Biden Is Now All-In on Taking Out China

October 14th, 2022 - by Jon Bateman / Foreign Policy

The US President Has Committed to Rapid Decoupling, Whatever the Consequences

Jon Bateman / Foreign Policy

(October 12, 2022) — The United States has waged low-grade economic warfare against China for at least four years now — firing volley after volley of tariffs, export controls, investment blocks, visa limits, and much more. But Washington’s endgame for this conflict has always been hazy. Does it seek to compel specific changes in Beijing’s behavior, or challenge the Chinese system itself? To protect core security interests, or retain hegemony by any means? To strengthen America, or hobble its chief rival?

Donald Trump’s scattershot regulation and erratic public statements offered little clarity to allies, adversaries, and companies around the world. Joe Biden’s actions have been more systematic, but long-term US goals have remained hidden beneath bureaucratic opacity and cautious platitudes.

Last Friday, however, a dense regulatory filing from a little-known federal agency gave the strongest hint yet of US intentions. The Bureau of Industry and Security (BIS) announced new extraterritorial limits on the export to China of advanced semiconductors, chip-making equipment, and supercomputer components. The controls, more so than any earlier US action, reveal a single-minded focus on thwarting Chinese capabilities at a broad and fundamental level.

Although framed as a national security measure, the primary damage to China will be economic, on a scale well out of proportion to Washington’s cited military and intelligence concerns. The US government imposed the new rules after limited consultation with partner countries and companies, proving that its quest to hobble China ranks well above concerns about the diplomatic or economic repercussions.

In short, America’s restrictionists — zero-sum thinkers who urgently want to accelerate technological decoupling — have won the strategy debate inside the Biden administration. More cautious voices — technocrats and centrists who advocate incremental curbs on select aspects of China’s tech ties — have lost.

This shift portends even harsher US measures to come, not only in advanced computing but also in other sectors (like biotech, manufacturing, and finance) deemed strategic. The pace and details are uncertain, but the strategic objective and political commitment are now clearer than ever. China’s technological rise will be slowed at any price.

To understand the strategy behind these new controls, it helps to look at what preceded them. A multitude of US measures have limited the flow of technology to and from China in recent years. Chief among these is the Entity List, which bars designated firms from importing US goods without a license.

The number of unique Chinese companies on this list quadrupled, from 130 to 532, between 2018 and 2022. Leading Chinese chip companies, supercomputing organizations, and software and hardware vendors have all landed on the list. Even so, BIS exercised its discretion to license large amounts of nonsensitive exports to listed companies.

One Chinese company, Huawei, has faced a unique, supercharged version of the Entity List. BIS targeted Huawei with an expanded form of its “foreign direct product rule,” a powerful regulation that grants US export controls greater extraterritorial reach. US export controls primarily apply to US-origin items, but the foreign direct product rule extends the scope to cover non-US items that were made using US technology.

By leveraging America’s centrality in the global chip supply chain, BIS forced semiconductor designers and manufacturers in third countries to limit sales to Huawei. Leading-edge chips were off limits, while less advanced chips were allowed. The controls grievously wounded Huawei.

These earlier restrictions were provocative in their time, but they reflected at least some sense of proportion. The new export controls, however, are different. They effectively bring all of China under the special rule formerly reserved for Huawei. Advanced semiconductors from any country will be presumptively denied to every Chinese company, even firms lacking direct ties to Beijing’s military or intelligence services. Among other consequences, this will hamstring the development and deployment of artificial intelligence (AI) throughout the country — hindering Chinese progress in e-commerce, autonomous vehicles, cybersecurity, medical imaging, drug discovery, climate modelling, and much else.

China’s own semiconductor sector is incapable of producing the leading-edge chips used in AI applications. And BIS aims to keep things that way: Its controls will block Chinese purchases of even years-old chip-making equipment and prevent American personnel from providing support or know-how.

To justify this dramatic escalation, BIS makes the same old national security arguments. Its filing takes pains to portray Chinese high-end computing as an urgent military threat. Nuclear weapons are invoked 16 times, on the grounds that top-tier processors facilitate their design and may be “inherently radiation hardened.”

Artificial intelligence is cited as a surveillance tool. It’s all factually true. Yet BIS never really deals with the fundamental fact that semiconductors and AI are both dual-use, general-purpose tools. Indeed, they are the basic building blocks for an advanced, globally competitive economy. Denying them to China is effectively a form of economic containment.

Granted, the new controls fall short of a total chip embargo. Chinese firms can still import lesser semiconductors for use in cars, toasters, and much else. Moreover, BIS has not yet imposed similarly stringent controls in other technology fields, such as biotech, which may be less amenable to decoupling for technological, economic, or political reasons.

But the US government’s latest move reveals a strategic mindset that cannot help but influence future China tech policy. US officials have focused intently on possible threats, imposed disproportionate measures, downplayed the complications, and strong-armed others into compliance. This mindset all but guarantees a continued march toward broad-based technological decoupling. Even US capital flows into China, which Trump worked hard to expand as he simultaneously cracked down on tech ties, are now facing new forms of federal pressure.

Many US policymakers and analysts will cheer a further decoupling. They rightly argue that Beijing’s decades-long strategy of intellectual property theft, hidden subsidies, and stealthy regulatory discrimination has played a large part in Chinese technological advancement. They correctly note that China has used its growing prowess to crush dissenters and minorities, threaten neighbors, prop up foreign autocrats, carry out espionage and influence operations, entrench market dominance, and lay the groundwork for future digital sabotage or coercion. And they can fairly claim that most previous US restrictions — though hardly all — were sensible and successful.

Yet the latest US move may erode some of the very conditions that have enabled earlier successes. Up until now, allies and partners were more or less willing to follow America’s lead, China proved unable to respond forcefully, the private sector adapted well enough, and US technocrats had room to shape key policy details.

The next phase of decoupling, however, could be more unpredictable and riskier. The increasing boldness of US unilateral actions, and Washington’s open embrace of a quasi-containment strategy, will draw reactions from many actors. This may finally set in motion forces beyond the control of US national security leaders. Four different groups will define what happens next.

The most important set of players is US allies and partners. They will of course comply with the new export controls, due to the long arm of US law. But Washington can’t afford to settle for begrudging obedience, because export controls are just one part of America’s international technology agenda.

The United States sorely needs other nations to coordinate industrial policy, share economic intelligence, harmonize digital regulations, press Beijing on joint concerns, and collectively envision a future economic order. This requires difficult negotiations.

The United States has labored, for example, to launch a “Chip 4” alliance with South Korea, Taiwan and Japan. which together dominate much of the semiconductor industry. But the project has been plagued by internal conflict, and it must now overcome Seoul’s outrage at its companies’ exclusion from a new US electric vehicle tax credit. Washington has also tried to write a human rights code of conduct for export controls alongside Canada, France, the Netherlands, and the United Kingdom, though 10 months have passed with no public results.

The US-European Union Trade and Technology Council has been more productive. The Indo-Pacific Economic Framework, less so. Ambitious multilateral efforts, like the US hope of reforming the World Trade Organization, have yet to pick up steam.

America’s latest export controls undermine these dialogues in two ways. By revealing the maximalism of Washington’s campaign against Chinese technology, the move will sharpen debates in allied capitals about whether US aims align with their own political and economic interests. And by flexing unilateral muscles so forcefully, the controls will cast doubt on US willingness to accommodate differing interests. (US officials imposed the new controls while international consultations were still underway, without securing any specific agreements.)

China, of course, will also react. Symmetrical retaliation — for example, blocking US imports of critical minerals or punishing key companies such as Microsoft, Apple, or Tesla — is unlikely. China has much to lose from such actions, and its economy already faces major headwinds. Beijing may instead push back in subtler ways, perhaps slow-rolling regulatory approvals or undermining the recent US-China deal on public company accounting standards.

The bigger threat would be Chinese reprisals against US allies and partners — like South Korea, Japan, or Taiwan — that must implement Washington’s controls. China has more leverage against these countries and will want to insert a wedge in America’s economic coalition.

China may also file a WTO complaint. Many US national security officials will roll their eyes at this ponderous and partly broken process, but its long-term consequences should not be dismissed. Much of the edifice of US techno-nationalist policy — from export controls to tariffs to blacklists — runs more or less counter to the WTO’s general bar against country-based discrimination.

The United States justifies its actions by expansively interpreting the “national security exception,” but it has wisely avoided testing this argument in formal dispute resolution.

A 2019 WTO decision concerning Russia and Ukraine cast real doubt on the US interpretation, both as a general matter and as applied to these new export controls. An adverse ruling would raise concerns among WTO-minded actors such as the European Union and much of the Global South. Moreover, a big US loss could further erode American commitment to the open trading system, ultimately imperiling its viability even as no plan yet exists for what might replace it.

America’s embrace of quasi-containment will come as no surprise to Xi Jinping. But it will certainly help him promote Beijing’s longstanding narrative that a hegemonic United States seeks to stifle China’s normal development. Many countries may be receptive to this argument, judging from the Global South’s lukewarm response to US-led sanctions and trade restrictions against Russia.

China can also portray US export controls as stymying progress on shared global challenges. It may cite, for example, the need of Chinese researchers to use supercomputers for vaccine development and climate science. (A recent Biden order defined “advanced clean energy” and “climate adaptation technologies” as “areas affecting US national security” that may warrant restrictive measures.)

The global private sector represents another important set of players. It is well-known that US export controls incentivize firms to escape American jurisdiction by offshoring their operations. Likewise, the foreign direct product rule encourages fuller purging of US technology throughout a global supply chain. This is admittedly hard to pull off. Regardless, private actors will respond to the new export controls’ signal of heightened geopolitical risks.

Washington has revealed a clear intent to suppress Chinese technological advances and a willingness to bear growing economic costs to do so. Businesses and investors will realize that decoupling is nowhere near its stopping point. Firms will expect a wide range of follow-on restrictions, not only tougher outbound investment screening and cross-border data rules, but other undefined measures still over the horizon. This will exert a chilling effect on US-China commerce, and perhaps even financial ties, across many sectors.

Some US policymakers may welcome such developments. Figures from Mike Pompeoto Christopher Wray to Mark Warner have exhorted US companies to rethink their China ties in light of intellectual property theft, a possible Taiwan crisis, and other business risks. But Washington could wind up getting more than it bargained for. Many private actors have grown weary of a US policy process that is sometimes opaque, unpredictable, irregular, and even uninformed.

In the face of this uncertainty, firms (and academic institutions) may pull back from benign and beneficial areas of US-China engagement. The private sector could ultimately choose to accelerate its own decoupling, which may be broader, faster, and more chaotic than US policymakers have planned for.

US businesses and universities may spurn high-skilled Chinese applicants who pose no real national security risk but would nonetheless face vague and onerous visa screening, “deemed export” controls, or research security requirements. US organizations may slow their adoption of innovative technology (drones, for example) due to the growing risk of bans on Chinese equipment and the dearth of competitive alternatives.

US companies may fail to bring new goods to market if China offers the most viable manufacturing site yet there is too much regulatory risk (from possible outbound investment screening, data protection rules, tariffs, and more) to justify long-term investments there.

In these and other scenarios, a volatile US policy environment forces private actors to go beyond or move ahead of what policymakers may actually want, harming US interests in the process.

Finally, the new export controls will reverberate within the US political system. Biden probably hopes to fend off Republican attacks that he is weak on China. This may help in the November midterm elections, but in the long run it’s a mug’s game. Anti-China measures have been a one-way ratchet: Each new restriction or sanction simply ups the ante for the next one, empowering hardline voices in the process.

There will soon be calls to broaden these export controls and use even more powerful weapons, like the Specially Designated Nationals List, against major Chinese companies.

If Biden is not yet prepared to take these steps, he will find it increasingly hard to explain why. Neither he nor any other US leader has made a serious effort to educate the American people about the costs and risks of decoupling. Rather, popular discourse and political energy overwhelmingly favor the restrictionists.

Republicans have made China-bashing central to their brand, and few Democrats are interested in challenging their premises or pointing to possible trade-offs. Many business leaders think differently, but they have lost political sway and they know it. Most choose to keep their head down, offering quiet pleas and technical comments to rulemakings. (The Semiconductor Industry Association said only that it was “assessing the impact of the new export controls,” which were imposed prior to the formal comment period.)

In short, not a single prominent political figure has emerged as a major voice of caution on decoupling. So long as that remains true, harsh new controls will only further consolidate the restrictionists’ dominance of mainstream discourse and build momentum for more of the same.

US-led technological decoupling from China has had enormous consequences in just a few short years. It has rewired international relationships, unsettled the global economic order, and transformed technology policymaking and politics in many countries. In this high-stakes game, Washington has been both card player and card dealer, making its own moves while constraining the choices of others.

Now the United States has gone all-in — wagering like never before and placing its cards on the table for all to see. The decisive American gamble: to openly block China’s path to become an advanced economic peer, even at significant risk to US and allied interests. Bigger US moves are probably coming in the future. But for now, Washington must wait to see how others play their hands.

Jon Bateman is a senior fellow in the Technology and International Affairs Program at the Carnegie Endowment for International Peace.

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