The incoming President Donald Trump’s “America First” policies were labelled as anti-free market and anti-globalisation by critics. None were more vocal than the Democratic Party. But the outgoing Joe Biden administration itself kept in place many of the tariffs Trump put forward during his first stint (2016-2020).
It was hard to fathom that the champions of global free trade were formulating unfair trade policies that artificially interfered with the market. However, the Biden administration argued that China is using technology to promote its authoritarian governance model, upgrade its military, and advance its interests and ideals abroad.
The administration identified certain technologies as potentially threatening the United States and allied security, and accordingly, restricted China’s access to them. It was dubbed as a “small yard, high fence” approach. The goal was to restrict a few military-grade technologies while maintaining normal economic interchange.
The Chinese leadership sees these moves as a form of containment to prevent Beijing’s rise and maintain hegemony. Washington’s allies also regard sanctions on China as protectionist rather than a matter of national security.
As the number of firms and sectors targeted rises, the US risks further undermining its relations with China, losing allied backing, and hurting its own companies while failing to slow China’s technical advancement.
What restrictions has Biden announced?
In 2022 and 2023, the Bureau of Industry and Security (BIS) announced new export controls to limit China’s “ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.”
Under the Biden administration, BIS added over 200 Chinese companies to the “Entity List,” which bars them from importing almost all US-origin products.
In June 2021, President Biden signed an executive order launching the NS-CMIC List sanctions programme. The executive order forbids American citizens from buying or selling publicly traded securities of companies the Secretary of Treasury deems involved in China’s defence and related material or surveillance technology industries.
In September 2023, Washington implemented an executive order instructing the Committee on Foreign Investment in the US (CFIUS) on risks to consider while examining covered deals. The executive order covers semiconductor manufacturing and advanced packaging, microelectronics, AI, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, critical materials, food security-related agriculture industrial base elements, pharmaceuticals and active pharmaceutical ingredients, and information and communications technology.
In August 2023, President Biden signed another order implementing overseas investment screening. The advanced notice of proposed rulemaking says that the Treasury Department is thinking about making it illegal or requiring people to notify them before they do certain things in the semiconductors and microelectronics, quantum information technologies, and AI sectors that are important to China’s military, intelligence, and AI. These things include mergers and acquisitions, private equity investments, venture capital investments, greenfield investments, joint ventures, and some debt financing transactions by American citizens.
How small is the yard?
The Biden administration’s priority areas were semiconductors and microelectronics, AI, quantum information technologies, defence, and surveillance technology. Semiconductor export controls included advanced semiconductors, their manufacturing equipment, and knowledge. Sanctions targeted Chinese firms’ military, intelligence, and security R&D, weapons and equipment production, and surveillance technology usage. Inbound investment screening emphasises military, intelligence, surveillance, and cyber capabilities.
The dilemma here was the fact that all technology targeted by two or more limitations was dual-use, except for defence. AI can improve facial recognition, information operations, autonomous weaponry, drug research, language translation, and logistics. Quantum information technology can expedite medication discovery, product design, and supply chain optimisation, as well as let troops operate in GPS-denied areas, identify submarines, and crack current encryption. Surveillance technologies can help countries spy on their citizens, protect homes and businesses, and aid legitimate police investigations.
Secretary of Commerce Gina Raimondo said semiconductors “drive innovation in nearly every emerging technology,” and National Security Advisor Jake Sullivan called microelectronics, quantum information systems, AI, biotechnologies, biomanufacturing, and clean energy “force multipliers.”
How high is the fence?
To implement semiconductor export controls, the US needed Japan and the Netherlands’ help. The Netherlands and Japan joined the US semiconductor export limits, but Japan does not ban re-exports and covers other semiconductor equipment. The government gave Samsung and SK Hynix indefinite export control exemptions for their Chinese operations and is likely to do the same for TSMC.
NS-CMIC sanctions only restrict investment in publicly traded company stocks. This method disregards private loans, private equity, and joint ventures, providing American people and organisations with a variety of ways to invest in sanctioned enterprises. Because the NS-CMIC List only applies to American citizens, foreign investors can replace American investors.
Finally, investment replacement affects inbound and outbound investment screening. Chinese FDI to Europe has topped US FDI since 2019, and in 2021, FDI from Europe, Japan, and South Korea exceeded US FDI to China. Also, 21 of the 27 European Union (EU) countries have inbound investment screening systems; however, their restrictions and investment types differ. Despite discussing the need for outward investment screening, the EU lacks such requirements.
The Biden administration’s economic constraints were more “mid yard, medium fence” than “small yard, big fence.” By going beyond a “little yard,” the administration played into China’s idea that Washington is trying to control its rise, jeopardises alliance cooperation, and hurts American enterprises. Without a “high fence,” the government risks failing to meet its goals.
Beijing prevented Chinese enterprises handling important data from buying Micron Technology processors and blocked an Intel-Tower Semiconductor merger. It also restricted shipments of semiconductor materials gallium, germanium, and graphite.
For effective export controls, sanctions, and inbound and outbound investment screening, the US needs allied collaboration. However, allies are reluctant to comply with these limitations. Not all US partners see China as a threat and benefit from its economic ties. As Washington introduces constraints in the coming days, allied collaboration may become difficult.
China generates over USD 50 billion for Nvidia, Intel, and Qualcomm. American companies and investors may suffer more than European, South Korean, and Japanese companies and investors due to the gaps between Japanese, Dutch, and US export controls, Samsung and SK Hynix’s export control waivers, and US and EU investment screening regulations. If limitations increase, US companies will suffer more economic damage.
Despite US prohibitions, Chinese capabilities grow. China’s SMIC created a 7nm chip, and YMTC created the most sophisticated consumer 3D NAND memory chip. Despite US export regulations preventing such technological advances, China’s 7nm chip production may not be high enough to meet domestic demand or be cost-effective. Furthermore, China is replacing American investment with its own. China raised USD 40 billion for its semiconductor industry through a state-backed investment fund.
Addressing current approach flaws
The Biden administration has stated that economic constraints are necessary for US strategy, and that national security comes first. If the Trump administration sticks to this, it should establish a “small yard, high fence” policy. The administration should restrict its constraints to defence, AI, semiconductors, and microelectronics. The administration should prioritise these sectors for military, intelligence, cyber, and surveillance developments. These technologies also support each other.
Advanced AI uses cutting-edge semiconductors and will improve military, intelligence, cyber, and surveillance capabilities. Meanwhile, the administration should deprioritise quantum information and surveillance.
On the “high fence” side, the administration should prohibit new equity investments, loan financing, joint ventures or other corporate entities with NS-CMIC List businesses and convince allies to impose comparable measures. The administration should also reduce Samsung and SK Hynix’s indefinite waivers to tighten export rules. Finally, the government should push the EU to review outbound investments.
Allies must cooperate; thus, the administration should offer incentives to join US limitations. Free trade agreements may be an incentive. America has no FTAs with allies like the United Kingdom, European Union, and Japan. Lifting the Inflation Reduction Act’s American content criteria for sustainable energy technologies, which has irritated the EU, South Korea, and Japan, might be another incentive. Third, providing partners with a comment period before Washington imposes extraterritorial sanctions could improve coordination.
The White House also announced an investigation into whether Chinese vehicle imports pose national security dangers and potentially impose limitations due to “connected” automotive technology, as the latter “collect enormous volumes of sensitive data about their drivers and passengers (and often use their cameras and sensors to gather detailed information on the American infrastructure), necessitating the Commerce Department investigation.”
The Alliance for Automotive Innovation, which represents General Motors, Toyota, Volkswagen, and other major automakers, advised the Commerce Department to “work closely with the auto sector to establish the breadth of any action.”
The group advised the Commerce Department to target “undue danger to US economic and national security” but not “capture low-risk transactions that could have unanticipated near-term implications on advanced car safety technologies.”
Washington trying to control the game
Top White House economic adviser Lael Brainard recently stated, “China is flooding global markets with a wave of auto exports on the back of their own overcapacity. We saw a similar playbook in the China shock of the early 2000s that harmed our manufacturing communities and this administration is determined we will not see a second China shock. That means putting safeguards in place now before a flood of unfairly underpriced autos undercuts the ability of the US auto sector to compete fairly on a global stage.”
Fate of the auto industry and pressure from China became a major theme in the 2024 presidential election with Trump suggesting China could dominate future auto production. American officials are already in talks with their Mexican counterparts, while sharing “concerns” about China using the Latin American country as a platform to ship into the United States at artificially low prices.
Chinese automaker BYD is seeking an extension of tariff relief for EV imports from Mexico’s government, as the company aims to build a plant in the country. A decree exempting some 15% to 20% of tariff payments on EVs imported from countries with which Mexico does not have a trade agreement was set to expire at the end of September 2024, as President Andres Manuel Lopez Obrador leaves office.
BYD launched sales in Mexico in 2023 via imports, and the company has since announced plans to build a local plant to push out up to 500,000 cars a year for the domestic market. BYD’s proposal to the government also offered alternatives, such as applying no tariff, a preferential tariff to the firm or a quota-based tariff.
On the other hand, MG Motor plans to build a manufacturing plant and a research and development centre in Mexico, to bring the additional benefit of gleaning market intelligence specific to Latin America.
The move will allow MG, a formerly British brand now owned by China’s SAIC Motor Corp, to “not only produce vehicles, but to also produce market intelligence specifically designed for and by Latin America.”
The venture’s sister brand IM, a luxury electric vehicle line, also plans to enter the Mexican market. For Mexico, the prospects of Chinese companies bringing new investments might sound music to the ear, in terms of propelling the Latin American nation’s economic growth further.
However, we are talking about a nation, which was coincidentally, the United States’ biggest trade partner in 2023, with nearly $798 billion in goods and services exchanged between the two sides.
In April, reports emerged about the Mexican government, under pressure from Washington, declining to offer incentives to Chinese automakers to invest. Trump is crystal clear on his intention to put a 100% tariff on every car coming into the United States across the Mexican border. He has also stated that to avoid the tariff, the foreign EV ventures operating in Mexico must open factories in the United States, while giving Americans priority during the hiring process.
Since we are talking about Washington’s “Protectionist” trade policies against China and the importance of the US-Mexico-Canada agreement in that, China has targeted Canada’s tariffs with the anti-discriminatory probe, hitting back at Ottawa, which recently announced its restrictive measures against Beijing including additional tariffs on Chinese electric vehicles, steel and aluminium products.
With Europe already upping its tariff game against China and the United States joining the fray by making its trade protectionism against Beijing harsher, the ultimate loser will be here the globalised 21st century economy whose operating basis has been the free movement of goods, technology and products.