Secretary of State Blinken, National Security Adviser Sullivan, and others will meet Chinese officials this week. The Biden administration should use the occasion to solidify American policy beyond slogans like “work with allies.” Senate Majority Leader Schumer already has ideas along these lines. Whoever takes the helm, it should happen soon and US policy should include the following:
1) Cut China out of supply chains determined to be vital.
2) Ban exports of advanced technology to the PRC. Do not
target individual firms.
3) Ban US investment in firms valuable to the People’s
Liberation Army (PLA) or which have supported genocide.
4) Gather the information necessary to properly implement
Washington’s steps to secure supply chains have been inadequate. The Trump administration failed to act meaningfully, starting prior to COVID-19. The Biden administration is “reviewing” when it can certainly identify the most important chains and means to protect them. Congress has actively discussed supply chains but necessary China-related provisions haven’t yet been crafted.
The guiding principle for those should be simple: When it’s
vital, China can’t participate. At all. Taxpayer subsidies for final production
can be justified in expanding US capacity, for example in vaccines and
semiconductors. But unless the full supply chain is considered, production
subsidies naturally encourage imports of inputs to production. American
subsidies will draw the attention of the PRC’s firms and government.
Firms will see commercial opportunity while Beijing will be strategic — even costly involvement in a supply chain brings the option to interrupt it. If the PRC targets a chain, it has the world’s most extensive subsidies regime, including forced sector consolidation and state-directed lending, to make its enterprises artificially attractive as participants. American support for an industry may increase Chinese participation.
Any incentive program to keep China out will be overwhelmed
by Beijing. The following should not be done frequently but, when vital, the
PRC should be legally barred from chains, extending to indirect participation
such as making components for equipment used. If the Biden administration wants
to expand green energy production, say, it should consider how much influence
this may hand Chinese suppliers.
This is forward-looking. Regarding advanced technology exports to the PRC, the US has no choice but to also look backward. Policy has been dominated by Huawei. This only makes sense if Huawei is the chief technology threat, yet the true threat is far broader and stems from the goals and methods of the Chinese state. The correct approach was overwhelmingly approved by Congress in mid-2018: enhance export controls.
Thirty months later, implementing regulations from the Department of Commerce are still lacking. Incoming officials must ensure complete implementation in 2021, including full characterization of foundational and emerging technologies. The much-discussed Entity List is a poor substitute for this, since it targets individual firms instead of technologies. Beijing can always shift technology acquisition efforts to another entity.
Similar to focusing on Huawei, removing Chinese stocks from
US exchanges addresses only a small part of a large issue. The market
capitalizations involved are notional — they don’t represent actual financial
flows. Accurate flows are found in data on American money headed to the PRC
through all channels, not just stocks listed on our exchanges, and featuring
offshore financial conduits.
The Department of Treasury shows US holdings of explicitly Chinese securities at a record $271 billion in November 2020, compared to $110 billion in November 2016. That’s still far from the full story. Over the same period, holdings of securities assigned to the Caymans nearly doubled to $2.42 trillion. A substantial part of that should be assigned to China, and total American portfolio investment in the PRC may now exceed $1 trillion.
This puts any US industrial policy at risk — tens of billions of taxpayer dollars for selected sectors may as well be lit on fire if larger amounts of American money support the sectors in China. One policy response utilizes the Pentagon list of firms linked to the PLA. Investment restrictions should be limited to important PLA supporters, then supplemented by a list of serious human rights violators. American funds should not assist these entities.
Finally, policy requires good information and a core Communist Party practice is to control and distort information. Decision-makers should know if supply chain participants are in some way dependent on the PRC. They should know the trend of American investment in China, including off-shore conduits. For that matter, US officials may not know the PRC’s true economic size. Whatever actions are taken by Congress or the Biden administration, we need more knowledge.