The real trade war with China has begun

Former President Trump launched a “trade war” with China in 2018, which mainly produced a series of economic skirmishes and logistical workarounds. Trade between the two nations has continued, with collateral damage where Trump imposed a tariff or China pushed back on retaliatory measures.

With far less fanfare, the Biden administration launched a new broadside against China that could do far more damage to its economy than anything Trump envisioned, and trigger 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 technologies to China. While several countries are making advanced chips, much of the technology behind that production is American, which means banning Biden will hamper China’s ability to develop artificial intelligence, supercomputers, advanced weapons and other crown jewels of the modern digital economy.

“These new controls [are] a real milestone in US-China relations,” Gregory Allen of the Center for Strategic and International Studies wrote in a recent analysis of the new rules. “These actions demonstrate an unprecedented degree of US government intervention to initiate a new US policy of actively strangling large segments of China’s tech industry – strangling with intent to kill.”

Until now, Biden’s China policy has been unclear. He kept Trump’s tariffs on some $350 billion of Chinese imports in place, 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 a military and economic threat more than any of his predecessors. Some economic ties will no doubt continue, but the US government is now practicing a kind 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 has become “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 of stealing Western technology, using government subsidies to corner market share in key global industries and building a muscular army capable of applying Chinese communist ideology in Asia and beyond. . At the same time, it became clear that the massive movement of factory labor to China had drained the American labor force, with little or nothing to replace the millions of jobs lost.

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

United States House Speaker Nancy Pelosi (D-CA) is joined by members of Congress as she signs the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, a law which will subsidize the domestic semiconductor industry in competition with companies in China and other countries, during a bill signing ceremony on Capitol Hill in Washington, United States, July 29, 2022 REUTERS/Jonathan Ernst

In the aftermath of the COVID 2020 pandemic, which exposed the United States’ alarming overreliance on imported goods from China and elsewhere, Biden pledged to strengthen domestic supply chains for products. and critical technologies. The Inflation Reduction Act, for example, includes a high domestic content requirement for electric vehicles in order to qualify for federal subsidies. It also includes powerful incentives for the national development of critical 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,” believing that it is best for private market incentives to determine who builds what and where. But there is a growing consensus on the need to fight government support for key industries in China and even some democratic countries with similar programs here at home.

In September, National Security Advisor Jake Sullivan delivered a speech in which he signaled a change in longstanding US policy on technology exports. “We need to revisit the long-held principle of maintaining ‘relative’ advantages over our competitors in certain key technologies,” he said. “Given the fundamental nature of certain technologies, such as advanced logic and memory chips, we need to maintain as wide a lead as possible.”

Sullivan’s remarks caught the attention of tech companies, but no one knew exactly what he meant, until the government announced the new export controls on Oct. 7. CSIS’s Gregory Allen detects four main thrusts of Biden’s new policy, which broadly seeks to disrupt China’s artificial intelligence industry: denying access to advanced chips, the software used to design those chips, equipment used to produce these chips and to the components that go into the production equipment. There is also a restriction on “American persons” working with Chinese companies – as suppliers or consultants, for example – in targeted industries.

“In summary,” Allen concludes, “the United States does not want China to have advanced AI computing and supercomputing facilities. By weaponizing its dominance as a choke point in the global value chain semiconductors, the United States wields technological and geopolitical power on an incredible scale.

“Something big is going to happen in terms of retaliation”

The effect was immediate. U.S. chip vendors such as Intel (INTC), Nvidia (NVDA), AMD (AMD), KLA (KLAC), Applied Materials (AMAT), and LAM Research (LRCX) have halted shipments to China as they determine what is allowed by the new rules and what is not. Apple (AAPL) has dropped plans 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 likely to be affected as well, given the close ties to US industry. Tech stocks, which had a bad year, sold off further after the Oct. 7 announcement.

China will probably react. “I suspect something significant will happen in terms of retaliation, because the impact of this rule is quite significant,” Kevin Wolf, former assistant secretary of commerce for the export administration, said in a recent podcast. China could block US imports of critical minerals from China or punish US companies doing business in China, which would be a tough escalation. It could also target US allies who must comply with some elements of the new US rule, including South Korea, Japan and Taiwan. Chinese President Xi Jinping will likely cite the move as evidence of US efforts to keep China down, perhaps stoking nationalist sentiment.

This economic containment effort carries risks. There will always be openings for companies from other countries to fill the void with their own chip technology, for example. US officials say they will spend the next year or two trying to convince allies to join the Chinese chip ban, but some countries could see it as a chance to boost the development of their own industries. of chips. China could also defy expectations and achieve more technological progress on its own than expected.

Politically, however, Biden’s new restrictions seem likely to stick regardless of which party wins the White House in 2024. Militant capitalism and China’s hostility to Taiwan and other neighbors have it left with few friends in Washington, and no “China-soft” wing of either party willing to advocate moderation. As 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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