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Biden single-handedly carries out his trade attack on China

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Successive U.S. administrations have been babbling about encircling, encircling, or misstepping the Chinese economy for so long, it’s pretty surprising when it seems serious. The Biden administration’s October 7 announcement of new semiconductor export controls accomplished what Donald Trump had failed to do for four years with his trade policy – the credible threat that the U.S. and China would forcibly separate their high-tech sectors, at least. The envisioned “armed interdependence”, the exploitation of trade and financial links to exert geopolitical pressure, now appears here.

The breadth of controls was a huge advance over Trump’s earlier measures. In particular, bans on US citizens and green card holders working in China’s semiconductor industry have meant hundreds of employees, including the world’s leading Dutch manufacturer ASML, shut down work within days.

Biden’s move is risky and not just for obvious reasons like direct retaliation. Beijing could indeed block exports of critical materials such as rare earths to the US, or flood the world with cheap basic chips to build market share and encourage addiction. A more fundamental danger is that the United States, acting largely without allies, will fuel a major trade and technology conflict that it cannot always win. China is already building local technology capacity with Xi Jinping’s dual roaming strategy, a shift towards self-reliance in the Chinese economy.

The US has traditionally calibrated export controls to allow American companies to protect their overseas earnings while keeping China technologically behind by a generation. If Washington abandons this for tighter controls and a full tech race, it needs to maximize efficiency in its international supply networks – for example, by including Europe’s leadership in early-stage chip research and machine manufacturing.

If you’re going to start a fight, better be part of a gang. Semiconductor supply chains are dazzlingly complex. Hacking China could suddenly reveal vulnerabilities the US didn’t know were there.

Biden’s broader trading strategy on security has a very strong element of onshoring for convenience. While the US chips law supposedly coordinates with the EU version, it seems poised to recreate it by creating parallel supply chains.

To be fair, the US has spent months trying to persuade the EU and other allies to adopt similar export controls as they coordinate trade bans against Russia. However, the EU’s approach to controls is based on detailed targeting of products from a multilateral list of restricted technologies rather than the broad spectrum approach of the US. Failing, Washington advanced on its own.

Perhaps, thanks to this diplomatic effort, the cries of betrayal from the EU were suppressed. US controls could harm European companies in a number of ways, including restricting the use of US components in machines and the sale of chips for Chinese supercomputers, as well as discouraging employment of American citizens. But as with the tax credits for North American-made electric vehicles in Biden’s Inflation Reduction Act (IRA), the EU and other affected allies are seeking explanations and exceptions rather than threatening WTO lawsuit or something stronger.

After the furious whim of Trump’s White House, it helps to have a relatively constructive counterpart in the Biden administration. Following the complaints, the US quickly granted temporary exemptions to the China-based semiconductor operations of Korean companies SK Hynix and Samsung. ASML, a jewel in the EU’s crown, said yesterday that it wasn’t too impressed with the new controls.

However, there is not always coordination between allies. Canada’s finance minister, Chrystia Freeland, declared in a hotly debated speech recently that she’s a fan of the trendy fellowship sport or building supply networks with like-minded countries.

Freeland commended the extension of the IRA’s tax credits for electric vehicle battery components to any country with which the United States has a trade agreement. However, credits for auto assembly are limited to cars manufactured in North America. A tax cut originally reserved for US production was extended to Canada and Mexico after determined lobbying by Ottawa. The EU, Japan and South Korea, which fall outside the fascinating circle of tax preference, may reflect that some friends (literally in this case) are closer than others.

Of course, dealing with Europe over trade and national security can be infuriating. Germany ignored decades of warnings about dependence on Russian gas. The EU should approach the China issue in good faith, not under the direction of the export lobby.

Cooperation will be good for both parties. The more complex a complex supply ecosystem is within a coordinated national security alliance, the more resilient it will be to coercion from hostile third-country governments or to shocks from pandemics or other forces of nature. The USA took a big risk. It is better not to take it alone.