China’s ability to circumvent US semiconductor export controls is well-documented. From smuggling billions of dollars in NVIDIA Corp. (NVDA) server racks through Southeast Asia—including a recent case where a hair dryer was used to remove and reaffix serial-number labels—to building “wafer bridges” that split advanced-node production across multiple facilities to skirt facility- and tool-level controls, these workarounds have become increasingly creative.
A key example is China’s response to semiconductor manufacturing equipment (SME) restrictions on advanced lithography—the most acute chokepoint in its supply chain. While exports of ASML Holding NV’s (ASML) extreme ultraviolet (EUV) tools to China have long been restricted, China has partially worked around these constraints using more complex, cost-inefficient “multi-patterning” techniques on deep ultraviolet (DUV) immersion scanners. While uneconomic for most chipmakers, domestic fabs such as Semiconductor Manufacturing International Corp. (0981 on the Hong Kong stock exchange) are better positioned to absorb the higher costs and lower yields given significant state backing. More importantly, this approach does not need to match leading-edge performance to be effective, as China can narrow the compute gap by scaling “good enough” chips at volume.
US national security policymakers are increasingly acknowledging China’s circumvention of US export controls. While US toolmakers are already largely barred from supplying advanced DUV equipment to China, allied firms in the Netherlands and Japan continue to operate under more permissive regimes, particularly with respect to servicing tools already installed in Chinese fabs. Given the frequency and complexity of maintenance requirements, restricting servicing could degrade China’s installed base over time. This gap in approach between the US and its allies has persisted despite significant diplomatic pressure from the Biden administration, which ultimately fell short of securing full alignment on export controls.
As the White House adopts a more conciliatory stance toward China, Congress is moving in the opposite direction, asserting a more hawkish role in shaping export control policy. One proposal under consideration is the Multilateral Alignment of Technology Controls on Hardware (MATCH) Act. Beyond imposing the most aggressive export restrictions on semiconductor manufacturing equipment (SME) to date, the bill would mark a step-change in the extraterritorial reach of US export control law.
The MATCH Act is designed to close the gap between US and allied export controls by invoking the Foreign Direct Product Rule (FDPR), which extends US jurisdiction to foreign-produced items that incorporate US-origin technology. In practice, the bill would force allies to adopt comparable controls on DUV immersion lithography and servicing, or bring those foreign-produced tools within the scope of US export controls.
Assuming effective global enforcement, an export ban on DUV immersion lithography would effectively cripple China’s ability to produce leading-edge logic chips at scale. At a time when the future of US technology leadership remains uncertain, such a move would represent a clear attempt to reassert control over a critical chokepoint in the semiconductor supply chain. We believe the potential use of extraterritorial power has highly significant global implications:
- Forcing alignment with US restrictions would break from the Wassenaar Arrangement’s voluntary, consensus-based approach for establishing common controls on dual-use technologies. Prior use of FDPR to restrict SME exports to China in 2022–2023 was meaningfully narrower and did not extend extraterritorial control across entire equipment categories, irrespective of node or end use. Even when the FDPR was expanded in December 2024, it carved out countries like the Netherlands and Japan that were “capable of imposing such controls themselves.”
- The approach could expose allies to economically significant retaliation from China. Beijing’s recent State Council directive authorizing countermeasures against extraterritorial measures appears to lay the groundwork for a potential response, while also increasing leverage ahead of the upcoming US-China summit.
- Most notably, it would effectively force the Dutch and Japanese governments to take adverse action against national champions. For ASML, the restrictions would result in losing up to $8 billion in China revenue or force it to restructure its supply chain to “design out” (eliminate) US technology inputs, which would be extremely challenging. This risks straining US-Netherlands relations, particularly given the latter’s emphasis on strategic autonomy, as recently demonstrated by the Dutch government’s seizure of control of the Chinese-owned chipmaker Nexperia to protect national security interests.
Despite a successful committee vote, the bill still faces several hurdles, and even hawkish congressional Republicans may struggle to support a measure that directly overrides the White House’s decision-making authority. In our view, the scale of what is being proposed will also fuel hesitation.
The MATCH Act would mark an unprecedented expansion of extraterritorial export control authority, reaching deep into allied supply chains and forcing alignment with US policy at a time when allies are increasingly pursuing technological sovereignty. Capstone will continue to closely monitor developments and associated risks for global semiconductor firms.
Read more from Capstone’s TMT team:
The End of Cheap AI: Why AI’s Cost Reckoning has Begun
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