Netherlands Poised to Align With U.S. on China Export Controls Amid Diplomatic Strain

The Dutch government signals a strategic alignment with U.S. export controls, potentially restricting ASML's servicing to Chinese clients, impacting China's chip industry development but reflecting national security priorities.

Netherlands Balances Diplomatic Ties and Chip Tech Controls Amid US Pressure

US demands that chipmaker ASML cease servicing some equipment it has sold to Chinese customers are causing diplomatic and business headaches for the Dutch government. Still, there are indications that it will continue to align with Washington on export controls, Reuters reported.

Although Prime Minister Mark Rutte's government is hesitant to make sweeping decisions, public statements and national security interests indicate that it will be slow to approve Chinese maintenance requests in the future and quick to deny them.

That would be a setback for China's efforts to develop its domestic chip industry, as ASML equipment is nearly impossible to replace and will deteriorate over time if not maintained.

However, it may complicate efforts by Rutte's government to prevent ASML Holdings NV, the Netherlands' largest company, from expanding internationally. One emerging factor is Dutch security priorities, specifically support for Ukraine in its war with Russia.

Rutte, expected to become the next NATO secretary general, discussed ASML with Chinese President Xi Jinping during their meeting in Beijing last week. He later stated that China's support for Russia was a serious issue, particularly given that the Netherlands is arming Ukraine with F-16s.

"It is incredibly important that China understands that any victory for Russia (in Ukraine) would pose an immediate threat" to both the Netherlands and Europe, Rutte stated.

He declined to say whether his government will deny licenses to ASML's Chinese customers.

Xi informed Chinese state media that he had warned Rutte against "decoupling and breaking links" with China.

Dutch-Chinese Relations Strained Amid Ukraine Conflict and Export Control Concerns

While Beijing claims to be neutral in the Ukraine conflict, Xi maintains a strategic alliance with Russian President Vladimir Putin.

The Netherlands blames Russia for the 2014 downing of Malaysia Flight 17 (MH17) over eastern Ukraine, which killed 198 Dutch citizens. It also houses and supports the International Criminal Court in The Hague, which has issued an arrest warrant for Putin on charges of war crimes.

Rutte urged China to do more to prevent Russia from obtaining "dual-use goods" with civilian and military applications, such as ASML machines and the chips they produce.

While his comments do not imply a policy of presumptive denial for Chinese customers seeking ASML gear that is subject to licensing rules, as US policy does, they do indicate the Dutch government's likely starting point.

ASML has declined to comment. It has previously stated that it complies with all export regulations.

European Parliament member Bart Groothuis states that the Netherlands should coordinate its export policy with larger allies.

"It is much better for us to do that, regulate ASML, together with the U.S., or in the future it may be Europe, and I would say that is the best way forward," he said.

U.S. Alan Estevez, President Joe Biden's export policy chief, is expected to raise the servicing contracts during a meeting with Dutch government officials and ASML executives on Monday.

The Dutch government must weigh its response in light of concerns about weakening US support for its security priorities, including Ukraine, particularly if Donald Trump wins the presidential election in November.

He stated that the Dutch regard China as "the only country that has at least some kind of influence on Russia potentially."

The Dutch Foreign Ministry, which oversees exports, said on Thursday that it would judge Chinese licensing requests in the same way it does others: on a "case by case" basis, taking into account the risks that they may end up being used for unintended military purposes.

However, Dutch officials will find it difficult to determine this from a distance, especially given Xi's civil-military fusion policies.

ASML's Limited Impact and China's Chip Industry Resilience Amid Export Restrictions

For ASML, the impact of an unknown number of license denials will be gradual and limited; maintenance accounts for roughly 20% of its revenue, and China is its third-largest market after Taiwan and South Korea.

Over the last three years, it has sold 10 billion euros ($11 billion) in equipment to Chinese chipmakers, most of which are not subject to export restrictions. Some have also gone to plants in China with Western-backed owners, such as SK Hynix and TSMC.

Individual Chinese chipmakers or plants denied a license may suffer significantly, as ASML machines are critical for chip manufacturing and difficult to replace. Experts say that Chinese chipmakers have shown surprising resilience to US-led sanctions thus far and will continue to find ways to engineer around them in the future.

"The cutting-off of servicing is going to inexorably degrade the capabilities of that equipment. And so the manufacturer will be fighting a sort of rearguard action to keep those machines going as long as possible," said Paul Triolo, a U.S. expert on China and semiconductors. "The question is in the long term, what other workarounds are possible here?"

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