‘Last month, a small U.S. federal agency released a regulatory filing that has gotten relatively little media attention—especially in the context of its immense global ramifications,’ writes Ravi Agrawal in ‘America’s Risky New China Policy.’

• As you will see, it's a little astonishing that this wasn't front-page news with continual follow-ups.

‘A monumental shift in United States policy vis-à-vis China took place on October 7,’ writes Bert Hofman, formerly of the World Bank and now at National University Singapore.

• ‘On that day, the US Commerce department released a 139 page document listing measures that effectively restrict China’s access to the most advanced semiconductors.’

‘This is a big step.’

• ‘As CSIS, a US think tank wrote:  “In weaponizing its dominant chokepoint positions in the global semiconductor value chain, the United States is exercising technological and geopolitical power on an incredible scale.” ’

‘So the gloves are off.’

• ‘In fact, the measures are unprecedented in peacetime in its breath and reach.’

Consider five of the several ramifications of these measures:

[.cmrred]1 | The immediate ramification[.cmrred] is for China’s semiconductor industry. CSIS’s Gregory Allen writes in his terrific analysis,  ‘Choking Off China’s Access to the Future of AI’:

• ‘These actions…begin a new U.S. policy of actively strangling large segments of the Chinese technology industry—strangling with an intent to kill.’

If that isn’t dire enough, here’s a tweet where Jordan Schneider of the Rhodium Group remarked:

• ‘ “This is what annihilation looks like: China’s semiconductor manufacturing industry was reduced to zero overnight. Complete collapse. No chance of survival.” ’

[.cmrred]2 | Another ramification[.cmrred] – and a warning – comes from Jon Bateman of the Carnegie Endowment in ‘Biden Is Now All-In on Taking Out China’:

• ‘This shift portends even harsher U.S. measures to come, not only in advanced computing but also in other sectors (like biotech, manufacturing, and finance) deemed strategic.’
• ‘The U.S. president has committed to rapid decoupling, whatever the consequences.’

[.cmrred]3 | A third ramification[.cmrred] is a new clarity in Biden’s China policy. ‘The purpose of the new export controls on semiconductors is clear enough,’ writes Michael Schuman in ‘Why Biden’s Block on Chips to China Is a Big Deal’:

• ‘To hobble China’s quest to catch up with the U.S. in crucial industries of the future.’

‘These controls mark a distinct shift in Washington’s approach to China.’

• ‘On top of trying to outcompete China, which is the intent of the CHIPS Act recently passed to support the U.S. semiconductor sector, Washington is now purposely and openly working to hold back Chinese economic progress.’

[.cmrred]4 | A less likely but still[.cmrred] worth considering ramification is Taiwan. In June 2020, Graham Alison of the Harvard Kennedy School and author of ‘Destined for War: Can America and China Escape Thucydides’s Trap?’ wrote ‘Could Donald Trump’s War Against Huawei Trigger a Real War With China?’

• In that essay he posited:

‘Let us imagine that the Trump administration actually implements the ban on all sales of advanced semiconductors and equipment to manufacture semiconductors to China.’

• ‘Could Beijing decide to try to make Taiwan the solution to its advanced semiconductor problem?’

‘Is such a scenario likely? I think not.’

• ‘I’m betting that U.S. declarations about an embargo on all semiconductors are more bark than bite.’  

Now two and a half years later Mr. Biden has bitten.

• And the issue of China’s invading Taiwan to gain its fabs – however unlikely - is again on the table.

[.cmrred]5 | Here’s a fifth ramification[.cmrred], and it’s one you could call personal.

• I accept that the U.S. is in a competition with China.

But for many years, I wondered, ‘When is America going to start competing?’

• We have been such a feckless competitor that I was beginning to believe Mr. Xi’s recycled assertion: ‘The East is rising, the West is declining.’
• Not declining from relative weakness but from our inability to get our act together.

My take on Mr. Trump’s administration inability to get its act together is summed up by AEI’s Derek Scissors who recently wrote:

• ‘Trump’s China trade and economic policies started off promising, deteriorated pretty quickly, and ended up as completely terrible.’
• My one quibble is with ‘promising.’ For my part, read ‘dumb.’

I began to have some hope of getting our act together with Mr. Biden.

• He worked to rebuild relations with allies who could join the U.S. in the competition.
• And he understood the need for America to strengthen itself for competition. Hence, the infrastructure, CHIPS, and other acts.

But whether Mr. Trump or Mr. Biden, one thing nagged me beyond all the rest.

• Why is America strengthening our competitor?

In the instant case:

• Why is America giving our competitor advanced semiconductor resources to strengthen itself to compete against us?

As Michael Schuman puts it so well in ‘Why Biden’s Block on Chips to China Is a Big Deal’

• ‘Xi’s oft-repeated call for a world-class military is aimed at tipping East Asia’s balance of power in China’s favor, and he would be foolish to expect Washington to hand him the technology to help him reach his goal.’
• ‘Economically as well, Xi’s industrial programs deploy huge state financial support with the clear goal of overtaking the U.S. in key technologies and pushing American companies out of the China market, and ultimately making them uncompetitive.’

‘Biden’s harsh controls are less surprising than Xi’s apparent assumption that the U.S. would blithely participate in bringing about its own economic doom.’

• ‘More surprising, perhaps, is that Biden’s shift took so long.’
• Amen

PART 1 | 'A DISTINCT SHIFT'

[.cmrh2]1 | ‘A distinct shift in Washington’s approach to China’[.cmrh2]

‘The purpose of the new export controls on semiconductors is clear enough,’ writes Michael Schuman in ‘Why Biden’s Block on Chips to China Is a Big Deal’:

• ‘To hobble China’s quest to catch up with the U.S. in crucial industries of the future.’

‘These controls mark a distinct shift in Washington’s approach to China.’

• ‘On top of trying to outcompete China, which is the intent of the CHIPS Act recently passed to support the U.S. semiconductor sector, Washington is now purposely and openly working to hold back Chinese economic progress.’

‘In Washington, the policy is seen as a rational response to heightened geopolitical threats, and the central role technology plays in them.’

• ‘National Security Adviser Jake Sullivan said in a speech in September that “we have to revisit the long-standing premise of maintaining ‘relative’ advantages over competitors” in which the U.S. “maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead.” ’
• ‘But, he went on, “that is not the strategic environment we are in today. Given the foundational nature of certain technologies … we must maintain as large of a lead as possible.” ’

More directly, ‘Gregory Allen, a senior fellow at the Center for Strategic & International Studies, called the controls a “genuine landmark in U.S.-China relations” that heralds “a new U.S. policy of actively strangling large segments of the Chinese technology industry—strangling with an intent to kill.” ’

• ‘Dan Wang of Gavekal Dragonomics also put it bluntly, describing in a report the controls as “a new China containment strategy.” ’

‍

[.cmrh2]2 | ‘Biden showed Xi who’s boss’[.cmrh2]

‘President Joe Biden showed Xi who’s boss,’ continues Mr. Schuman.

• ‘Biden demonstrated that the U.S. still possesses the fight—and the bite—to defend its primacy.’

‘Biden’s new policy reveals that the standard narrative of China’s unstoppable ascent and America’s inexorable decline is based on flawed assumptions.’

• ‘The U.S. continues to hold tremendous economic and technological advantages over China, which, as Biden just signaled, Washington is becoming more willing to use against its Communist competitor.’
• ‘Above all, Biden’s export-control measures are a ruthless expression of American clout—and an intentional reminder that, in many respects, America has it and China does not.’

‘The problem for Xi is that he picked a fight with a wealthier and technologically more advanced power well before his nation had attained the economic strength to wage it.’

‍

[.cmrh2]3 | ‘Xi brought this reversal on himself.’[.cmrh2]

Here’s the subtitle of Mr. Schuman’s essay:

• ‘The new U.S. export controls on semiconductor technology will hurt Chinese industries.’
• ‘Xi Jinping has only himself to blame.’

The point: ‘Xi brought this reversal on himself.’

• ‘His oft-repeated call for a world-class military is aimed at tipping East Asia’s balance of power in China’s favor, and he would be foolish to expect Washington to hand him the technology to help him reach his goal.’
• ‘Economically as well, Xi’s industrial programs deploy huge state financial support with the clear goal of overtaking the U.S. in key technologies and pushing American companies out of the China market, and ultimately making them uncompetitive.’

‘Biden’s harsh controls are less surprising than Xi’s apparent assumption that the U.S. would blithely participate in bringing about its own economic doom.’

• ‘More surprising, perhaps, is that Biden’s shift took so long.’

PART 2: CONTROLLING THE CHOKEPOINTS

[.cmrh2]1 | ‘Four interlocking elements’[.cmrh2]

‘Choking Off China’s Access to the Future of AI’ is terrific analysis by CSIS’s Gregory Allen.

• Here are a few excepts, but I encourage to read the full ten pages.

‘On October 7, the Biden administration announced a massive policy shift on semiconductor exports to China as well as revised rules for how the lists of restricted parties are managed,’

• ‘With the new policy, which comes on the heels of the CHIPS Act’s passage, the United States is firmly focused on retaining control over “chokepoint” (or, as it is sometimes translated from Chinese, “stranglehold”) technologies in the global semiconductor technology supply chain.

‘The most important chokepoints are:’

• ‘AI chip designs,’
• ‘electronic design automation software,’
• ‘semiconductor manufacturing equipment, and’
• 'equipment components.’

‘These are four interlocking elements of the new policy targeting different segments of the semiconductor value chain, and all elements must be understood simultaneously to grasp the scope of what the Biden administration plans on achieving.

‍

[.cmrh2]2 | Four aims[.cmrh2]

‘In short, the Biden administration is trying to:’‍

1 | ‘Strangle the Chinese AI industry by choking off access to high-end AI chips.'

• ‘The United States does not want China to have advanced AI computing and supercomputing facilities, so it has blocked them from purchasing the best AI chips, which are all American.’

2 | ‘Block China from designing AI chips domestically by choking off China’s access to U.S.-made chip design software.’

• ‘The United States does not want China designing its own AI chips, so it has blocked China from using the best chip design software (which is all American) to design high-end chips.’

3 | ‘Block China from manufacturing advanced chips by choking off access to U.S.-built semiconductor manufacturing equipment.’

• ‘The United States has blocked chip manufacturing facilities worldwide from accepting entity-listed Chinese chip design firms (as well as any Chinese chip company building high-end chips) as customers.’  

4 | ‘Block China from domestically producing semiconductor manufacturing equipment by choking off access to U.S.-built components.’

• ‘The United States does not want China to have its own advanced chip manufacturing facilities, so it has blocked them from purchasing the necessary equipment, much of which is irreplaceably American.’

‍

[.cmrh2]3 | ‘Strangling with an intent to kill’[.cmrh2]

‘The Biden administration’s latest actions simultaneously exploit U.S. dominance across all four of these chokepoints.’

• ‘In doing so, these actions demonstrate an unprecedented degree of U.S. government intervention to not only preserve chokepoint control but also begin a new U.S. policy of actively strangling large segments of the Chinese technology industry—strangling with an intent to kill.’

PART 3 | TARGET TAIWAN?

[.cmrh2]1| 'More bark than bite'[.cmrh2]

In June 2020, Graham Alison of the Harvard Kennedy School and author of ‘Destined for War: Can America and China Escape Thucydides’s Trap?’ wrote ‘Could Donald Trump’s War Against Huawei Trigger a Real War With China?’

• In that essay he posited:

‘Let us imagine that the Trump administration actually implements the ban on all sales of advanced semiconductors and equipment to manufacture semiconductors to China.’

• ‘Could Beijing decide to try to make Taiwan the solution to its advanced semiconductor problem?’

‘Is such a scenario likely? I think not.’

• ‘I’m betting that U.S. declarations about an embargo on all semiconductors are more bark than bite.’  

Now that two and a half years later Biden has bitten, the issue – however unlikely - of China’s invading Taiwan to gain its fabs is again on the table.

‍

[.cmrh2]2 | Remember Huawei?[.cmrh2]

‘The centerpiece of the Trump administration’s “tech war” with China is the campaign to prevent its national champion Huawei from becoming the dominant supplier of 5G systems to the world.’

• ‘After months of diplomatic efforts to dissuade other nations from buying their 5G infrastructure from Huawei, the administration delivered what one official called a “death blow.” ’

‘On May 15, the Commerce Department banned all sales of advanced semiconductors from American suppliers to Huawei.’

• ‘It also prohibited all sales of equipment to design and produce advanced semiconductors by foreign companies that use U.S. technology or intellectual property.’

Now Mr. Biden has taken the next step of banning all advanced semiconductors.

• Will this put Taiwan in even more in China's crosshairs?

‍

[.cmrh2]3 | ‘The solution to China’s advanced semiconductor problem?’[.cmrh2]

‘Could the U.S. attempt to enforce that ban become a twenty-first-century equivalent of the oil embargo the United States imposed on Japan in August 1941?’

• ‘To punish Japan for its military aggression against its neighbors in the late 1930s, the United States had initially imposed sanctions, and later an embargo on exports of high-grade scrap iron and aviation fuel to Japan.’
• ‘When these failed to stop its expansion, Washington ratcheted up the pressure by including essential raw materials such as iron, brass, and copper.’
• ‘Finally, on August 1, 1941, Franklin D. Roosevelt announced that the United States would embargo all oil shipments to Japan.’

‘Eighty percent of Japan’s oil came from the United States, and Japan’s military forces required that oil to operate at home as well as across the Greater Co-prosperity Area in Northeast Asia.’

• ‘Facing what it saw as a choice between slow but sure strangulation, on the one hand, and taking an extreme chance that offered hope of survival, on the other, the government chose to take its chance with what it hoped would be a “knockout blow”—a bold preemptive attack aimed to destroy the U.S. Pacific Navy stationed at Pearl Harbor.’

‘As relations between the United States and China worsen over the months ahead [this is June 2022], could Beijing decide to try to make Taiwan the solution to its advanced semiconductor problem?’Now two and a half years later Dr. Alison’s ‘unlikely’ scenario of the U.S.’s cutting off China from advanced semiconductors has happened.

• And the issue of China’s invading Taiwan to gain its fabs – however unlikely - is again on the table.

PART 4 | ‘LITTLE MEDIA ATTENTION.’ HUH?

Given the foregoing, our opening seems extraordinary:

• ‘Last month, a small U.S. federal agency released a regulatory filing that has gotten relatively little media attention—especially in the context of its immense global ramifications.’
• How could this not have been front-page news?

You may not have seen much about this policy shift and its implications in the press.

• But going forward, be alert to new and similar policies that the media misses – they’re going to be ‘immense.’