China's AI Rise and Dependence on ASML's Semiconductor Equipment: Geopolitical Risks and Policy Responses

Executive Summary

ASML is the sole manufacturer of EUV lithography equipment, a single bottleneck that has become a structural constant in the US-China tech rivalry. While China is projected to reach a 66% self-sufficiency rate for advanced nodes by 2035, its 'weak link' in lithography is unlikely to be resolved within the same period. The Netherlands finds itself compelled to maintain a dual-track balance between US pressure for export controls and its own industrial interests. South Korea is not a bystander in the US-China regulatory friction but a direct stakeholder subject to origin verification. As such, it must proactively establish a dual-track response system that distinguishes between national strategic technologies and general commercial domains. Given the pattern of US regulatory actions accumulating independently of high-level diplomatic tracks, it is necessary to promptly establish joint industry response channels and origin verification infrastructure.

I. Issue Analysis

China's AI Rise Highlights Dependence on ASML's Semiconductor Equipment

1. Background and Developments

Eindhoven is a quiet provincial city with a population of 240,000. Headquartered on its outskirts, ASML is the world's only company that manufactures the lithography equipment necessary for the mass production of advanced AI chips [1]. ASML's significance has become common knowledge even outside Silicon Valley, with South American media noting that the ability of ChatGPT and Gemini to generate human-like instant responses is ultimately thanks to chips made with the company's equipment [1]. The Council on Foreign Relations (CFR) identifies the Netherlands as a country as crucial as Taiwan in the AI supply chain, because ASML is the sole manufacturer of the extreme ultraviolet (EUV) lithography equipment essential for advanced semiconductor production [4].

This bottleneck was the starting point for US export control design against China. Since 2019, Washington has pressured the Dutch government to restrict not only ASML's most advanced EUV equipment but also some of its older DUV equipment from being exported to China. For The Hague, this was a decision that directly harmed its largest publicly traded company and Europe's sole semiconductor equipment champion. Although the Dutch government has emphasized that it retains final approval authority under its own export control legislation (the Trade Act), it has in practice had to strike a balance between US pressure and its own industrial interests.

2. Current Situation

China's response is converging on a path of self-reliance. Goldman Sachs projects that the supply shortage of advanced semiconductors will significantly decrease by 2035, driven by aggressive capacity expansion and yield improvements at Chinese foundries like SMIC. However, it added the caveat that the 'weak link' of lithography equipment will remain an obstacle to complete semiconductor independence [10]. Taiwan's DigiTimes cited similar figures, forecasting that China's self-sufficiency rate for advanced nodes will reach 66% by 2035 [12]. China's state-run Global Times reported that the country's semiconductor industry profits surged 18.5-fold year-on-year from January to July 2026, framing this as a result of the expanding 'AI+' initiative and self-reliance efforts [8]. In the same vein, the case of ChangXin Memory Technologies (CXMT) returning to profitability with a nearly tenfold year-on-year increase in first-half revenue has also been reported in South Korea [18].

A Czech media outlet reported that Chinese companies like Huawei have unveiled the GLM-5.3-Flash model, which runs entirely on domestically produced chips. The report noted that while the US ban on advanced AI chip exports is achieving its intended effect, it is also producing a counter-reaction: the construction of China's own computing ecosystem [17]. A sense of crisis is also palpable on the US side. Foreign Policy assessed that China's achievements are forcing Washington to reconsider its AI strategy, which has been centered on closed-source models [5]. Indeed, Nvidia signed a $6 billion deal to pay the startup Poolside to build an open-weight model to compete with DeepSeek and Moonshot AI's Kimi K3 [14]. The Global Times described this as a symbolic shift away from the closed-source development path the US industry has long adhered to, adding expert commentary that China also welcomes this trend [14].

3. Key Actors and Positions

ASML (Netherlands)is the entity at the heart of the bottleneck and the primary stakeholder in the export controls. Its status as the sole supplier of EUV equipment gives the company overwhelming bargaining power, but it also narrows its room for maneuver between the political demands of the US and Chinese governments. China was once a market that accounted for a significant portion of ASML's revenue, and as export restrictions tighten, the company faces the dilemma of voluntarily shrinking an irreplaceable growth driver.

The Dutch Governmentmust balance protecting its national industrial champion with maintaining solidarity within its NATO and EU alliances. While nominally retaining its own authority to review export controls, The Hague has in practice aligned with Washington's pressure campaign against China. This choice has come at the cost of reducing its own companies' market access.

The Chinese Government and Semiconductor Industryare clearly pursuing a path of self-reliance led by domestic companies such as SMIC and CXMT. State-run media, represented by the Global Times, present the surge in semiconductor profits as a success story for this self-reliance policy [8]. In contrast, Western financial institutions like Goldman Sachs view the localization of lithography equipment as a structural constraint that will not be resolved in the short term [10].

The US Government and Silicon Valleyhave maintained a strategy of restricting China's access to advanced computing through export controls. However, they now face assessments that this strategy, contrary to its intent, is having the side effect of accelerating the development of China's own ecosystem [17][5]. Nvidia's investment in an open-weight model is a product of this trend of reassessment [14].

4. Core Issues

The first issue is how long the single bottleneck of lithography equipment will remain effective. Both Goldman Sachs and DigiTimes expect China's self-sufficiency rate for advanced nodes to rise to a significant level (around 66%) by 2035, yet they make an exception for lithography equipment [10][12]. This implies that the structural dependence on ASML is unlikely to be fully resolved within the next decade.

The second issue is the paradoxical effect of export controls. Observations from both Czech and US media suggest that the controls, instead of reducing China's external dependence, are promoting the establishment of an independent ecosystem [17][5]. This is leading to pressure on Washington to reconsider its control strategy itself.

The third issue concerns the Netherlands' strategic autonomy. The key question is what degree of discretion The Hague can actually exercise in balancing its domestic companies' commercial interests with the US-led alliance solidarity. The Dutch government's position will likely continue to be tested by changes in the share of ASML's revenue from China and the level of additional regulatory demands from the United States.

II. In-Depth Analysis

China's AI Rise Highlights Dependence on ASML's Semiconductor Equipment

1. Analysis of Root Causes

The bottleneck originates from the physical properties of extreme ultraviolet (EUV) lithography technology. The technology to generate an EUV light source with a wavelength of 13.5 nanometers and guide it with mirrors without refraction requires nearly two decades of research and development and the collaboration of thousands of component suppliers. In this process, ASML absorbed the optical systems of Germany's Zeiss and the light source technology of America's Cymer, establishing itself as a virtually irreplaceable single supplier. This is why the CFR highlights the Netherlands as being as important as Taiwan in the AI supply chain [4]. While foundries can be dispersed across multiple countries, the supply of EUV equipment is concentrated in one place: Eindhoven.

China's attempts at semiconductor self-reliance halt at lithography for the same reason. While Goldman Sachs projects that the supply shortage of advanced chips will diminish due to SMIC's capacity expansion and yield improvements, it explicitly identifies lithography as the 'weak link' [10]. The 66% self-sufficiency rate for advanced nodes by 2035 cited by DigiTimes, when viewed from the opposite perspective, means that 34% will still remain dependent on external sources [12]. While Chinese domestic companies (like Naura and AMEC) are producing alternatives for chemical vapor deposition and etching equipment, no alternative path exists for EUV. This asymmetry formed the logical basis for the design of US export controls.

2. Structural Context

Political Structure: The Hague's Dual Pressures

The Dutch government has consistently maintained the principle that it holds final approval authority based on its own export control laws. However, the actual decision-making process has not been free from Washington's pressure. Since 2019, the United States has demanded that the Netherlands include not only EUV but also some DUV equipment in its export restrictions. The Hague had to make a decision that would harm its largest publicly traded company and Europe's sole semiconductor equipment champion. This is a long-standing dilemma in Dutch foreign policy. When security commitments within the transatlantic alliance conflict with domestic industrial interests, the negotiating power of a small, open economy like the Netherlands is limited. The fact that a significant portion of ASML's shares are owned by US-based institutional investors, and past debates over a potential Nasdaq listing, also make it difficult for the Netherlands to pursue a completely independent course.

Economic Structure: Simultaneous Pressures of Dependence on Chinese Revenue and Self-Reliance

For ASML, China was once one of its largest markets, accounting for over 40% of its revenue. As export controls tighten, ASML is forced to accept short-term revenue losses. Simultaneously, an opposite economic dynamic is unfolding within China. The Global Times reported that from January to July 2026, profits in China's semiconductor industry surged 18.5-fold year-on-year, framing this as a result of the 'AI+' initiative and self-reliance efforts [8]. The case of ChangXin Memory Technologies (CXMT) returning to profitability with a nearly tenfold year-on-year increase in first-half revenue illustrates the same trend [18]. In other words, while export controls reduce ASML's short-term revenue, they also paradoxically accelerate capital accumulation in China's semiconductor industry by stimulating replacement demand and government subsidies for domestic firms.

Security Structure: The Geopoliticization of Bottleneck Control

The design of US export controls is based on the assumption that controlling a bottleneck point allows for control over the entire downstream industry. However, this assumption is being increasingly tested over time. The case of Huawei's GLM-5.3-Flash, reported by a Czech media outlet, shows the emergence of a model that runs entirely on domestically produced chips [17]. This suggests that the controls are not leading to a complete blockade but are instead producing a counter-reaction, stimulating the creation of China's own computing ecosystem. This sense of crisis is also palpable within Washington. Foreign Policy assessed that China's achievements are compelling the US to reconsider its AI strategy, which has been centered on closed-source models [5]. Nvidia's $6 billion contract with the startup Poolside to build an open-weight model is also a product of this reassessment [14]. The Global Times evaluated this as a shift in the US industry's approach and published commentary welcoming it, which indicates that the bottleneck control strategy has entered a phase of interaction where it is altering the opponent's strategy as well.

3. Historical Precedents and Comparative Cases

The US pressure on Japan's semiconductor industry in the 1980s and the current situation are superficially similar but fundamentally different. The US-Japan Semiconductor Agreement at that time was aimed at adjusting market share between allies. Today's export controls against China involve a triangular structure where an ally's (the Netherlands') company is mobilized to contain an adversary (China). The Hague's position is far more vulnerable than Tokyo's was in the 1980s because the negotiating partner and the target of control are separate. While Japan held bargaining chips to protect its industry, the Netherlands is in a position where it must subordinate its industrial interests to the higher framework of its security alliance.

The Cold War-era Coordinating Committee for Multilateral Export Controls (CoCom) regime is another relevant precedent. The West's export controls on strategic goods to the Soviet Union delayed but did not completely block Soviet indigenous development. The Soviet Union narrowed the gap by combining circumvention procurement with its own development, demonstrating a typical pattern where the effectiveness of controls diminishes over time. China's current attempts at lithography localization and SMIC's circumvention production of 7nm-class chips using DUV multi-patterning follow a similar trajectory. However, a key difference from the CoCom era is that the scale of initial investment and the pace of technological accumulation in today's semiconductor equipment industry are much greater. A single EUV machine costs over 200 billion won, and the industrial ecosystem required to replicate the precision of Zeiss optics cannot be duplicated in the short term. For this reason, China's self-reliance efforts will likely require a much longer timeline than the Soviet Union's during the CoCom period.

4. Key Variables Shaping Future Developments

The first variable is the political sustainability of the Dutch government's position. If the balance between cooperation with the US and protection of domestic industry wavers within The Hague's coalition government, there could be changes in the intensity of further regulations on ASML or in the practice of granting waivers. Key points to watch are the lobbying efforts by ASML's management toward the government and whether the supply of services and parts for older equipment to China is maintained.

The second variable is the speed at which Chinese foundries, including SMIC, improve their yields for DUV multi-patterning. Even if the advanced chip supply shortage eases by 2035 as Goldman Sachs predicts, a faster-than-expected pace of improvement would reignite the debate over the overall effectiveness of the US control strategy [10].

The third variable is the differentiation of policy lines within the United States. The reconsideration of the closed-source model strategy pointed out by Foreign Policy and Nvidia's investment in open-weight models suggest that Washington may be shifting its focus from a purely containment-oriented approach to one that also emphasizes strengthening its own competitiveness [5][14]. Whether this policy shift leads to a relaxation of export controls or solidifies into a dual strategy of combining controls with strengthening domestic competitiveness will determine the future persistence of the bottleneck structure.

The fourth variable is the impact of China's tightening data and technology controls on the ability of Western equipment and service companies to continue their operations in China. As seen in Beijing's strong response to Meta's attempted acquisition of Manus and Nokia's withdrawal from the Chinese market [13], there is a possibility that Western companies' access to China for services and maintenance, including ASML's, could be used as a bargaining chip if tensions over the bottleneck intensify.