US China Tech Controls Face Problematic Diagnosis

Recent reports highlight the negative impacts of US tech export controls targeting China. But the US is determined to march forward — and to force allies to follow.

Although US export controls are designed to widen Washington’s lead over Beijing in the race for advanced semiconductors, two new studies suggest the crackdown is boomeranging, hurting US business while helping Chinese companies.

Analysis from the New York Federal Reserve shows the new controls wiped “out $130 billion in market capitalization” for US firms and caused them to “experience a drop in bank lending, profitability, and employment.” Another study from US and Chinese financial experts claims controls on dual-use tech from 2007-2019 caused Chinese tech manufacturing or assembly firms to produce “more high-quality innovations.”

In short: US pressure appears to be accelerating Chinese innovation while depriving US firms of the revenue needed to keep their lead. Despite this evidence, the Biden Administration defends the chip crackdown and vows to continue expanding the export controls.

These studies are among the first to outline the costs of China-focused export controls imposed by the Trump and Biden administrations. President Joseph Biden expanded Trump-era efforts to hamper Chinese telecommunications champion Huawei in October 2022 imposing new export controls on advanced AI chips and chip-making tech.

The US continues to tighten those restrictions. On May 7, the US Department of Commerce revoked licenses for Intel and Qualcomm to sell chips to Huawei. In April, the US forced Dutch chip equipment giant ASML to stop servicing tools made with US tech sold to Chinese customers. The Commerce Department is reportedly considering new controls on selling the software that powers AI services such as ChatGPT. A proposed bipartisan House bill would provide the Department of Commerce with new powers to block exports of advanced AI systems.

The new independent studies portray past US export controls as provoking a wide range of unintended consequences. China “boosted domestic innovation and self-reliance, and increased purchases from non-US firms that produce similar technology.” Beijing points to new Huawei phones powered by Chinese-made advanced chips as early evidence of China out-innovating the US controls.

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Admittedly, US experts and officials draw the opposite conclusion. They see the new Huawei phones as evidence the controls are working, as the phones’ chips are low quality, costly to produce, and may have been made with illegally obtained US tech. As US Commerce Secretary Gina Raimondo puts it: “The export controls are working because that chip is years behind what we have in the United States. We’ve out-innovated China.”

US officials outline a two-pronged strategy to maintain the West’s global lead in tech innovation. The export controls are one prong. The other is pouring cash from the respective US and European Chips Acts. The DC-based Semiconductor Industry Association forecasts success for the joint cash-and-control strategy. It projects the US and Europe will jointly produce 34% of the world’s advanced chips by 2032, with China producing only 3%.

But the carrot and stick program faces challenges.

Start with the public funding of chip manufacturing. Taiwan Semiconductor Manufacturing Company’s new chip factory in Phoenix, Arizona — bolstered by $6.6 billion from the US CHIPS Act — is plagued with labor issues. Intel, in line to receive $8.5 billion, claims it needs even more money and wants a second CHIPS Act, which the Biden administration supports, but a frugal Congress may not.

Enforcement of existing rules is spotty. Congress has failed to increase the US export control agency’s budget since 2010 despite expanding its responsibilities. Chinese firms can skirt the regulations by smuggling US tech through shell companies. The Entity List, a central part of US export controls, is address-based, making it prone to evasion by moving restricted tech from a sanctioned chip fab to an unsanctioned one located in the same facility.

US controls also depend on allies in Europe and Asia enacting similar restrictions in a timely manner. The Netherlands and Japan are partially matching US efforts — under intense pressure from Washington — but their controls lack US-style enforcement capabilities such as end-use and personnel restrictions. The United States imposed its controls unilaterally, and it took months to convince the Dutch and Japanese to adopt similar measures. This bought time for China to stockpile Dutch and Japanese tech.

Time gaps like this reduce the efficacy of US controls, potentially facilitating China’s jump to the next tier of advanced chips.

Although the European Union is exploring ways to strengthen its export controls regime, its emphasis on “de-risking” supply chains from China is increasingly focused on China’s “unfair” trade practices, not on limiting China’s technological advancement.

Another challenge is the EU’s unwieldy structure. EU governments and industry groups remain skeptical of ceding certain national security powers to the Brussels-based European Commission.

So far, Chinese retaliation has been limited. Beijing is approving export licenses after slapping controls on minerals critical to chipmaking in September 2023. Chinese officials are cheering US chipmaker Micron’s construction of a new plant in Xi’an despite a purported sales ban. President Xi Jinping is ramping up efforts to subsidize Chinese chipmakers and remove US parts from Chinese tech.

The US rationale for imposing export controls is to prevent China from using Western tech to modernize its military. But the strategy risks dangerous side effects. While US controls may be widening the innovation window — at great cost to US and European industries — they are creating a necessity for China to close the gap.

As the US cracks down, European and Asian allies could revolt. China could start weaponizing its considerable leverage in other areas such as legacy chips, solar panels, or critical minerals. The tech Cold War would intensify, fracturing the global tech ecosystem — and hurting everyone.

Matthew Eitel is Special Assistant to the President & CEO at the Center for European Policy Analysis (CEPA).

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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