent in the context of secondary sanctions, which are aimed at restricting third party states and its economic actors’ activities with the sanctioned country, e.g. Iran or Russia, by threatening to cut-off the former’s access to the US financial system. The justification for US secondary sanctions’ extraterritoriality relied on a combination of the protective principle, referring to essential interests, such as national security; the ‘territorial’ use of the US financial system under the territoriality principle; and financial transactions involving US ‘counter-parties’ as an outgrowth of the nationality principle (Ruys/Ryngaert).
In the case of ASML’s lithography machines the US policy sphere put forward that the nexus to regulating ASML is Cymer, a California-based firm acquired by ASML, that produces lasers for the lithography machines. As there are 400 000+ components in ASML’s machines (Miller, p.228), finding components of US origin or relying on US intellectual property may not be challenging in order to establish links with US entities based on some justification under the territoriality or nationality principle. Further, the initial 2022 export controls were aimed at addressing ‘National Security Concerns Posed by PRC Military Modernization,‘ which could also be a basis for arguing extraterritorial prescriptive jurisdiction under the protective principle.
The relevance of the WTO framework for extraterritorial export controls?
When China filed a request for consultation at the WTO’s Dispute Settlement Body over the US 2022 export restrictions it argued that:
‘The United States not only imposes export controls itself on China, but also compels other WTO Members to follow suit by virtue of its extra-territorial control. By overstretching the extent of export controls and by bulling other WTO Members, the United States has caused severe disruption to international trade and risked the disintegration of the global semiconductor supply chain.’
The issue at hand is whether US trade restrictions aimed at the targeted state (China) with extraterritorial effects on a third state (the Netherlands) would be in contravention with the US’ WTO obligations in their bilateral trade relations with the Netherlands. Art. XI(1) GATT prohibits ‘quantitative restrictions’ on the ‘exportation or sale for export of any product destined for the territory of any other Member.’ This means the prohibited export restrictions include not only restrictions on ‘US-origin’ products, but also any foreign product, over which the US purports to assert extraterritorial jurisdiction. However, Art. XI(1) does not say anything on the legality of the extraterritorial effects of export controls on a third state under the WTO framework.
Indeed, these issues have yet to be specifically tested before the DSB (Matsushita et al). In international trade law scholarship issues of extraterritoriality, owing to ‘national security’ rationale of US extraterritorial measures, have been discussed under the General Exceptions of Art. XX GATT or Security Exceptions in Art. XXI (Bartels, Bianchi, Blattner, Voetelink, Vranes). In their recent post Heusel/Wiater, have called into question whether geoeconomics goals of supply chain resilience can be squared with a national security argument that would be accepted under Art. XX. As such, the legal questions as to the lawfulness of extraterritoriality of export controls cannot be conclusively answered under the current WTO regime.
EU ‘symbolic’ defences against the extraterritorial reach of US export controls
Over the past years, the EU has ramped up its economic security and resilience efforts to guarantee the Union’s ‘strategic autonomy,’ and thus has considered solutions to ‘defend’ its ‘economic sovereignty’ through instruments such as the Blocking Statute and the recently adopted Anti-Coercion Instrument (ACI).
According to Art. 1 Blocking Statute, it provides:
‘protection against and counteracts the effects of the extra-territorial application of the laws […] where such application affects the interests of persons […] engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries.’
It prohibits EU entities from complying with US sanctions legislation or allows them to seek authorisation to comply with US measures (Art. 5). Whilst it could be conceivable that the Blocking Statute could be applied to counter the US export controls, policy analysts have bemoaned that the statute is merely ‘symbolic’ or downright ‘dysfunctional,’ having not deterred any US use of extraterritorial economic measures. Thus, challenges to the efficacy of the Blocking Statute are first, the shifting of the geopolitical burden on economic actors to make their own calculations on whether to violate US or EU law; and second the lack of coordinated responses across EU member states, and thus a lack of a critical mass opposing US extraterritorial reach.
In a previous post I highlighted how the ACI is merely deterrent instrument to signal to the EU’s trade partners that it will not tolerate economic ‘blackmail.’ The ACI relies on the notion of economic coercion as prohibited intervention to justify the resort to (trade) countermeasures [Arts. 1(2) and 2(1) ACI]. Neither the Netherlands nor the EU seem inherently opposed to the US’ overall China strategy – besides perhaps the perturbance of having the US unilaterally calling the shots first. But, most crucially the Dutch government is not opposed to the measures. Its consent precludes any wrongfulness in accordance with Art. 20 ARSIWA, even if one were to argue that US extraterritorial export controls constitute an interference in the Netherlands’ domaine réservé, which includes decisions on its foreign policy encompassing trade relations with China.
Conclusion: The spectre of extraterritoriality over supply chain governance
The extraterritorial reach of US export controls will likely go unchallenged. The topic was noticeably absent from the recent Biden-Xi Summit on 15 November 2023, perhaps a sign that China’s back is against the wall in this respect. As for EU counterparts, complying with US export controls is not only a necessary business calculation but also a foregone conclusion given US-EU convergence on their economic security strategies against China. Nonetheless, calls for the EU to be a ‘maker’ and not just a ‘taker’ in economic security policy are growing – an difficult undertaking in a recalcitrant geopolitical reality.
What has become clear is that the US’ strategic use of its extraterritorial jurisdiction will loom large over future governance of critical global value chains of semiconductors. US export controls are undeniably efforts of a ‘weaponized interdependence’ within global supply chains. This strategy is effective when a state can assert control, i.e. its own jurisdiction or mobilise its allies to exercise their jurisdiction, over chokepoints in a network. In this light, ASML seems but another chokepoint to capture. The US had already succeeded ‘diplomatically’ through an intergovernmental agreement, under which the Netherlands committed to instituting Dutch export controls on ASML to align with US interests. Now, US extraterritorial export controls go one step further in locking in these commitments.
The US already has a chokehold over the semiconductor supply chain by virtue of the concentration of semiconductor IP, design, and proprietary know-how in the hands of US tech companies. First, this legally provides a nexus for US export control regulations to sink their teeth into, i.e. for the US to exercise prescriptive jurisdiction over their own legal persons. Second, and more importantly, this geoeconomically translates to the US being the centre of global semiconductor R&D, accounting for 53% value added to the semiconductor global value chain. Quinn Slobodian recently spoke of ‘network imperialism,’ and perhaps this is the most vivid way to understand why it seems so futile to legally challenge the discomforting spectre of extraterritoriality.
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Anh Nguyen is a PhD researcher in the Law and Governance of Quantum Technologies research group within the Institute for Information Law at the University of Amsterdam. Her work delves…
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EJIL:Talk!
Blog of the European Journal of International Law