Export Controls: The Dust Begins to Settle

I did not intend to write so frequently about export controls in recent weeks, but the U.S. policy change is significant, and people keep asking me what I think. Producing one more column on the subject is the simplest way to provide my thoughts, so here we go again.

Anybody who follows the issue should be familiar by now with the basics of the new rule, so I will focus on its significance and consequences. The bottom line is that I have mixed feelings about it. It signifies the end of a 30-year policy I had a hand in creating, but one can make the case—and I have—that the old policy was running out of gas, and we now face an adversary that has already made up its mind to go it alone technologically and develop its own globally competitive companies in a range of high-tech sectors, most of which are currently led by U.S. companies. The new U.S. rule reinforces that decision but did not cause it. The Chinese made that decision years ago.

Even so, we should take a moment to pay tribute to the old policy, which served the United States well. By permitting exports of older technology, it enabled U.S. companies to gain substantial revenue from China sales, much of which they plowed back into research and development (R&D) for next generation technologies, enabling the United States to “run faster.” It also, for a time, kept China partly dependent on U.S. technology, albeit an older version, because they were able to obtain it fairly easily. That slowed down their efforts to develop their own technology independently for some years. One can argue that we sold China what they needed to develop on their own—the capitalists “selling us the rope we will use to hang them,” commonly attributed to Lenin.

There is some truth to that, but it needs to be weighed against the advantages the exports provided our industry to promote it own further development. It should also be noted that many of China’s gains came from illegal acquisition of U.S. technology and intellectual property (IP) theft, which happened regardless of our policy.

However, that is all water under the bridge, and it is smarter to focus on the future, where the picture is mixed. Most close observers of the new rule believe it is relatively airtight. That is, its combination of controls on specified chips, the equipment to make them, and the personnel necessary to design them and keep the manufacturing machines running will likely succeed in denying China the capabilities in artificial intelligence (AI) and high-performance computing that the U.S. government is worried about.

The immediate consequences of the rule are narrow. In the short run, it doesn’t cover much—less than 1 percent of chips being sold—leaving many companies unaffected. However, since the rule caps the level of technology subject to control, rather than moving the control level up as our own technology advances, the universe of controlled items is guaranteed to grow over time. Given the pace at which technology in the semiconductor sector advances, it will not take more than a few years before the impact becomes much greater. In addition, if the administration expands the rule to cover additional items, as has been rumored, the rule could rapidly become unwieldy. That leads to some important questions for the future:

  1. How will the change affect U.S. company revenues and their investment in future development?
  2. Will the change cause China to accelerate development of its own indigenous technology?
  3. Will it encourage third countries to design out U.S. technology so their products don’t get caught in future controls?
  4. Will it encourage third countries to try to compete independently in this sector?

Some of the answers can be predicted. On affecting revenue, yes. A fair estimate of the revenue loss from decreased China sales is $4–6 billion, mostly in manufacturing equipment. However, the effect on their future investment in new products is harder to predict, aside from noting that making less money is never a good thing. On accelerating China’s own development, yes, certainly. As I said above, the new rule did not cause this decision, but it will only give new urgency to Chinese planning.

The last two questions are harder. By capping the level of technology being controlled, the United States has certainly created an incentive for third countries to avoid getting caught up in the controls by designing out U.S. technology. This has happened before, notably with commercial communications satellites, and the cost to that industry is well-documented. Similarly, the rule certainly creates the temptation for third countries to develop their own products and capture the market share in China the United States is foregoing. However, semiconductor production is an industry where the technology and capital barriers to entry are very high, and immediate new entrants into the marketplace are unlikely.

That means, though, that the actions other producing nations take will be critical to the success of the U.S. controls but also to the future of U.S. companies. This is why the United States is working hard to persuade Taiwan, Japan, South Korea, and the Netherlands to follow its lead. If they do not, the Chinese will be able to acquire chips and equipment despite U.S. controls, and, more important for the long term, companies in those countries will be gaining market share at our expense.

That the United States announced the rule unilaterally before lining up other producing countries suggests it was having trouble getting them to cooperate, and its failure to produce any agreements nearly two months later reinforces that. In the end, they will likely cooperate tacitly but without the overt agreement the United States would like, which means they have a sharp eye on their own commercial interests and are keeping their future options open. What they ultimately do will have a significant impact on the success of our policy and the future success of our industry.

That makes the new rule a gamble. In the short run it will achieve its objective, but in the long run, it could well leave the United States in a weaker position. There has always been a fine line between under-controlling and over-controlling exports, and there are distinct downsides to both. The former gives the adversary stuff you don’t want him to have; the latter kneecaps your own industry. The administration is well aware of the dilemma, and they believe they’re staying on that fine line. In a few years, we’ll see if they’re right about that.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.       

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