Biden goes it alone in his trade assault on China

Successive US administrations have been chuntering about encircling, outflanking or wrongfooting China’s economy for so long it’s quite startling when one seems to mean it. The Biden administration’s announcement on October 7 of new semiconductor export controls achieved what Donald Trump failed in four years of flailing about with trade policy — it credibly threatened that the US and China, at least their high-tech sectors, will be decoupled by force. The prophesied “weaponised interdependence”, the exploitation of trade and finance linkages to exert geopolitical pressure, now appears to be here.

The breadth of the controls was a big advance on Trump’s earlier measures. In particular, the prohibitions on US citizens and green card holders working in China’s semiconductor industry meant hundreds of employees, including from the world-leading Dutch manufacturer ASML, stopping work within days.

Biden’s move is risky, and not just for obvious reasons such as direct retaliation. Beijing could indeed block exports to the US of critical materials like rare earths, or flood the world with cheap basic chips to build market share and encourage dependence. A more fundamental hazard is that the US, acting largely without allies, is stoking a major trade and tech conflict it might not always win. China is already building domestic tech capacity through Xi Jinping’s dual-circulation strategy, a shift towards self-reliance in the Chinese economy.

The US has traditionally calibrated export controls to allow American companies to maintain overseas earnings while keeping China technologically a generation or so behind. If Washington abandons that for strict controls and an all-out tech race, it needs to maximise efficiency in international supply networks — for example, incorporating Europe’s lead in early-stage chip research and machine manufacture.

If you’re going to start a fight, best be part of a gang. Semiconductor supply chains are blindingly complex. Cutting off China might suddenly reveal vulnerabilities the US didn’t know were there.

Unhelpfully, Biden’s broader security-related trade strategy has too strong an element of onshoring for comfort. The US chips act, though supposedly co-ordinated with the EU’s version, seems set to create duplication through creating parallel supply chains.

To be fair, the US spent months trying to persuade the EU and other allies to adopt similar export controls in the way they co-ordinated trade bans on Russia. However, the EU’s approach to controls remains based on the granular targeting of products drawn from a multilateral list of restricted technologies rather than the US’s broad-spectrum approach. Having failed, Washington went ahead on its own.

Perhaps because of that diplomatic effort, the cries of betrayal from the EU have been subdued. The US controls could hurt European companies in several ways, including restricting the use of US components in machinery and restraining the sale of chips destined for Chinese supercomputers, as well as deterring the employment of American citizens. But as with the tax credits for North American-made electric vehicles in Biden’s Inflation Reduction Act (IRA), the EU and other affected allies are seeking clarifications and exceptions rather than threatening World Trade Organization litigation or something stronger.

It helps to have a relatively constructive interlocutor in the Biden administration after the irascible caprice of Trump’s White House. After complaints, the US quickly issued temporary waivers to the China-based semiconductor operations of the Korean companies SK Hynix and Samsung. ASML, a jewel in the EU’s crown, said yesterday it wasn’t much affected by the new controls.

However, there isn’t always co-ordination among allies. In a much-discussed speech recently, Chrystia Freeland, the Canadian finance minister, declared herself a fan of the newly fashionable sport of friendshoring, or building supply networks with like-minded countries.

Freeland lauded the extension of the IRA’s tax credits for electric vehicle battery components to any country with which the US has a trade agreement. But credits for car assembly itself remain confined to autos built in North America. A tax break initially reserved for US production was extended to Canada and Mexico after determined lobbying by Ottawa. The EU, Japan and South Korea, which remain excluded from the charmed circle of tax preference, might reflect that some friends are (in this case literally) closer than others.

Of course, dealing with Europe over trade and national security can be infuriating. Germany ignored decades of warnings about dependence on Russian gas. The EU must approach the China issue in good faith, not driven by its export lobby.

Co-operation will be good for both sides. The more of a complex supply ecosystem that lies within a co-ordinated national security alliance, the more it will be resilient to coercion from hostile third-country governments or shocks from pandemics or other forces of nature. The US has taken a big risk. It’s better not to take it alone.