By: Jackson Craig Scott, Graduate Teaching Assistant, Baker School

Dr. Wonjae Hwang, Affiliate of the Center for National Security and Foreign Affairs (NSFA) and Professor of Political Science, presented the third of six lectures in the 2023-24 National Security Forum lecture series on the U.S.-China rivalry, hosted by NSFA. The purpose of this lecture was to explain the impact that United States (U.S.) trade restrictions with China on dual-use technology have on the U.S., China, [1] and the U.S. allies.

In the past several years, the U.S. has implemented multiple policies to regulate trade with China on dual-use technology items – those that carry both commercial and military applications. For example, a rocket can be used as a satellite launcher or an inter-continental ballistic missile, microchips are used in PlayStations and missile guidance systems, and artificial intelligence (AI) is used in medical analysis and cyber attacks. The items that the U.S. has regulated are advanced IC (integrated circuits), semiconductor manufacturing equipment (SME), AI and machine learning technology, quantum information and sensing technology, 3D printing, 5G network, Position, Navigation, Timing (PNT) technology, missiles and nuclear technology, amongst others.

Regarding restrictions and regulations, there are two types: unilateral and multilateral. Unilateral are those enacted by just the U.S. Multilateral restrictions rare those enacted by the U.S. and its allies. Unilaterally, the U.S. has enacted Executive Order 14017, the CHIPS and Science Act (2022), and the Inflation Reduction Act (2022). Also, in 2011 the Wolf Amendment was enacted which regulated NASA in their space technology transfers to other countries including China.

For multilateral restrictions and regulations, the U.S., South Korea, Japan, and Taiwan enacted the Chip (Fab) 4 Alliance in 2022. The U.S. enacted the Wassenaar Arrangement in 1996 and in 2020 enacted a ban on ASML sales of EUV Lithography machines to China. There was a trilateral summit in August of 2023 that included the U.S., Japan, and South Korea which created a high tech alliance to build a supply chain network for multiple goods. Due to the globalized economy, the U.S. needs its allies to coordinate these efforts.

There have been multiple effects of these trade restrictions. For example, re-shoring of formerly outsourced companies moving back to the U.S. is taking place. August 2022 to July 2023 saw a $270bn investment in the U.S.; this is twice than in 2021. Korean companies Samsung, TSMC, LG, Hyundai/SK Hynix, and Micron have all invested into the U.S. in recent years. The U.S. has limited advanced chip production in China, there will be no upgrades for technology in facilities in China, and no more SMEs can go to Chinese firms.

U.S. restrictions have caused some issues with U.S. allies. There has been difficulty in coordination. There have been debates about what are U.S.-interests and what are shared interests. Shared interests include global supply chain resilience. To do this internally, the U.S. needs to enhance domestic productivity, reshore, and nearshore. Externally, the U.S. needs to strengthen partnerships with political/military allies and pursue friendshoring.

Interestingly, the Federal Reserve Bank of New York found that disruptions to the global supply chains were not only because of the rivalry with China. Other factors contributed to this. So, why has the U.S. enacted trade restrictions and regulations? The main reason is because of the importance of technology competition. The U.S. is in competition with China and one strategy the U.S. is using is trade. The U.S. wishes to remain technologically powerful. There are three indicators of technological power: high tech exports, research and design expenditures, and charges for the use of intellectual property. Since 2011, China’s technology power has been higher than the U.S. For example, in September of 2023, the Australian Strategic Policy Institute said that “Out of 64 critical and emerging technologies, China is the leading state in 53 while the U.S. only in 11.”

There are four key challenges for U.S. allies in this context. The first challenge is reshaping global supply chains around the U.S. Excluding China may require South Korea and Japan to revisit and renounce their hedging strategies. Second is the China Factor. South Korea and Japan cannot afford to cut their economic ties with China. Third is friction in cooperation. Trade challenges have caused private firms to be in competition with each other and caused complications regarding intellectual property protection. Additionally, there has been a lack of trust between South Korea and Japan and between Taiwan and Korea. The fourth challenge is diversification of economic partnerships. South Korea and Japan now will have to replace China with other countries.

Regarding challenges to the world, there now has to be a tradeoff for economic security instead of efficiency. In the long run, many people say China could benefit and the U.S. could lose. For example, the U.S. restrictions could cause global supply chain disruptions, they could help China be independent in the chip industry in the long run, and decoupling is very costly and unlikely.

Takeaways

1. Careful consideration of the scope and degree of restrictions for the dual-use technologies/goods.
2. Coordinating with U.S. allies around “shared interests” is the key for the long-term success.
3. Multilateral legal, political frameworks that ensure mutual benefits for the U.S. and allies.

To watch the full the lecture, click here.

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[1] References to China are about the government and military, not the people of China.