The Unintended Consequences of US Export Controls

The much-anticipated U.S. National Security Strategy released in October made clear what has been obvious: Russia and China are the biggest immediate threats to the United States. In outlining the country’s defense goals, the Biden administration stated that “outcompeting China and restraining Russia” would be its primary focus. But while there is broad support to reach those objectives, there is growing concern about the unintended consequences of targeting China in particular as Washington’s economic policy becomes ever more intertwined with security concerns.

The overlap between economic interests and security policy has been intensifying in recent years. The Trump administration began to define U.S. relations with China in increasingly belligerent terms, a trend that has not abated. In a deeply divided U.S. Congress, it has been one of the few key issues that has garnered broad bipartisan support, and the Biden White House has effectively entrenched the belligerence further. Since the onset of the pandemic, there has been greater public awareness not only of the fragilities of global supply chains but also of the risks of relying excessively on Chinese imports.

The Biden administration’s initial response to the new reality was to identify industries that are essential to the United States but are sourced largely from overseas – including semiconductors and critical minerals. Policies to encourage industries vital to U.S. competitiveness as well as national security to be anchored within the United States were welcomed and widely seen as a logical response to the disruptions caused by the outbreak of the pandemic.

In fact, Washington was hardly alone in investing in supply chain resilience and endeavoring to reshore key industrial sectors. Across the Indo-Pacific and Europe, governments have been stepping up efforts to enhance their ability to withstand external shocks and stave off uncertainties in global markets stemming from natural disasters or from political pressure.

As a result, the CHIPS and Science Act that was passed in August was seen as a logical extension of Washington’s overall strategy of bolstering domestic competitiveness. The act, which invests $50 billion in the U.S. semiconductor industry as well as technology innovation, may have rattled Taiwanese and South Korean semiconductor manufacturers in particular, given their undisputed dominance in producing the world’s most advanced chips, but Washington’s overall objective was clear to both those within and outside of the United States.

The export controls on chips and advanced technology announced in early October, on the other hand, have been met with considerable resistance from U.S. companies as well as from foreign governments, including key U.S. allies and partners from Japan to Singapore to Australia and beyond. While export restrictions are expected to cripple not only the advancement of China’s semiconductor industry but its ability to pursue technological capabilities that could further Chinese military power, many fear that the ultimate goal is actually to decouple the United States from China technologically.

For U.S. companies, the price of doing business in China has risen significantly as the risk of coming under the scrutiny of the Commerce Department has intensified. The de facto ban on sending U.S. chip manufacturing equipment and materials to China, and the ban on U.S. persons working in China in the advanced technology sphere, is effectively requiring U.S. companies to self-censor and retreat from China.

According to media reports, only days after the export restriction rule was introduced, Apple had already decided to put a hold on plans to use memory chips from China’s Yangtze Memory Technologies. Just how many such business decisions are made by the electronics giant and other companies that would be directly impacted by the policy remains to be seen. But it is not only U.S. corporations that will be impacted by the newly introduced export control measures. U.S. consumers too will undoubtedly feel the impact, as costs for consumer electronics rise at a time when inflation continues to hurt wage earners.

Still, the biggest unintended consequence of tightened export controls toward China may well be U.S. relations with key allies and partners, especially in the Indo-Pacific. Although staunch U.S. allies in the region may share Washington’s concerns about Chinese economic coercion and technology advancements, the fact remains that China – and not the United States – is their biggest trading partner. The prospect of following U.S. regulations regarding investing and operating in China without consultation will be a challenge for governments, of course, but it will be a daunting task for Asian companies to abide by, even if they were in agreement with the U.S. goals.

For the most part, greater resistance to and bypassing of Washington’s rules regarding engaging with China on the technology front are to be expected, and that in turn could hamper relations with the United States more broadly.