Schrödinger’s Cat Emerges from the Bag

For the second week in a row, my plans to write about the electric vehicle (EV) tax credit and its implications for the World Trade Organization (WTO) have been derailed by external events, this time a speech on Friday by National Security Adviser Jake Sullivan.

His speech to the Special Competitiveness Studies Project (SCSP) Global Emerging Technologies Summit addressed a popular topic these days—the accelerating digital revolution, its application to more aspects of our lives, and its implications for U.S. policy. Some of it was old, even well-worn, but some of it was new. Sullivan laid out four policy pillars and then proceeded to dissect each of them: investing in our science and technology ecosystem, nurturing top STEM talent, protecting our technology advantages, and deepening and integrating our alliances and partnerships.

The first is not new, but Sullivan did lay out clearly what the government thinks is important—computer-related technologies, biotechnologies and biomanufacturing, and clean energy technology. Much of the government’s action is embodied in the CHIPS and Science Act, an executive order on Biotech and Biomanufacturing, and the Inflation Reduction Act. He also attempted to address one of the perennial criticisms of industrial policy by arguing that in this case the government was trying to draw in private capital rather than replace it with federal spending. That is the right approach, but it remains to be seen if it will work.

The second pillar on talent is also not new but has moved higher up the list of things to worry about due to our high-tech companies pointing out that all the money is nice, but they can’t find the workers they need to utilize it. Sullivan repeated some U.S. government actions to attract STEM talent—good moves—but, as always, avoided the third rail of comprehensive immigration reform, which is overdue and badly needed, not only for STEM purposes but simply to provide enough workers for our economy to grow.

The third pillar—technology protection—will get the most media and business attention because it is the most explicit statement so far of the administration’s policy shift on investment and export controls. Readers of this column will find his comments familiar since I predicted them several weeks ago. Sullivan rejected the “sliding scale” policy of keeping our adversaries several generations behind and argued instead for a broader policy aimed at degrading our adversaries’ battlefield capabilities and pointing to the actions against Russia as a template for that.

Unfortunately, missing from his argument was any recognition of the potential cost of this policy to our high-tech companies who rely on the revenue from exports. This abandonment of our long-standing “higher fences around a smaller number of items” policy could take us back to the Cold War days and end up hurting our companies the most—the very ones we want to rely on for future innovations. So far, the Commerce Department has pursued this change cautiously. I hope that will continue.

On the investment front, Sullivan touted the president’s directive last week to Committee on Foreign Investment in the United States (CFIUS), laying out new guidance for the committee to consider when reviewing inbound investments. This is useful guidance that may fill some gaps in the current analytical approach.

Sullivan also said the administration was working on an outbound investment review process. While administration action is probably better than legislation, if only because it is more flexible, it would still set up a structure I believe is redundant and unnecessary. (I will not repeat my rants about that here.) The biggest challenge the administration faces is the same one in the pending bills—how to implement a narrow, targeted policy when there will be enormous pressure to build in a catch-all provision that will make virtually all investments subject to review.

A clue to what “narrow and targeted” means can be found in last week’s CFIUS directive, which identified critical technologies as including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, critical materials, and elements of the agriculture industrial base. When the administration produces an outbound review order, I would look for the same technologies to be identified.

Aside from a brief reference to guardrails in the CHIPS and Science Act to preclude funding recipients from investing in China, Sullivan avoided the Buy America and domestic content provisions that seem to be popping up all over the place. Many of these violate WTO rules and may get in the way of other policy goals, such as the transition to clean energy, by requiring U.S. parts and components that are not sufficiently available. I’ll go into that in more detail when I finally get around to writing about the EV tax credit.

The final pillar, multilateralizing our efforts, repeats a major Biden theme that distinguishes him from Trump. While I suspect the trade initiatives, such as the Indo-Pacific Economic Framework for Prosperity, may turn out to be less than predicted, the salient security question is whether the administration’s success in organizing a common approach on Russia will be a one-off event or the beginning of a trend that will apply to China as well. The Russia controls and sanctions respond to a crisis. Dealing with China requires a longer, more carefully constructed strategy, and it is not clear that our allies will buy into it. The administration is right to pursue it, but whether that cat is dead or alive when it emerges from the bag remains to be seen.

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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