Xiaomeng Lu, Senior Policy Manager for Asia & US at Access Partnership, examines new US-China export controls to dissect how China will retaliate
The more stringent export control regulations recently introduced by the US Department of Commerce which will prevent American companies from sending products and technology to China could have a significant impact on the way the two countries do business with each other and their respective technology sectors. While the new rules aim to prevent China from deploying dual-use US technology for military purposes and to limit the availability of US technology-enabled chips to Huawei, the move could also further exacerbate the US-China technology decoupling trend and put US technology companies at a disadvantage versus their global competitors.
A turning point: The Huawei incident
As the US has become increasingly concerned about national security, particularly in the wake of last year’s Huawei incident, US-China export control has begun to be used as both a regulatory and political tool by the US government. The impact of Huawei being put on an US export blacklist was severe – stopping US companies from supplying Huawei with semiconductors and components overnight. This action has not only affected Huawei, but it has also posed a big business threat for American suppliers as for some, Huawei accounted for up to 40% of their sales. Subsequently, some companies in the US have pushed back against this ban and the US government has granted temporary licenses to work with Huawei.
The impact of Huawei being put on an US export blacklist was severe
This incident demonstrated the US government’s approach to mitigating risk, yet because of the nature of the integrated global supply chain, in doing so, the US government has shot the American tech industry in the foot with damaging consequences for US companies. But as the new regulation around military use and user and direct product rule come into force, it’s no longer just Huawei being hit by US export control regulations. Rather, the impact will be felt by technology companies across China, the US, Taiwan, Japan, Korea and other jurisdictions.
Implications for the businesses
The new export control regulation is very vast in scope, with export licenses required for transactions with not only direct military end-users, but also any private companies that support a military end-use in China. Currently, it is unclear how the US Department of Commerce will do due diligence to define “military use” and “military user”. Given the way Chinese institutions, academic organisations and companies work, the majority of US companies’ clients could fall into the scope of military use and military user. Therefore, the regulation will cut off these types of purchase opportunities, resulting in a loss of revenue for US companies and requiring Chinese organisations to look elsewhere. This creates a huge barrier to business for companies in both countries and tiers off the buyer-supplier relationship – ultimately exacerbating the decoupling trend.
In addition, the amended foreign direct product rule aims to prohibit Huawei’s acquisition of semiconductors that are the direct product of certain US software and technology.
According to the US government, Huawei’s continuation in using US technology undermines the national security and foreign policy purposes of US export control policy by commissioning their production in overseas foundries using US equipment.
For many Chinese companies, the recent rule changes, as well as the sanctions placed on Huawei, have acted as a wakeup call about how they deal with US regulation. Perhaps unsurprisingly, it has led some to view the US market as a hostile environment. After all, who’s to say that the sanctions placed on Huawei won’t be placed on other Chinese technology companies, such as Dahua, DJI, Hikvision, and TikTok as well?
Consequently, the new US-China export controls may drive some Chinese companies to move their investment outside of the US to markets that are deemed friendlier. This is a worrying turn of events for US companies, as last year China accounted for about 36% of roughly $193 billion in sales made by US semiconductor companies worldwide. The export control rule change is also going to have major implications for US businesses. As a result, some of those US companies impacted may begin to diversify and move their personnel and R&D activities, for example, overseas. Others are considering restructuring the businesses to delink their IP from the US to get away from export control restrictions. Conversely, others may decide to forgo the Chinese market altogether, while some attempt the difficult process of finding a middle ground between the two options.
Either way, the US would lose immediate investment and sales revenue from China and Chinese customers, or future R&D capacity and technology ownership as a result of export control rule changes.
China’s response to US-China export controls
While Huawei is obligated to stop working with some US companies as a direct result of the export control regulation, the Chinese government is also taking action. The recent passing of the cybersecurity review measures is just one of the retaliatory tools in the Chinese government’s toolbox. The measures cast a wide scope in talking about any suppliers that provide technology solutions to critical infrastructure operators in China. This requires operators to reveal the products they are looking to purchase before they go ahead with a transaction, to look at how diverse the suppliers are, whether the product is secure both in a technical and political sense, and whether to trust the supplier.
With Huawei banned in the US due to 5G national security concerns, China could potentially use its measures to retaliate
The issue of trust, coupled with the fact that the cybersecurity review measures could be enforced very selectively, suggest that the Chinese government could use the measures to retaliate to the US’ export controls. With Huawei banned in the US due to 5G national security concerns, China could potentially use its measures to retaliate by banning the company’s US competitors, such as Cisco or Juniper, from supplying the Chinese 5G infrastructure, and reciprocate the US “rip and replace” initiative in China’s 4G network. As the measures have only recently been introduced, it remains to be seen how exactly the Chinese government will use them and to what extent the US will bear the brunt. However, if tensions continue to escalate and sanctions continue to be imposed on Chinese technology companies, the US government would be wise to consider the tools China has in its arsenal and the potential for their own initiatives to backfire.
The future of US-Chinese relationships
Although the current export controls mainly affect the sale of semiconductors and components, there is no guarantee that in time the rules won’t apply to areas such as artificial intelligence. If this comes to be, the implications will resonate beyond the technology sector and into everything from healthcare and transportation, to biotech. This could further damage relations between China and the US and have severe consequences for industries and companies in both countries.
However, looking to the future of the relationship and export controls, much rests on the outcome of November’s US elections. Certainly, if Donald Trump remains in power, the export control regulations may become even stricter over the course of his second term with enforcement of the regulations continuing to be uneven and political. However, Joe Biden on the other hand is likely to give more certainty to the bilateral relationship, replacing the flip-and-flop Twitter diplomacy with more traditional official communication between the two countries and the potential to delay or suspend tariffs.
replacing the flip-and-flop Twitter diplomacy with more traditional official communication
Though the overall trend of increasing strategic competition in technology between the US and China will sustain, returning to a degree of normalcy will provide all businesses better ability to assess risk and forward-plan accordingly. While much of US politics remains uncertain, both US and Chinese companies should prepare plans for both outcomes and consider diversification to overcome the current and any potential new export control regulations.
