Our So-Called Foreign Policy: A Welcome Biden Breakthrough on China Tech Policy Coming?

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China, export controls, investment, Michael McCaul, monitoring and enforcement, national security, Our So-Called Foreign Policy, Politico, tech, The Wall Street Journal

A key Republican in Congress recently said that the Biden administration is seriously considering a major and long overdue escalation of its efforts to hamstring a Chinese drive to achieve global technology dominance that gravely threatens U.S. national security. And a recent Wall Street Journal investigation has shown exactly why it’s so overdue.

Last week, Michael McCaul, Chair of the House Foreign Affairs Committee, told Politico that (in reporter Gavin Bade’s words) “The White House is considering new action to block U.S. business with entire swaths of the Chinese tech economy — an investment blockade stricter than previously reported.

As McCaul himself put it, based on conversations he says he’s had with U.S. officials, the administration “is talking about a theory where they would stop capital flows into sectors of the economy like AI [artificial intelligence], quantum, cyber, 5G, and, of course, advanced semiconductors — all those things….They actually want to say, right, you can’t invest in any [Chinese] company that does AI. You can’t invest in any company does cyber” or other similar sectors.”

As I’ve repeatedly suggested, such broad brush measures are vital for two main and closely related reasons. First, there are no Chinese entities (even those laughably classified as “private sector”) in any industry, including tech, that aren’t ultimately under the control of the Chinese government.

So it’s been utterly and dangerously foolhardy to believe – as U.S. administrations long have – that not just capital but knowhow and high tech products that Washington permits to be sent to specific Chinese entities aren’t likely to be made available to or used to benefit any other organization in China. And that includes the government and of course the military.

It’s true that Washington’s national security export control system isn’t totally unaware that such leakage may occur. Therefore, for instance, tech and product transfer requests with clear national security implications are typically approved only for customers that supposedly can be trusted to comply. Efforts to verify their trustworthiness are made as well.

But here we come to the second main reason that much more sweeping bans on doing tech business with China are needed: enforcement is excrutiatingly difficult at best. After all, the Chinese tech sector is enormous, which means that the financial and human resources needed for adequate monitoring would be equally enormous. Even worse, the highly secretive Chinese system boasts an impressive arsenal of tactics aimed evading the controls, and the aforementioned Wall Street Journal article indicates how spectacularly they can succeed.

A Journal investigation has found that “China’s top nuclear-weapons research institute has bought sophisticated U.S. computer chips at least a dozen times in the past two and a half years, circumventing decades-old American export restrictions meant to curb such sales.”

Indeed, because of its nuclear weapons-related work, this institute was one of the first such organizations put on U.S. export control blacklists – and that was back in 1997. So it’s clearly long been the subject of great ostensible American concern. Moreover, in 2020, in order to shrink the opportunities for cheating by the lab, the Trump administration  added “10 entities owned or operated by the academy as well as 17 aliases it uses to the entity list for procuring U.S.-origin items in support of Chinese nuclear-weapon activities.”

How, then, did it manage to obtain these semiconductors? Because in a system like China’s, which is not only highly secretive but totally lacking in independent regulatory systems and even apolitical rule of law, nothing is easier than concocting endless numbers of “aliases” and shell companies and fake arrangements of all kinds. Good luck to any American inspectors trying to keep up. Which is why total U.S. bans on investing in entire Chinese tech sectors would be so welcome.

At the same time, why stop at investment? Similar bans on broad classes of products and tech licensing deals are essential, too – and for exactly the same reasons. China operates nothing less than a vast, government wide mechanism for obtaining advanced tech capabilities from abroad by hook or by crook. Concentrating U.S. countermeasures on specific institutes or entities that can quickly change their identities is simply a fool’s quest. With the widest possible bans, Washington could reap the gains of an approach that’s the secret of success in much of life both inside and outside policymaking: keeping it simple.

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Making News: Back on National Radio on Banning TikTok & Other Decoupling from China

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Byte Dance, CBS Eye on the World with John Batchelor, China, decoupling, export controls, Gordon G. Chang, Making News, national security, privacy, semiconductor manufacturing equipment, semiconductors, social media, tech, TikTok

I’m pleased to announce that I’m scheduled to be back tonight to the nationally syndicated “CBS Eye on the World with John Batchelor.” Our subject – a raft of recent and proposed U.S. government moves to decouple the nation’s economy from China’s, including legislation to ban the Chinese-owned social media app TikTok.

The segment, which also features co-host Gordon G. Chang, is slated to be broadcast at 10 PM EST. But the entire program is always compelling, and you can listen live at links like this. As always, moreover, I’ll post a link to the podcast as soon as one’s available.

And keep on checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: Europe’s Worrisome Fence-Sitting on China

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alliances, allies, Biden, Bloomberg.com, China, Emmanuel Macron, Europe, export controls, France, free-riding, Mark Rutte, national security, Netherlands, Our So-Called Foreign Policy, semiconductors, technology

Ever since he belatedly admitted their importance (see here and here), a foundation of President Biden’s strategy for dealing with the wide-ranging challenges posed by China has been bringing America’s long-time treaty allies on board.

As the President made clear in a major speech shortly after his inauguration, China is America’s “most serious competitor” and “America’s alliances are our greatest asset” in countering this threat – and dealing with other global threats and crises.”

Mr. Biden seems to be making progress in mobilizing support from America’s Asian allies, both in terms of pushing them to get serious about their military budgets, and by winning meaningful cooperation for U.S. efforts to stay ahead of China in the means to produce ever more advanced semiconductors – which are central to creating the cutting-edge military systems of today and tomorrow.

But on the Europe front, this allies-focused strategy is hitting some serious roadblocks. Specifically, as Bloomberg.com just reported, although the continent’s major economies – especially the Netherlands, home of ASML, the company that makes the world’s most important semiconductor manufacturing equipment – have gone along to some degree with this American campaign, they’ve also warned that their cooperation will be limited in important ways.

Most disturbingly, particularly given U.S. plans to expand its new, sweeping controls on doing advanced semiconductor business with China, the Netherlands trade minister declared that the country “will not copy the American measures one to one. “We make our own assessment….” His remarks came after Chinese dictator Xi Jinping urged Dutch Prime Minister Mark Rutte to “oppose the politicization of economic and trade issues and maintain the stability of the global industrial chain and supply chain.”

Less disturbingly (because his country isn’t nearly as important a link in the global semiconductor supply chain) but disturbingly nonetheless (because it has always spoken with an outsized voice in European councils), France’s President Emannuel Macron told a group of business leaders, “a lot of people would like to see that there are two orders in this world. This is a huge mistake, even for both the US and China. We need a single global order.”

As a foreign policy realist, I can’t possibly criticize these and other countries for prioritizing what they view as their own national interests. Nor should American leaders. (Criticizing the accuracy of these views? That’s another story.) But Washington should call out avowed allies like the Netherlands and France for what looks like another version of long-time European national security free-riding, and make clear that continuing to play the game of what Bloomberg reporters call “carving out a middle ground when it comes to China” will carry severe consequences.

After all, Macron is right that the United States and China are “two big elephants” in a jungle, and that “If they become very nervous and start a war, it will be a big problem for the rest of the jungle.”

By the same token, however, allies that can’t be counted on when such conflicts start aren’t really allies at all, for their uncertainty makes impossible sound military planning, and could lead to dangerously erroneous miscalculation and other decisions.

In 1931, Florence Reece, the wife of a union organizer, wrote the classic protest song “Which Side Are You On?” to decry the notion of fence-sitting during times of conflict like those in Kentucky’s coal fields during that era. It’s a question that American allies like the Netherlands and France soon need to start answering much more clearly as China’s systemic threat to the United States grows ever more serious.

Following Up: Podcast Now On-Line of National Radio Interview on U.S.-China Economic & Tech Relations

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Biden administration, CBS Eye on the World with John Batchelor, China, export controls, Following Up, Gordon G. Chang, microchips, nationalsecurity, Party Congress, tech, Trade, Xi JInPing

I’m pleased to announce that the podcast of my interview last night on the nationally syndicated “CBS Eye on the World” with John Batchelor is now on-line.

Click here for a timely discussion, with co-host Gordon G. Chang, of how the results of the just-concluded Chinese Communist Party’s annual congress will impact U.S. trade with the People’s Republic, and whether the Biden administration’s major new measures will adequately slow China’s drive to achieve global technology leadership..

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: For Banning All U.S. High Tech Sales to China

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Biden administration, China, Chips Act, Defense Department, export controls, national security, Our So-Called Foreign Policy, semiconductor manufacturing equipment, semiconductors, tech

Just as my good buddy Ace recently gave me a great idea for a post on U.S. Ukraine policy, my equally good buddy Swifty (a finance guy) yesterday gave me an equally great idea – about how to ensure that U.S. curbs on sales of high tech equipment to China really put the hammer on the semiconductor industry being built in the People’s Republic. And interestingly, it mirrors an idea that I proposed many years ago for America’s human rights policy – government compensation for American-owned firms that lose business due to such limits.

In recent months, Washington has made major – albeit incredibly belated – progress in cutting off such American aid to Chinese tech manufacturers, whose burgeoning capabilities of course will boost China’s military power and potential. Important restrictions on what U.S.- and foreign-owned businesses can supply to China’s microchip entities are contained both in the bill signed by President Biden to boost semiconductor manufacturing in the United States, and in a sweeping set of restrictions on what both U.S.- and foreign-owned firms can supply to China’s microchip entities.

But even if these new policies are adequately enforced – always a big question surrounding American efforts slow China’s tech progress – they suffer two related weaknesses stemming from their tight focus on the highest end semiconductors and the equipment needed to make them. First, the vast majority of chips in use today – including in military systems – are lower-tech, so-called “legacy” chips, and China’s growing presence in the global market for these devices can create dangerous vulnerabilities itself.

Second, any sales of the machinery and software needed to make these legacy chips is bound to wind up helping teach Chinese scientists and engineers how to make their more advanced counterparts.

And this is where Swifty’s idea comes in. As he noted, it needs to be America’s goal to cripple China’s ability to make any type of semiconductor, and to completely shut down its learning opportunities. The big obstacle to imposing the broader controls needed to achieve this goal? The fact that this step would drive U.S.-owned companies that make semiconductor manufacturing equipment out of one of their biggest markets.

Swifty’s recommendation? Compensate them for these losses – at least until they can recoup them by selling to friendly countries to which chip production that’s under pressure from U.S. restrictions moves from China. He adds that such payments would be eminently affordable.

After all, even though the China market is enormously important to these firms, the China revenues they say they’ll lose are drops in the bucket compared with the mammoth scale of overall U.S. government spending, and even of the U.S. defense budget. (For some company-specific figures, see, e.g., here and here.)

That last point is particularly critical. For knee-capping China’s tech prowess is vital to U.S. national security. So think of these payments as defense spending – since it’s at least as important to prevent China from deploying lots of high tech weapons on the battlefield in the first place as to develop ways to fight them on the battlefield.

This national security perspective also matters greatly for dealing with another possible outcome of this greatly escalated U.S. strategy of denial – sabotage by American allies whose tech companies try to take advantage of U.S.-owned firms’ exit from China. Although the Biden administration has given some of them temporary exemptions, so far, the rest seem to be abiding by the new Biden administration rules – even in one case in which a loophole may well exist. But if they balk at wider restrictions, they should be told that their actions could wind up enabling Chinese forces to kill Americans in combat, and that they can’t expect continued U.S. protection if they persist. 

Way back in the early 1980s, I wrote that if the United States was serious about human rights policy, compensation should be paid to American-owned companies that lose foreign business in dictator-ruled countries subjected to U.S. economic sanctions. If Swifty’s similar approach isn’t used for China tech policy, it’ll be difficult to claim that the nation is serious about its national security.        

Our So-Called Foreign Policy: Is Biden Learning the Limits of Multilateralism?

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Afghanistan, alliances, allies, America First, ASML, Biden, Biden administration, Blob, China, Chips Act, Europe, export controls, Japan, multilateralism, NATO, North Atlantic treaty Organization, oil, oil price, OPEC, Our So-Called Foreign Policy, Saudi Arabia, semiconductors, South Korea, Taiwan, Ukraine War

Remember the buzz worldwide and among the bipartisan globalist U.S. foreign policy Blob that Donald Trump’s defeat in the 2020 presidential election heralded the start of a new golden age of America’s relations with its longstanding security allies?

Remember how President Biden himself pushed this line with his claim that “America is back” and that Washington would end the supposed Trump practice of denigrating and even rupturing these relationships, and resume its post-World War II strategy of capitalizing on these countries’ strengths and fundamental agreement with vital American interests to advance mutually beneficial goals?

Fast forward to the present, and it’s stunning how thoroughly these American globalist hopes – and the assumptions behind them – have been dashed.

The latest example has been Saudi Arabia’s rejection of Mr. Biden’s request to delay an increase in oil prices announced by Riyadh and other members of the OPEC-Plus petroleum producers cartel. It’s true that few Americans currently view the Saudis as ideal allies. Continuing human rights abuses and especially evidence that its leaders ordered the assassination of a dissident Saudi-American journalist – and coming on top of revelations of Saudi support for the September 11 terrorists and Islamic extremism more broadly – will do that. Indeed, candidate Biden had even promised to make Saudi Arabia as a “pariah.”

But follow-through? Forget it – largely for fear of antagonizing the Saudis precisely because of their huge oil production and reserves, and because the President evidently still viewed them as a key to countering Iran’s hegemonic ambitions in the energy-rich region.

As for Saudi Arabia, it and much closer allies (including in Europe) were far from enthralled with how Mr. Biden pulled U.S. forces out of Afghanistan – which they charge took them by surprise and seemed pretty America First-y.

Under President Biden, the United States appears to have performed better in mustering allied support for helping Ukraine beat back Russia’s invasion. But look beneath the surface, and the European contribution has been unimpressive at best, especially considering that Ukraine is located much closer to the European members of the North Atlantic Treaty Organization (NATO) than is the United States.

In particular, according to Germany’s Kiel Institute for the World Economy, which has been tracking these developments since the war began, to date,

 “The U.S. is now committing nearly twice as much as all EU countries and institutions combined. This is a meagre showing for the bigger European countries, especially since many of their pledges are arriving in Ukraine with long delays. The low volume of new commitments in the summer now appears to be continuing systematically.”

In fact, European foot-dragging has reached the point at which even Mr. Biden’s Treasury Secretary, Janet Yellen, has just told them (in diplospeak of course) to get on the stick.

Apparently, America’s allies in Asia as well as Europe have hesitated to get behind another key initiative as well: Slowing China’s growing technological progress in order to limit its potential militar power.

In a September 16 speech, White House national security advisor Jake Sullivan confirmed that the United States had officially doubled down on this objective:

“On export controls, we have to revisit the longstanding premise of maintaining “relative” advantages over competitors in certain key technologies.  We previously maintained a “sliding scale” approach that said we need to stay only a couple of generations ahead. 

“That is not the strategic environment we are in today. 

“Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

And on October 7, the United States followed up by announcing the stiffest controls to date on doing business with Chinese tech entities – controls that will apply not only to U.S.-owned companies, but to other countries’ companies that use U.S.-owned firms technology in high tech products they sell and high tech services they provide to China.

Including these foreign-owned businesses in the U.S. sanctions regime – as well as in parallel efforts to rebuild American domestic capacity and marginalize China’s role in these sectors – is unavoidable for the time being, since the domestic economy long ago lost its monopoly and in some cases even its presence in the numerous products vital to semiconductor manufacturing in particular.

But as the Financial Times reported last month, a year after Washington drew up plans to create a “Chip 4” initiative to work with Taiwan, Japan, and South Korea to achieve these goals, “the four countries have yet to finalise plans even for a preliminary meeting.”

The prime foot-dragger has been South Korea, which fears Chinese retaliation that could jeopardize its massive and lucrative trade with the People’s Republic. But the same article makes clear that Japan harbors similar concerns.

Also unenthusiastic about the U.S. campaign is the Dutch manufacturer of semiconductor production equipment ASM Lithography (ASML). ASML’s cooperation is crucial to America’s anti-China ambitions because it’s the sole global supplier of machines essential for making the world’s most advanced microchips.

So far it’s been playing along. But similar complants about possibly losing business opportunities in China – which may account for nearly half of the world’s output of electronics products along with much of its production of less advanced semiconductors – have already persuaded the Biden administration to give some South Korean and Taiwanese microchip manufacturers a one-year exemption from the new export curbs. Could ASML try to win similar leniency?

In fairness, the Biden administration hasn’t wound up placing all its foreign policy bets on alliances and securing multilateral cooperation. Indeed, its new National Security Strategy re-states the importance of rebuilding American economic strength as a foundation of foreign policy success; the legislation it successfully sponsored to bolster the United States’ semiconductor and other high tech capabilities put considerable money behind that approach; and to its credit, it announced the new China tech curbs even after it couldn’t initially secure adequate allied cooperation – assuming, correctly, that an act of U.S. leadership could bring start bringing them in line.

Hopefully, a combination of these rifts with allies and its recognition of the importance of maintaining and augmenting national power mean that President Biden at least is learning a crucial lesson: that supporting multilateralism and alliances can’t be ends of a sensible U.S. foreign policy in and of themselves. They can only be means to ends. And although they can obviously be valuable in many instances, the best ultimate guarantor of the nation’s security, independence, and prosperity are its own devices.       

Our So-Called Foreign Policy: No U.S. Learning Curve on Denying China Vital Tech

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China, Commerce Department, export controls, innovation, Kate O'Keefe, national security, Our So-Called Foreign Policy, sanctions, tech, The Wall Street Journal

The biggest reason to be appalled by The Wall Street Journal‘s excellent report yesterday on America’s efforts to control exports of high tech goods and knowhow to China wasn’t the raw data it contained – which showed that the U.S. government almost never rejects requests by business to sell high tech goods and knowhow to China.

No – as disturbing and scary as these findings are, the biggest reason to be appalled by the article is how clearly it reveals that, after decades of dealing with China, and despite the recent U.S. decision to spend huge amounts of money to try to stay ahead of China technologically, Washington has learned absolutely nothing about the threat to America’s national security, independence, and prosperity posed by this increasingly hostile and dangerous adversary, or how to counter it effectively. And maybe it hasn’t wanted to learn?

In fact, the article, by Journal reporter Kate O’Keefe, adds to the evidence that U.S. officials don’t even view China as especially hostile – let alone dangerous – at all. The People’s Republic is evidently assumed to be a country and an economy that in key respects closely resembles most other major powers with which U.S. companies do business.

Sure, U.S. export controls policies put China in a special category, and subject it to special restrictions for goods like weapons and satellite and space equipment, whose transfer to China is banned outright. But when it comes to “dual use” products and tech – which have both civilian and military applications, and which comprise an enormous group of goods and services – the American approach in practice treats China

>as if it’s got an independent private sector that can be sharply distinguished from its government agencies;

>as if China’s civilian government agencies can be easily distinguished from its national security apparatus;

>as if virtually all these entities operate in reasonably transparent ways and can be “trusted” to act safely in their role as “end-users” of these purchases;

>as if America’s main export control or sanctions challenge is making sure that cutting edge products and tech aren’t provided either directly to the Chinese military or other branches of the Chinese bureaucracy that jeopardize U.S. interests (like the secret police), or indirectly – via a small handful of other actors that, for whatever reason (Corruption? Tragically misguided patriotism?), will pass them along to the Bad Guys; and

>as if the U.S. government has the ability to make sure that prohibited items are kept out of the wrong hands.

Just two examples from O’Keefe’s article of how patently inane this approach has been:

>”Kharon, a Washington, D.C.-based research and data-analytics firm, said it has identified tens of thousands of Chinese entities that may meet the U.S. criteria for military end-user export restrictions, even though there are only roughly 70 on the Commerce Department’s current list.” (Commerce is the lead export control agency.)

>The Commerce Department has added to its list of entities for which Americans need a license to do business the officially state-owned flagship Chinese semiconductor manufacturer SMIC – but only after a U.S. defense contractor “documented the chip maker’s military customers.”

Back in 2012, I wrote that China represents a systemic challenge requiring a completely different export control (and sanctions) approach. Nowadays, when China has grown so much stronger in large part because of this La-La-Land (to be charitable) U.S. strategy, a course change is more important than ever.

What this means is that, no matter how they’re classified by the Chinese regime or structured on paper, every single entity in the People’s Republic that’s in the tech or broader manufacturing sector must be recognized as being under Beijing’s actual or potential control. Therefore, they can be counted on to (a) make available to the authorities anything they acquire that can undermine U.S. interests and/or keep the leadership in power; and (b) do everything possible, including with the regime’s active help, to cover its tracks.

This doesn’t mean that difficult China export control and sanctions policy issues don’t lie ahead for Washington. For that, we can thank all the U.S. leaders before Donald Trump’s presidency who so recklessly turned the People’s Republic into such a powerhouse tech manufacturer and major tech market. (At the same time, the fundamentally moronic export control system remained largely intact during the Trump years.) But one critical reform can be put in place immediately – new regulations realizing that if a product or technology is deemed too dangerous to sell or transfer to any one China entity, it’s by definition too dangerous to sell or transfer to all Chinese entities. Because the China challenge is systemic.

Our So-Called Foreign Policy: Shocking New Findings on How Corporate America Keeps Strengthening China’s Military

Tags

AI, artificial intelligence, Biden adminisration, Center for Security and Emerging Technology, China, export controls, Georgetown University, innovation, Intel, investment, national security, Nvidia, Orbcomm, Our So-Called Foreign Policy, semiconductors, Silicon Valley, software, tech, venture capital, Xilinx

Recent weeks have seen an impressive burst of new information about how U.S.-owned businesses are fueling the technological and military strength of China, a country whose armed forces American soldiers, sailors, and airmen and women could be fighting on the battlefield before too long.

The first source of this information comes from Georgetown University’s Center for Security and Emerging Technology (CSET) in an October report called Harnessed Lightning: How the Chinese Military is Adopting Artificial Intelligence.

The study focuses on China’s own efforts to develop artificial intelligence (AI) capabilities and incorporate them into its military operations and systems, and goes into fascinating detail about how much money is spent on these efforts, and how many Chinese entities of all kinds are involved in the campaign. The authors also make clear – just in case it wasn’t screamingly obvious already – how widespread these applications can be, and their incredible potential to revolutionize warfare and hand victory to the power possessing the best knowhow.

But as one of the team explained in a summary magazine article two days ago:

“Our research also highlights that U.S. companies are inadvertently powering Chinese military advances in AI. The overwhelming majority of advanced computer chips at the heart of China’s military AI systems are designed by U.S. firms like Intel, NVIDIA and Xilinx, and manufactured in Taiwan. We found that suppliers actually depicted NVIDIA-branded processors in photos of their products, providing clear evidence of the role U.S. technology plays in powering China’s advances. One company, which won a contract to supply chips for the PLA Strategic Support Force, even bought the domain ‘nvidiagpu.com.'”

Moreover, much more than simply semiconductors are involved. So is machine-learning and intelligent text-processing software, along with systems for “real-time monitoring” of “millions of global shipping and related users” with the help of 108 satellites from the American company Orbcomm.

My only objection: It’s inconceivable that these U.S. firms don’t fully understand the national security implications of their activities. The report itself notes that

“Because most institutions that supply AI-related equipment are new and not subject to end-use controls, the Chinese military is frequently able to access or acquire technology from abroad, including from the United States. Some Chinese suppliers make a business out of sourcing foreign data or components and reselling them to sanctioned Chinese defense companies or PLA [People’s Liberation Army] units.”

But the U.S. businesses must be aware that any of their products sold to any Chinese entity are going to be made available to the Chinese military simply because that’s the way China has operated since the Communists have been running the place. So this rationale can be easily laughed off.

The same cynical reaction is justified for claims that U.S.-owned firms don’t know that the capital they’re steering into the Chinese tech sector will also benefit the Chinese military. And these capital flows are both impressive and coming both from finance companies and from the huge semiconductor manufacturer Intel – which is hoping to receive billions in U.S. government subsidies and tax breaks to help restore its competitiveness in microchip production largely (of course) to bolster national security.

As reported by The Wall Street Journal this morning, Intel is “is among the active investors, backing a Chinese company now called Primarius Technologies Co., which specializes in chip-design tools that U.S. companies currently lead in making.” RealityChek regulars, moreover, know that Intel has been investing in other defense-related Chinese entities for years.

Not that American investment firms aren’t also doing their part to strengthen China’s tech prowess and therefore military capability and potential. Including the Intel deal, the Journal found, American companies “participated in 58 investment deals in China’s semiconductor industry from 2017 through 2020, more than double the number from the prior four years….”

And on top of these transactions, according to the Journal, “the China-based affiliates of Silicon Valley venture firms Sequoia Capital, Lightspeed Venture Partners, Matrix Partners and Redpoint Ventures have made at least 67 investments in Chinese chip-sector companies since the start of 2020….” In all, the sums involve run into the billions.

And in case you still doubt that these U.S. firms fully understand how valuable their investments are to a country that’s increasingly hostile to America, the Journal article quotes the head of one of these Chinese recipients as saying that his operation is working with the Chinese regime and other partners “to help our country get rid of its dependence on foreign high-performance chips.” Since the United States is still ahead in this sector, a China that no longer relies on American high tech products is going to be a China that’s caught up – and possibly grabbed the lead.

What’s the U.S. government doing about this dangerously unacceptable situation? It’s true that Washington has long maintained a system of export controls aimed at preventing China and other worrisome countries access to critical, militarily relevant goods and knowhow. But as the CSET study documents, this system is being completely overwhelmed – in part because of sorely inadequate funding and staffing, and in part because it’s never switched from a case-by-case approach to the kind of much broader denial strategy that’s clearly needed for a systemic threat like that posed by China.

There’s legislation in the works to plug some of the holes, and according to the Journal, the Biden administration seems supportive. Let’s just hope that the government gets its act together sometime before weapons powered by American technology and funded by American investors start killing American servicemen and women somewhere in East Asia.

BTW, thanks to friend Bill Holstein for calling my attention to these two items. 

 

(What’s Left of) Our Economy: New Doubts About U.S.-China Decoupling

Tags

American Chamber of Commerce in Shanghai, Biden, China, decoupling, Donald Trump, exchange students, export controls, foreign direct investment, investment, tariffs, Trade, trade war, Wall Street, {What's Left of) Our Economy

As known by RealityChek regulars, the biggest question surrounding U.S.-China economic relations is probably whether the two countries will “decouple” their trade and investment relations with each other.

For several reasons, I’ve been pretty optimistic that the disentangling of the two big economies will continue and even speed up. These include the sizable decoupling progress that’s already been made; the strong and still growing criticisms of China’s behavior pretty much across the issue board by the American public and their leaders; the Biden administration’s surprising decision to continue most of the major Trump anti-China policies; and Beijing’s own determination to bring commercial entities often misleadingly described as “private” businesses even more completely under its thumb and make operating in China ever harder for foreign companies. (See, e.g., here and here.)

But after reading a summary of a recent survey by the American Chamber of Commerce in Shanghai, I’m not so sure.

The organization, comprised of more than 1,300 companies, is one of the leading foreign business groups in the People’s Republic, and last month released its latest annual China Business Report. Among the key findings:

>77.9 percent of the 338 respondents said they were optimistic or slightly optimistic about their next five years in China – the highest such level since former President Trump’s trade war began in 2018.

>77.1 percent reported that their latest profits were higher than expected.

>More than 82 percent expected higher revenues this year than last year – which would represent growth levels “last seen before the worst days of the US-China trade war.”

>The share of respondents reporting annual growth in investment in China (59.5 percent) is also nearly back to 2018 levels (62 percent).

>And only 28 percent of responding manufacturers producing in China had any plans to move production out of the People’s Republic.

Meanwhile, even though its economy is experiencing major problems due largely to mounting energy shortages to an overly aggressive anti-pandemic policy to signs that its mammoth real estate sector will turn into an equally mammoth burst bubble, Wall Street seems more enthusiastic than ever about channeling capital to China.

Signs that decoupling is proceeding are by no means entirely gone. Data on U.S. direct investment (that is, investment in tangible assets like factories as opposed to financial investments like stocks and bonds) for 2021 aren’t available yet, but figures for last year (reported in the above linked RealityChek post) showed that two-way flows continued a decline that dated from before the pandemic slowed both economies dramatically. Moreover, China’s crackdown on its big tech entities has included discouraging them from listing on American stock exchanges.

We do have 2021 goods trade data, and through the first half of this year, U.S. imports from China remained a smaller share of the entire U.S. economy (0.51 percent of annualized gross domestic product) than in the first quarter of 2018 – the last pre-trade war quarter (0.61 percent). Interestingly, the export ratio has returned to those 2018 levels (0.16 percent).

Moreover, since the flow of people back and forth was another major measure of how the United States and China had been drawing closer together, it’s also worth noting evidence that even though overall foreign student applications to American colleges and universities have resumed rising, they’re falling from China.

Since I’m not clairvoyant, I’m not going to pretend to know whether decoupling will slow or stop or accelerate again. But this scenario seems at least plausible: Goods trade between the two countries will keep stagnating at best (especially if the bulk of the Trump tariffs stays in place, and if President Biden keeps expanding controls on defense-related tech exports); but unless the Biden administration puts new clamps on, flows of capital – especially from the United States to China – will keep picking up.

Moreover, as explained by a Financial Times columnist, not only will these investments greatly increase the resources available to China’s dictators. They will also inevitably help China “put its savings to good use.” Which means that U.S.-China commercial interactions could well boomerang in numerous dangeorous ways against Americans even more than they do already.

(What’s Left of) Our Economy: Chip Derangement Syndrome

Tags

CCP Virus, Chad Bown, China, coronavirus, COVID 19, East Asia, export controls, fabless, Foreign Affairs, Huawei, infotech, lockdowns, Mainstream Media, manufacturing, metals, offshoring lobby, Peterson Institute for International Economics, reopening, semiconductor shortage, semiconductors, supply chains, tariffs, Trade, Trump Derangement Syndrome, Wuhan virus, {What's Left of) Our Economy

As some RealityChek regulars may have noted, I’m spending somewhat less time lately batting down ill-conceived, off-base, and downright incoherent individual books or articles etc on key subjects like trade and globalization, foreign policy, and immigration. It’s not that there’s any less “nonsense out there” these days. Goodness knows there remain enough mouthpieces of the Offshoring-, Forever Wars-, and Cheap Labor-Lobbies in and out of the Mainstream Media paid handsomely cranking out this bilge.

It’s just that they’re clearly so much less important these days, as the American political system has so markedly been ignoring their missives. I mean, even a longtime China coddler and offshoring trade deal supporter like President Biden knows – at least politically – that these stances don’t fly any more. Not that enough progress has been made. But champions of what I think can fairly be called the pre-Trump conventional wisdom in these areas are increasingly giving off those “wrong side of history” vibes – and lashing out at Trump policies in ever more desperate and arguably deranged ways.

I’m making an exception today, however, because Chad P. Bown’s new article in Foreign Affairs blaming the former president significantly for the global semiconductor shortage, appeared in such a (still) influential publication, and is such a thoroughly pathetic example of the marginalized trade policy establishment’s Get Trump and Trumpism obsession.

For the last few years, Bown has served as the MSM’s go-to economist for swipes at Trump’s tariffs and trade wars – every single one of them. As a result, it’s almost inevitable that, with Trump out of power, and Mr. Biden now having retained for months the principal Trump China and metals tariffs – every single one of them – that he’d be looking for new ways to show how mistaken these measures have been.

Although Bown admits that the unprecedened stop-start nature of the CCP Virus-era U.S. economy, the suddently booming demand for microchip-intensive infotech products during the pandemic, and weather-related production disruptions all contributed substantially to the shortage, he also claims that Trump’s trade and tech policies also “squeezed supply” – by definition enough to write about.

His main arguments: First, Trump’s tariffs on semiconductors made in China reduced U.S. imports on net because American purchases from other countries didn’t make up for those chips. Second, his restrictions on the sale of American-made semiconductors to Huawei led the Chinese telecommunications gear giant and other Chinese tech companies to start hoarding chips from everywhere for fear of inadequate overall supplies, and left fewer semiconductors for other users to buy. Third, these curbs on sales of U.S.-made semiconductor to such an enormous customer discouraged chip-makers from all over the world from investing in production capacity in the United States in favor of building factories that could supply China from elsewhere.

But even though, as noted above, Bown admits that other culprits deserve responsibility as well, he not only downplays their effects. He completely ignores the impact of much more fundamental, indeed root, causes. Highly conspicuous, for example, are the consequences of decades of the kinds of offshoring-happy trade policies so strongly supported by Bown and his Offshoring Lobby-funded think tank, the Peterson Institute for International Economics. These policies persuaded U.S.-owned semiconductor manufacturers to move to China and the rest of East Asia much production capacity that could have been installed in America – in large part because they sent to China and the rest of East Asia so much production of the infotech hardware production that buys so many semiconductors.

Nor does Bown mention the dangerously shortsighted decisions of so many U.S.-owned semiconductor companies to eschew manufacturing for a “fabless” business model of researching and designing chips and then farming out the production “foundries” run by separate contract companies – mainly in Asia. Largely as a result, the growth of inflation-adjusted American semiconductor output fell by fifty percent between the U.S. economic expansion of 2001-2007 and the longer expansion of 2009-2019. (See my National Interest article on the subject from last October for the statistics presented above and below.) 

The growth during the latter period (73.68 percent) seems impressive in isolation. But it wasn’t nearly enough to prevent the U.S. share of global semiconductor manufacturing capacity from sinking to 12 percent – less than half the percentage in 1990. And it’s not like the growth of this global capacity has been killing it lately, especially considering it’s an archetypical “industry of the future.”

You wouldn’t know this if you if you were relying solely on Bown, but by one key measure, this capacity’s 2013-2019 cumulative expansion (14.29 percent, as shown in the chart below (which comes from the main trade association of the global semiconductor manufacturing equipment industry) was actually slower than the after-inflation growth of total global output of everything (18.29 percent). And if that’s not a surefire formula for a global shortage to me, tariffs and export controls or not, I don’t know what is. Nor do Chad Bown, or the Foreign Affairs editors who published a diatribe that’s factually unhinged even by the rock bottom standards of Mainstream Media coverage of U.S. trade policy.