Costfoto/NurPhoto via AP
A technician tests a semiconductor seal in a production operation in Guiyang, Guizhou province, China, August 16, 2023.
With a great deal of fanfare, the administration earlier this month announced its long-awaited executive order on export controls directed at China. But the details of the order are feeble. And with China’s economy on the ropes, the administration is already coming under pressure to weaken the order still further. This would be a huge mistake.
As I wrote last week, China’s immediate woes are the result of the Chinese state allowing the overleveraged property development sector to grow far too large, followed by a crash set off by the government’s belated attempts to tighten credit and restrain the speculative building. China’s problems are compounded by its long-overdue shift from an export-led economy to one that emphasizes domestic consumption, and its future is hampered by a demographic deficit. But none of this has altered China’s aggressive mercantilism, its strategy of stealing intellectual property, or its military buildup. This provides the case for strong export controls.
Critics of U.S. policies that served to enable China’s predatory behavior were hoping that the export control order would be what some call a “CFIUS in reverse.” CFIUS is the Committee on Foreign Investment in the U.S., housed at the Treasury. This interagency body has the power to block foreign efforts to purchase American companies when they raise national-security concerns.
A CFIUS-in-reverse would monitor outbound investments that might use U.S. technology and capital to bolster China’s military sector and otherwise harm national interests. But despite protests from China and from U.S. corporations and bankers who profit by working with China, the Biden export control order is far from a CFIUS-in-reverse.
In principle, the order seems potent, but the press coverage has exaggerated what it actually does. According to The New York Times, “The order will prohibit venture capital and private equity firms from pumping more money into Chinese efforts to develop semiconductors and other microelectronics, quantum computers and certain artificial intelligence applications.”
In fact, the order merely directs the Treasury to take comments on the general idea, and to issue regulations within six months that require advance notifications of possibly prohibited transactions. The order will only take effect next year and is widely expected to define national-security prohibitions extremely narrowly. Nothing in it will affect the vast majority of venture capital and private equity investment flows to China, much less portfolio investments.
The details of the order were the subject of fierce infighting between relative hawks in the administration with national defense and industrial-policy concerns, and doves at the Treasury. The anodyne order suggests that Treasury won, and Treasury will be in charge of writing the regs and carrying the order out.
Meanwhile, the administration is coming under increasing pressure from both corporate America and its own China doves to normalize relations. Commerce Secretary Gina Raimondo is travelling to Beijing later this week, ostensibly to promote U.S. exports. Raimondo will come under pressure from her counterparts to weaken the export controls.
The administration has been warned by Republicans to keep export controls off the agenda. “We urge you, prior to your trip, to publicly clarify that U.S. export controls are non-negotiable, and that the PRC should expect more, not less, U.S. export controls moving forward,” Rep. Mike Gallagher (R-WI), chair of the House Select Committee on the Chinese Communist Party, House Foreign Affairs Chair Michael McCaul (R-TX), and other representatives wrote in a letter to Raimondo on Friday.
Raimondo’s trip is one more example of how the administration finds it difficult to speak with one strong voice when it comes to China policy.
