April 13, 2020 7:16PM

U.S.-China Tech Battle Threatens Pandemic Containment and More

Reuters reports that the Trump administration is planning to tighten export controls “to prevent China from obtaining advanced U.S. technology for commercial purposes and then diverting it to military use.” That sounds unobjectionable. After all, one purpose of U.S. export control laws is to ensure that dual‐​use items—articles that have both commercial and military applications—are exported for commercial use only, unless explicitly licensed for military use. But closer scrutiny of the fine print is needed to assess whether the expected national security benefits of these new rules will be significantly outweighed by their commercial, geopolitical, and human costs.

The Export Control Reform Act of 2018 (“ECRA”) grants the administration broad jurisdiction over “the export, reexport, and in‐​country transfer” of dual‐​use items, such as “accelerometers,” which are devices that measure the movement of objects and are used in commercial aircraft navigation systems, as well as in missile guidance systems. The ECRA requires the secretary of commerce to establish and maintain a list of controlled items, and a list of foreign persons and end uses deemed threatening to national security.

Under the law, licenses are required to export those items and to export to those persons, but exceptions apply under certain conditions. Some of those exceptions are on the chopping block. According to Reuters, three major changes are in store:

One change would do away with the civilian or “civ” exemption, which allows for the export of certain U.S. technology without a license, if it is for a non‐​military entity and use… Another change would stop China’s military from obtaining certain items without a license even if they were buying them for civilian use, such as scientific equipment like digital oscilloscopes, airplane engines and certain types of computers…A final change would force foreign companies shipping certain American goods to China to seek approval not only from their own governments but from the U.S. government as well.

Forestalling the Chinese military’s access to advanced technology seems like a legitimate aim of U.S. policy, and the first two rule changes identified above might help achieve that outcome at an acceptable cost. It seems reasonable that U.S. exporters of certain advanced technology to non‐​military entities in China should require licenses so that illicit channels of technology transfer can be better monitored and shut down. Likewise, given Beijing’s own blurring of lines between military and civilian activities—President Xi speaks of a “civil‐​military” fusion in the area of technology adoption—why should that distinction be preserved under U.S. export control laws?

It’s prudent to require U.S. exporters of dual‐​use items to the Chinese military to have a license—even when those items are designated for civilian use. Of course, those changes would make exporting to China more burdensome. But most of the added costs would be borne by the parties to the transaction—U.S. exporters and Chinese importers—and would probably justify the national security benefit obtained.

The last measure (or set of measures) under consideration, however, is problematic because it is less surgical than the others and threatens collateral damage to the technology ecosystem, U.S. commercial interests, broader relations with China and other countries, and international efforts to contain and defeat a global pandemic.

U.S. export controls apply directly to products made in the United States, but also extra‐​territorially to products made in third countries with “controlled” U.S. equipment, which contain a certain minimum percentage of controlled U.S. content. Exporters of these products from third countries require U.S. approval. The new rule would lower (and maybe eliminate) the content threshold so that licenses would be required by more producers in third countries, including all foreign companies producing semiconductors with U.S. chip‐​making equipment that are sold to China’s Huawei Technologies.

Sales of U.S.-made goods to Huawei have been restricted since last May, when the company was put on a Commerce Department blacklist for reasons of national security. But up until now, foreign suppliers of U.S. technology to Huawei have been beyond the full reach of U.S. authorities. The new rule would extend that reach, giving the U.S. government veto power over sales of even basic commodity semiconductors to Huawei from producers in Taiwan, South Korea, and elsewhere, wreaking havoc, in the near term, on Huawei’s capacity to plan, produce, and profit.

It isn’t hard to believe these new rules are intended primarily to thwart Huawei’s success—an objective many policymakers in Washington seem to support. But before pulling the pin, the administration should solicit stakeholder feedback and conduct an honest analysis of the likely costs and broader impact of the rule changes on the technology ecosystem, which includes industries up and down the supply chain from companies doing research to commercial innovation to semiconductor manufacturing to the production of everything called information and communications technology.

What might they learn? The following, if this U.S. technology industry coalition letter is a guide:

Abrupt changes to the export controls regulations for semiconductors will create uncertainty for the entire technology industry. Semiconductors are the foundation of modern electronics, information technology, cloud services, critical infrastructure and the defense industrial base. In addition to playing a critical role in sectors throughout the economy, semiconductors play an essential role addressing the COVID-19 public health emergency. Semiconductors drive the functionality in advanced medical equipment used by health professionals to treat the public, and they enable the products and services that allow telework, remote learning, telemedicine, and other aspects of our economy and daily life. Semiconductors will also play a pivotal role in driving the industries of the future and the economic recovery once the public health emergency is defeated.

Changes to the export control regulations under consideration have the potential to result in significant impacts on the semiconductor industry, its global supply chain, and the broader technology sector that relies on predictable access to semiconductors. Given the importance of this industry – and in light of the unprecedented public health crisis and economic disruption – it is imperative that any regulatory changes be narrowly tailored and minimize damage to industry. Subjecting such regulatory changes to public comment would help ensure that Commerce benefits from the industry’s views and avoids unintentionally exacerbating an already difficult economic situation.

A letter to President Trump by the president of SEMI, an association representing the semiconductor and electronics manufacturing supply chain, warned that the new rules would “serve as a disincentive for further investments and innovation in the U.S. and lead to the design‐​out of U.S. technology and components.” Indeed, companies such as Taiwan Semiconductor Manufacturing Corporation, a long‐​time consumer of U.S. chip‐​making equipment and the world’s largest producer of commercial chips, which obtains 17 percent of its revenue from sales in China, will look to other countries for their capital equipment needs.

Likewise, the move would encourage China to expedite development of its own chip‐​making capacity and to source more semiconductors from South Korea, which would hasten a decline in revenues and market shares of U.S. chip and chip‐​making equipment firms. The damage to U.S. commercial interests would go beyond the semiconductor supply chain, as Beijing looked to deploy retaliatory measures to frustrate the efforts of U.S. businesses in China and elsewhere. Ultimately, disruptions in semiconductor supply chains could impede production and increase the costs of various kinds of smart medical equipment and devices relied upon by health professionals in the battle against COVID-19 and other diseases. 

Controlling exports of cutting‐​edge technologies that have military or intelligence applications is probably a prudent aim of policy. But the new export controls go beyond that and seem unnecessarily provocative, especially during a time when U.S.-China cooperation is sorely needed. Most concerning is that the accumulated weight of the measures and countermeasures that have burdened relations for several years may soon prove too hard to bear, resulting in a total collapse in the bilateral relationship. The specter of the world’s two largest economies refusing to cooperate to contain the pandemic and repair the global economy is a worry to take very seriously.