What is the “right track” for US-China trade relations?
The semiconductor industry has been squarely in the crosshairs of US-China trade tensions for four years. As the US faces a presidential leadership transition, will a Biden administration change the dynamic? The chip industry is counting on it, and China hopes so too.
In a recent address to the US-China Business Council, China’s foreign minister Wang Yi said China is open to and hoping for a renewed relationship. “We should strive to restart the dialogue, get back to the right track, and rebuild mutual trust in the next phase of Sino-US relations.”
China should not expect an immediate unwinding of the Trump agenda. In a recent New York Times interview, Biden stated that he intends to first review the existing US-China agreement and then develop a “coherent strategy” with traditional allies in Europe and Asia. He wants trade policy that will “… actually produce progress on China’s abusive practices – that’s stealing intellectual property, dumping products, illegal subsidies to corporations” and forcing “tech transfers” from American companies to their Chinese counterparts. These goals could have been directly lifted from Trump’s US Trade Representative Section 301 Report (March 2018). Biden also wants to build leverage through bipartisan consensus for large scale investments in R&D, infrastructure, and education to compete with China. His view is that the US currently has neither the policy nor the leverage.
The Trump administration has been on a four-year campaign to redress trade imbalances, counter long-standing industry complaints regarding China’s trade practices, check China’s global cybertheft reach and deny advanced technology to its national security complex (military, intelligence, cyber and space). Trump levied tariffs, strengthened oversight of Chinese licensing and M&A activity with the signing of the Foreign Investment Risk Review Modernization Act, and expanded export controls targeting both denied parties and advanced technologies. In addition, he triggered the foreign direct product rule to restrict global companies (primarily TSMC) from product shipments to Chinese companies (primarily Huawei) using US-origin technology (notably from US EDA & IP firms and semiconductor equipment manufacturers). The Justice Department took on high profile litigation to prosecute IP theft (UMC and Fujian Jinhua). And the “Clean Networks” initiative formed alliances with more than 50 democracies dedicated to using only trusted vendors in their 5G networks.
The policy result: mixed. The trade deficit is higher today than at the outset. The US semiconductor industry reacted negatively to policies impacting market share, financial performance, and free trade, but positively to litigation addressing high profile IP theft. The semiconductor industry and many of its customers scrambled to revise global supply chains to mitigate risk. The impact to China’s technology industry was severe. Huawei was hit particularly hard by the denial of access to chips (resulting in the sale of its Honor smartphone business) and by a partial global boycott of its 5G communications systems. Huawei and SMIC are now essentially locked out of access to leading edge chip technology (7 nm and below). China retaliated with tariffs and its own denied parties list. It codified a new strategy to become self-sufficient across the entire semiconductor value stack.
The pending “de-coupling” threatens a bifurcation in global technology standards, inefficiency in R&D investment and a revival of economic nationalism. Industrial policy has (re)surfaced in the US, Europe, India and elsewhere as regions move to protect access to leading technologies, address cyber risks to national security and critical infrastructure, and secure the supply of key components. Taiwan announced an initiative to form its own semiconductor equipment industry to reduce dependence on US firms and mitigate the reach of US sanctions.
Many executives in the semiconductor industry desperately want to roll back the Trump agenda. They want unfettered access to China’s market and to global talent, but with protection of IP and freedom of action to operate globally. They want to avoid the balkanization of the industry. They acknowledge policy objectives of their countries of incorporation but want to extract the chip industry from being a lever of economic and national security policy. They do not want to be in the club long dominated by soybeans, oil, steel, airlines, and autos.
So should a Biden administration unwind, maintain, or modify policy to gain consensus and leverage? Will it acquiesce to China’s view of the “right track”? A geopolitical reality check regarding China must underpin potential policy revisions. The Biden team surely understands that there is already near bi-partisan consensus in the US Congress that China threatens global security, denies essential human rights, and disregards obligations taken under international agreements. These threat vectors will not disappear with Joe Biden in the White House.
China is a regional and global security threat with an increasingly aggressive military posture against neighbors in the South & East China Seas and on its border with India. It is prosecuting a rapid build-up of conventional and asymmetric military capability leveraged by a “civil-military fusion” policy that enables Chinese government access to any technology available in its commercial sector. It continues trade secret and IP theft through both traditional and cyber espionage. The Belt & Road Initiative and debt diplomacy through Chinese investment in overseas port facilities and raw materials personify economic strategies backing China’s goal of global hegemony. Is this being on the “right track”?
China’s election to the UN Human Rights Council belies an atrocious human rights record. It has imprisoned and forced into involuntary labor millions of Muslim Uighurs. It also persecutes Buddhist, Falun Gong and Christian communities. The Chinese Communist Party is the only acceptable orthodoxy. China abrogates obligations it has taken under international treaties. It refuses to accept the results of maritime disputes arbitrated under the UN Convention on the Law of the Sea. It unilaterally terminated its 50-year treaty on Hong Kong (one country, two systems) and imprisoned advocates for democracy. Its role in COVID-19 remains to be understood. Right track?
China masterfully leveraged access to open societies and the international trading order since joining the WTO in 2001, lifting millions of people out of poverty. But it has not met its reciprocal obligations to free, fair, and transparent trade practices. China’s economic development play book is extensive: subsidization of national champions; restrictions on foreign access to local markets; requirements on global corporations for licensing and/or minority ownership in joint ventures as the ante for market access; acquisition of global firms followed by repatriation of IP and production; cyber theft targeting commercial IP and technology critical to national security. Right track?
Finally, across the straights sits Taiwan, jurisdiction to one of the most vibrant and strategic segments of the semiconductor industry. China has taken an unambiguous position on its ultimate sovereignty over Taiwan and its aim for reunification, positions not widely supported in the international community. China is using economic and military leverage to bend Taiwanese leadership and the international community toward that view. Right track?
Any US President who subordinates this threat profile in the quest for improved trade relations with China does so at the peril of the United States and its allies. Consensus and the use of leverage are central to the path forward.
Indeed, there is US bipartisan consensus in Congress on the China threat and the need to invest heavily in both research and manufacturing to keep US chip technology at the leading edge and assure security of chip supply. This consensus is exemplified in the CHIPS Act now integrated in the pending National Defense Authorization Act (NDAA). Internationally, there is consensus among more than 50 liberal democracies as to the threat posed to trusted communications networks by Huawei’s 5G platform and an associated commitment not to deploy Huawei.
Despite the revulsion of “All Things Trump” by most leaders in technology, objective policymakers recognize this consensus and the substantial leverage bequeathed by the Trump administration on which to advance US objectives with China. How then should a Biden administration position trade policy and the semiconductor industry in this context? Should chips be exempt from use as a lever of US policy viz-a-viz China?
First, Biden should maintain all sanctions and tariffs and avoid the visceral instinct to immediately reverse the actions of the Trump administration. This would clearly signal to China that a new Biden administration shares in the US bi-partisan consensus that China is a threat to global security and that abuses of human rights and the abrogation of treaty obligations are not acceptable. For now, maintain the leverage that was painfully developed.
Next, Biden should task Katherine Tai on day one to lead the development of a “National Trade Strategy” to drive clarity of US objectives and approach on trade policy. This would guide consistency in US action and transparency for the American people, corporations, and trading partners. It should embody the high ground of “free, fair and open trade”, embrace international trade deals that expand the global economy, embody strong IP protection, provide national security carve-outs, and integrate “reciprocity and proportionality” as central tenets in countering trade treaty violations. It should support use of trade as a viable lever in achieving national policy priorities.
Third, coordinate China trade policy with liberal democratic trading partners. Those most critical from a semiconductor perspective are South Korea, Taiwan, Japan, Singapore, the EU, Israel, and India. Unilateral US action has at times disenfranchised traditional allies, but the Clean Networks alliance and the 42 nation Wassenaar Arrangement governing export control provide beachheads from which to expand. A Biden administration should evaluate conditions under which the US could join the Trans-Pacific Partnership and negotiate toward that end. It should reconcile open issues and re-engage the WTO. These actions will blunt China’s ability to further displace US global trade leadership following China’s win in finalizing the Regional Comprehensive Economic Partnership.
Fourth, unambiguously confirm support for the CHIPS Act as incorporated in the pending NDAA, or any revision needed in 2021. Extend the CHIPS Act to include multi-year funding for the comprehensive R&D imperatives in the “Decadal Plan for Semiconductors”, as recently published by the Semiconductor Research Corporation.
Finally, re-engage in trade negotiations with China with clear objectives and allied support. Establish as part of the talks a technical working group inclusive of US and Chinese entities of the SIA, SEMI and GSA. Charter the group to deliver recommendations for specific technical and governance methods of protecting IP and ensuring that the application of US-sourced technology be limited to commercial use and firewalled from China’s national security infrastructure. A robust verification regime must be the ante for lifting existing tariffs and sanctions. Phase tariffs and sanctions out in concert with China’s demonstrated acceptance of its international treaty obligations.
The Thucydides Trap posits the inevitability of military conflict between a current global hegemon and a rising power. Is war then pre-ordained for the US and China? Semiconductor technology is the key ingredient of the digital economy and is essential to the future of both countries, indeed the globe. An agreement on chips between the great powers might pave the way for resolution of other critical flash points and lead minimally to détente.
Joe Biden is right to seek US bi-partisan consensus and alignment with allies as he steps back onto the global stage. He should wisely use the multiple points of leverage passed along from the prior administration and assure that the “right track” is defined by the interests of the US and its allies, not solely those of Beijing.
Terry Daly is a retired semiconductor industry executive and senior fellow at The Council on Emerging Market Enterprises, The Fletcher School of Law & Diplomacy, Tufts University
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