US tech war against China is unwarranted and self-destructive

Under pressure to clarify its economic and security policies toward China, the Biden administration recently dispatched two top emissaries to “explain” that the US does not seek to decouple from China (which it effectively seems to be doing). 

However, both Treasury Secretary Janet Yellen and National Security Adviser Jake Sullivan left unanswered how Washington plans to curb tech transfers and investments to China. That fostered the perception the new US measures could harm investors and disruptive to the world’s trading system. 

Neither fared too well. 

A misguided tech war

In the past few years, Congress has strengthened the Committee on Foreign Investment in the United States (CFIUS), while creating authority to scrutinize some of US firms’ overseas investments. In 2018, Congress also overhauled the systems screening investments into the US and export controls of goods and technology. Last October, the Biden administration announced sweeping and highly controversial export controls on sensitive technologies to China aiming to undermine the country’s  ability to buy advanced chips and chipmaking equipment. 

Furthermore, the administration has built a “guardrail” into the CHIPS Act limiting investments that recipients of subsidies can make in China. Meanwhile, financial sanctions are used on the Treasury’s “specially designated nationals” list. 

Hence, to argue, as Yellen and Sullivan did, that the administration will only deploy “narrow” investment restrictions, is self-illusionary. After all, these measures have broad and untargeted negative implications, especially at a time when the US economy is teetering at the edge of recession, facing a spreading banking crisis and rising debt default risk. 

Whatever is the Biden administration’s short-term debt-limit strategy, the US long-term economic challenges have only begun and tech war will make them worse.

White House vs US businesses, investors, consumers

In addition to the proposed ban against foreign investment by US firms in Chinese tech companies, the administration now wants to restrict what kinds of technology can be sold in China. With their initial focus on high-end semiconductors, the guidelines may extend to artificial intelligence, quantum computing, electric vehicles and rare earth metals; in brief, the perceived emerging industries of the future.

Ironically, both the White House and a bipartisan group in Congress have had a hard time to achieve consensus on the outward investment controls. Seeking competitive leverage as always, American businesses and financial giants still want to work with China, just as ordinary Americans want cheap, affordable prices. Yet, the Biden administration, Capitol Hill and the Pentagon have different goals.

As US think-tanks have projected, Biden’s executive order will have far-reaching implications in 

• Investments in publicly-listed Chinese firms by individuals and funds.
• Investments in startups by venture capital and private equity funds. 
• Investments by US firms, typically in R&D or production facilities in China
• Activities by US companies’ subsidiaries, and foreign firms’ US subsidiaries.

For weeks, the Biden administration pledged to unveil China investment curbs in cooperation with its allies before the G7 summit. That did not happen. Instead, only in its 51^st article, the Hiroshima communique states that G7 partners “stand together” in their respective relations with China, but individual members will “act in [their] national interest.” Moreover, the communique stipulates the need for “de-risking, not decoupling.” Furthermore, the document was released one day ahead of schedule for unspecified reasons, perhaps specifically to avoid last-minute pressuring.

Despite the administration’s effort to multilateralize its misguided policies, the US will likely be mainly alone in having to walk the talk. Brussels has signaled rhetorical interest in an outbound regime, but is unlikely to execute in the near-term. Japan and Korea do have outbound investment review regimes, but both are narrowly targeted. 

If that’s the case, why the hurry by the Biden administration?

Biden’s politics of distraction, record-low ratings

Two weeks after president Biden announced his reelection campaign, his approval ratings sank to a record low at 36 percent. The increasingly divisive elderly Democrat believes he will end his second-term at 87-year-old, whereas surveys suggest most Americans do not like the idea.

According to the ABC News/Washington Post poll, a high percentage of Americans (56%) disapprove of the job the president has done so far. Even the majority of the Democrats surveyed (58%) said they would rather pick someone else to be their presidential nominee. So, most Republicans and more than half of Biden’s Democratic compatriots disapprove his performance. 

In retrospect, Biden did not win the 2020 election; the anti-Trump candidacy did. That’s why his approval ratings peaked at mid-50s in January 2021, when he was still settling in the White House. As the administration failed to reset the bilateral China ties, opted to expand the trade friction into a tech war, engaged in contested economic policies and a controversial proxy war in Ukraine, Biden’s ratings have plunged. 

With fiscal policies feeding into runaway inflation, the intensifying banking crisis and still another debt-limit debacle, the trend won’t change anytime soon. Today, Biden’s ratings lag even behind those of Trump, the current front-runner to be the GOP nominee. 

Flawed and costly futures

Whatever meager security benefit the Biden administration hopes to gain from withholding US investment and international recognition from Chinese tech firms may be offset by the huge collateral damage that these new restrictions are likely to cause in the US and worldwide. 

Over time, the restrictions may also virtually ensure that Americans will not learn from Chinese tech companies, many of which are already at or close to the top of their fields in science and technology.

In early 2021, former WTO economist Anne Krueger warned that President Trump’s modus operandi had been “to bully China on trade, foreign investment, cyberspace, e-commerce, intellectual property, the South China Sea, Taiwan, and other issues.” She proposed a thorough reset in the US-China trade ties. 

If Trumps bombastic, go-it-alone approach was fundamentally flawed, Biden’s tech restrictions will over time penalize US businesses, investors and consumers, derail global recovery and drag US allies into a geopolitical stagnation, while causing massive losses in missed opportunities. It is the wrong thing to do at the wrong time.

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Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). He has published many books and reports on the global technology sector. For more, see https://www.differencegroup.net/  

This is an updated version of the original commentary that was published by China Daily on May 22, 2023