Update on Export Controls and Sanctions
Category: Supply Chain • Jun 4, 2021
By Dr. Paul Freedenberg
Former Undersecretary of Commerce, AMT consultant on trade issues
The question is still open regarding whether President Biden will pursue a tougher policy regarding trade and export controls with China than his predecessor. The President has yet to name his political-level officials to handle export control policy. Yet, it is precisely export controls and sanctions that are likely to be the principal tools the U.S. government uses to punish the Chinese for what it considers bad behavior. That lack of identifiable policymakers creates a situation where it is difficult to predict what sort of policy Biden will pursue on a day-to-day basis.
During the Reagan Administration, the appointment of Richard Perle to a critical position at the Department of Defense (DOD) told observers that Reagan was likely to be tough regarding export controls and sanctions to the Soviet Union. Today, the Biden team has sent no such signal through a personnel appointment at DOD or the Department of Commerce, the two agencies that administer export control policy. Secretary of Commerce Gina Raimondo has no record in this area in her previous role as Governor of Rhode Island, so her appointment tells little about future export control policy. She has stated that she favors increased exports, but that might mean trade with all nations, not just China.
The administration recently announced that it was lifting the ban on importing specific power grid equipment connected to the internet that was instituted during the latter months of the Trump Administration. This ban was part of the tightening of export controls to block China from using Chinese-made equipment to infiltrate our internet and telecommunications structure. In the short term, the importation ban hurt U.S. capabilities and semiconductor sales more than it hurt China's ability to spy on the West or steal intellectual property. In other words, it is not clear what benefit we got from that isolation of Chinese telecommunications companies, other than diminishing the fear that Chinese intelligence might be able to monitor Western exchanges of information.
The Trump Administration put export control bans on imports and exports of equipment that the U.S. and our allies were buying from Huawei and ZTE. However, it had difficulty convincing our allies to join us in this effort since the equipment from China was sophisticated and less expensive than its Western competitors. Moreover, the U.S. cut off a large market to our own vendors. It would seem that the recent policy change to pause that absolute ban indicates that the Biden Administration wants to give itself enough time to work out the optimum approach for the United States. It probably will not go back to a complete ban once the pause has ended.
The United States trades hundreds of billions of dollars of goods and commodities with China every year. It represents a key market for many U.S.manufacturers, and its products are throughout our supply chains. Retaliation like cutting off trade or using sanctions is not as easy as it was (and is) with Russia (or the old Soviet Union) when trade was measured in the tens of millions of dollars per year.
Back in the 1960s, the U.S. reached out to China and began trading with them as a part of a strategy to make the Soviets nervous about the possibility that we might ally with China or provide them with a capability the Soviets did not possess. Fifty years later, China is now the key potential adversary, and Russia is insignificant from a trade perspective (although they still have nuclear weapons).
Given the importance of China as a market and a component supplier, it would be reasonable to assume that there will be a gradual easing of export controls, with a concomitant reduction in punitive tariffs. China is too important to our economy, and it is by far the largest machine tool market in the world. The left wing of the Democratic Party will not like this approach. It prefers that Biden use export controls to pressure China on human rights abuses. But the President does not want to go out looking for trouble, and an aggressive export control approach to China is fraught with risks. In the future, we will most likely impose sanctions for human rights violations and for violations of the sovereignty of our East Asian allies that China is likely to commit. Still, open hostility and significant diminution of trade with Chinese companies do not seem to be in the cards, at least as far as official Administration policy in the foreseeable future.
On the other hand, there are already bills introduced, or about to be introduced, in Congress to deal with the competition and the perceived high-technology threat posed by China. From the point of view of the U.S. manufacturing sector, particularly machine tools and automation, bills to subsidize and provide tax credits for research and development would be welcome and beneficial. Any government support in this sector would be viewed as an offset to China's subsidies for its manufacturers. U.S. subsidies could be used to advance manufacturing and machine tool development and would likely be considered legitimate under the rules of the World Trade Organization. They could be justified as measures to strengthen the defense industrial base.
However, there is a danger of going overboard in the perception of a Chinese threat to U.S. manufacturing. One bill under consideration would create a new version of the Coordinating Committee for Multilateral Export Controls (CoCom) with China as its target. CoCom existed from 1949 until 1994 as an organization created to coordinate punitive technology policy against the former Soviet Union. The newly proposed CoCom would be formed to cut off high-technology flows to China.
There are a few reasons why this approach won't work:
- Few, if any, of our allies would join us in a multilateral effort. China is too important and represents too big a market to expect our allies to join us in this fight. Unilateral action by the United States would not be in our best interests since China can obtain whatever it needs from other sources.
- The United States already has an organization to deal with China's high-technology trade — the Wassenaar Arrangement, which is voluntary and does not allow a veto of one power over another's exports.
- With the possible exception of Japan, our allies do not consider the threat from China to be as great as we do.
It is unlikely that legislation openly hostile to China will pass Congress during the current session. But a growing number of lawmakers on both sides perceive China as a threat to the United States. As a result, the Biden Administration is likely to move slowly to improve trade or remove tariffs. The President certainly does not want to be perceived as "soft on China," opening him to criticism from liberals and conservatives. A continuation of the current policy toward China is more likely, with cautious moves toward a reduction of tensions in both export controls and trade. In the absence of a crisis, I don't expect dramatic changes in any direction.