The real trade war with China has begun

Former President Trump launched a “trade war” with China in 2018 that mostly led to a series of economic skirmishes and logistical solutions. Trade between the two nations continued, with some collateral damage where Trump lobbied a tariff, or China lobbied back retaliation.

With far less fanfare, the Biden administration has launched a new broadside against China that could do far more damage to its economy than Trump intended, and trigger an unprecedented retaliation from China. On October 7, the Biden administration surprised the world with new export controls that effectively ban the sale of advanced American computer chips and chip-making technology to China. While several nations make advanced chips, much of the technology behind that production is American, meaning the Biden ban will hinder China’s ability to develop artificial intelligence, supercomputers, advanced weapons and other crown jewels of the modern digital economy.

“These new controls [are] a genuine landmark in US-China relations,” wrote Gregory Allen of the Center for Strategic and International Studies in a recent analysis of the new rules. “These actions show an unprecedented level of US government intervention to start a new US policy to actively strangle large parts of the Chinese technology industry – strangle with intent to kill.”

Until now, Biden’s China policy had been fuzzy. He maintained the Trump tariffs on about $350 billion worth of Chinese imports, without saying whether he might revise them as part of a broader strategy or continue Trump’s piecemeal approach to China. What is clear now is that Biden plans to treat China as more of a military and economic threat than any of his predecessors. Some economic ties will no doubt continue, but the US government is now pursuing a sort of economic containment strategy – subordinating trade and commerce to national security for the first time since China joined the World Trade Organization in 2001 and became the “factory of the world”.

The growing risks posed by China

US relations with China have frayed since the Obama administration, as China developed an aggressive program to steal Western technology, use government subsidies to gain market share in key global industries, and build a muscular military capable of enforcing China’s communist ideology in Asia and outside. . At the same time, it became clear that the mass movement of factory work to China had eroded America’s workforce, with little or nothing to replace the millions of lost jobs.

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Trump focused mostly on the U.S. trade deficit with China, which economists widely see as a misguided way to address the growing risk China poses. The Trump tariffs were meant to stimulate new American manufacturing by raising the cost of Chinese imports and making US manufacturing more competitive. But there has been no meaningful change in US industrial production since the Trump tariffs took effect. However, there has been another notable change: Many imports of tariffed goods from China have been replaced by imports of non-tariffed goods from other countries, as Chad Bown of the Peterson Institute for International Studies has shown. It’s just a mix of import flows, which does nothing to strengthen the American economy or create American jobs.

US House Speaker Nancy Pelosi (D-CA) is flanked by members of Congress as she signs

US House Speaker Nancy Pelosi (D-CA) is flanked by members of Congress as she signs the “Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022,” which will subsidize the domestic semiconductor industry as it competes with companies in China and other countries, during a counting ceremony on Capitol Hill in Washington, U.S., July 29, 2022. REUTERS/Jonathan Ernst

In the aftermath of the 2020 covid pandemic, which revealed an alarming US over-reliance on imported goods from China and elsewhere, Biden pledged to strengthen domestic supply chains for critical products and technologies. The Inflation Reduction Act, for example, includes high domestic content requirements for electric vehicles to qualify for federal subsidies. It also includes strong incentives for domestic development of key minerals such as lithium, cobalt and nickel.

The CHIPs+ Act, which Congress passed in July, was an unusual bipartisan effort to boost U.S. semiconductor production. Most Republicans and some Democrats normally oppose such “industrial policy” and believe it is better for private market incentives to determine who builds what where. But there is a growing consensus about the need to combat state aid to key industries in China and even some democratic nations with similar programs at home.

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In September, National Security Adviser Jake Sullivan gave a speech in which he signaled a change in long-standing US policy on technology exports. “We need to rethink the long-standing premise of maintaining ‘relative’ advantages over competitors in certain key technologies,” he said. “Given the fundamental nature of certain technologies, such as advanced logic and memory chips, we need to have as large a lead as possible.”

Sullivan’s comments got the attention of tech companies, but no one was sure what he meant, exactly, until the government announced the new export controls on October 7. Gregory Allen of CSIS discovers four main features of the new Biden policy, which is broadly aimed at disrupting China’s artificial intelligence industry: denying access to advanced chips, the software used to design those chips, the equipment used to produce these chips and the components that go into the production equipment. There is also a restriction on “US persons” working with Chinese companies – as suppliers or consultants, say – in the targeted industries.

“In conclusion,” Allen concludes, “the US does not want China to have advanced AI computing and supercomputing facilities. By weaponizing its dominant chokepoint position in the global semiconductor value chain, the United States exercises technological and geopolitical power on an incredible scale.”

“Something significant will happen in terms of retaliation”

The effect has been immediate. US chip suppliers such as Intel ( INTC ), Nvidia ( NVDA ), AMD ( AMD ), KLA ( KLAC ), Applied Materials ( AMAT ) and LAM Research ( LRCX ) have halted shipments to China as they figure out what is allowed under the new rules and what not. Apple ( AAPL ) has released a plan to use chips made by Chinese company YMTC in future iPhones, according to Nikkei Asia. Tech giants based in other countries, such as Taiwan’s TSMC, are also likely to be affected, given close ties to American industry. Tech stocks, which have had a bad year, sold off further after the Oct. 7 announcement.

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China is likely to respond. “I think something significant is going to happen in terms of retaliation, because the impact of this rule is quite significant,” Kevin Wolf, former assistant secretary of commerce for export administration, said in a recent podcast. China could block US imports of critical minerals from China or penalize US companies doing business in China, which would be a form of muscle flexing. It could also target US allies that must comply with certain parts of the new US rule, including South Korea, Japan and Taiwan. Chinese President Xi Jinping is likely to cite the move as evidence of US efforts to contain China, perhaps fueling nationalist sentiment.

There are risks with this financial containment effort. There will still be opportunities for companies from other countries to fill the gap with their own chip technology, for example. US officials say they will spend the next year or two trying to get allies to join the Chinese chip embargo, but some nations may see it as a chance to jumpstart the development of their own chip industries. China may also defy expectations and make more technological progress on its own than expected.

Politically, however, the new Biden restrictions seem likely to stick, regardless of which party wins the White House in 2024. China’s militant capitalism and hostility toward Taiwan and other neighbors have left it with few friends in Washington, and no “soft on China” wing in both parties willing to advocate moderation. Since Biden has kept Trump’s tariffs in place, the next president will likely cement Biden’s chip embargo and perhaps look for other ways to tighten the screws on China.

Trade wars are not good, but some may be necessary.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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