U.S. policymakers are considering a new set of measures to navigate escalating economic and military competition with China, with the latest proposals potentially further reshaping global trade with ripples not just in technology but also in health and finance.
A hearing last week by the U.S.-China Economic and Security Review Commission, which advises Congress, on managing relations between the world’s two largest economies offered a glimpse into a wide range of proposals, from expanding tariffs and export controls to greater oversight of U.S. investment abroad and the origins of goods imported from countries like Mexico and Vietnam.
The aim of the proposal is to decouple some ties with China, but not so much that it undermines the United States or alienates U.S. allies in rebuilding ties with China.
But global companies could be caught in the middle: Many analysts expect further export and investment restrictions and tariffs to be imposed targeting other technology sectors, such as artificial intelligence, including high-bandwidth memory, and potentially the pharmaceutical and aviation industries.
Also on the agenda is increased scrutiny of where asset managers, private equity and venture capital firms are investing in China.
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“The big losers in all this will be U.S. companies like Intel.
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Advanced Micro Devices
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and Nvidia
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Tool makers such as Applied Materials and Lam Research will also see their market share in China decline further, leading to cuts in research budgets and impacting their ability to continue to innovate,” said Paul Triolo, partner and head of technology policy for China at consulting firm Albright Stonebridge Group. Barons on mail.
China’s pushback has been limited to areas where it has an advantage, such as critical minerals for electric vehicle batteries, but Beijing has introduced stricter licensing requirements for graphite and other materials.
“Any disruption to graphite exports to countries like Japan and South Korea could disrupt the electric vehicle battery and electric vehicle supply chains outside of China,” Triolo warned.
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So far, China has focused on increasing investment to bolster its domestic capabilities. Beijing has just announced a third fund to boost domestic semiconductor and critical technology production.
Previous funds focused on equipment and materials for China’s semiconductor industry, but the latest fund is targeting computing and storage chips needed for generative AI, which are also at the center of U.S. efforts to limit China’s access to critical technologies through export restrictions, said Winston Ma, an adjunct professor at New York University Law School and AI investor and former head of the North American office of a Chinese sovereign wealth fund.
Investors and shareholders in this latest fund include China’s top six state-owned banks, and Ma expects to see more bank lending to China’s semiconductor industry.
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Triolo added that Beijing’s increased support for domestic companies such as Huawei and SMIC could increase pressure on foreign rivals. China’s latest fund is a continuation of the country’s efforts to speed up innovation in its domestic semiconductor industry and overcome constraints imposed by U.S. export controls, he said.
And those U.S. restrictions are likely to continue no matter who is in power. Jamieson Greer, an international trade partner at King & Spalding and former chief of staff to U.S. Trade Representative Robert Lighthizer, called for more tariffs as China’s policies allow a flood of cheap goods overseas and puts export controls in place.
But while the Biden administration is seeking to maintain a more limited approach of small yards and tall fences, Greer said at the hearing that maybe yards shouldn’t be so small.
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Greer also called on Congress to revoke the permanent normal trading relations status that China was given when it joined the World Trade Organization two decades ago. Giving China preferential normal trade access “seems like a cheat” as the country evolves into an adversary rather than a partner, Greer said.
But Mary Lovely, a senior fellow at the Peterson Institute, warned that such a move would disrupt global trade and spark an economic war against the WTO, making allies unlikely to follow the U.S.’s lead. “They would look elsewhere, which would lead to further isolation and weakening of U.S. leadership,” she said at the hearing.
While Labrie supports stronger restrictions and targeted regulations on China, she said the U.S. needs to go further than just helping companies make capital investment decisions and also consider coordination with trading partners as the U.S. seeks to diversify its supply chains to countries like Vietnam and Mexico.
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China has been investing heavily in both countries to build manufacturing bases, and some participants at the hearing called for measures to prevent China from using those facilities to circumvent trade restrictions. One possibility would be to redefine the origin of a product to focus on who made it rather than where it was made, but that change would set up a drawn-out fight to renegotiate the trade agreements.
Some have called for increased scrutiny of where U.S. investors are investing in China. Derek Scissors, a senior fellow at the American Enterprise Institute, called for increased disclosure of portfolio flows, including not only direct investments but also investments from offshore accounts. The next step would be to restrict investment in areas where the U.S. already restricts the sale of export goods through export controls.
“Under the Trump administration, portfolio investment in China increased by $860 billion, dwarfing the impact of the trade war,” he said at the hearing. “We have had a pattern of helping China develop complementary military technologies, and then being surprised when China acquires military and economic power.”
Scissors recommended asking the Defense Department to identify subsectors of greatest concern to develop a blueprint for areas in which the U.S. wants to restrict investors. Potential areas for consideration include cutting-edge AI systems, hypersonic technology, quantum technology, and more advanced semiconductors.
Contact Reshma Kapadia at reshma.kapadia@barrons.com.
