The real trade war with China has begun

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Former President Trump launched a “trade war” with China in 2018 that mostly produced a series of economic skirmishes and logistical workarounds. Trade between the two nations continued, with some collateral damage where Trump lobbed a tariff, or China lobbed back retaliatory measures.

With far less fanfare, the Biden administration has launched a new broadside against China that could do far more damage to its economy than anything Trump contemplated, and trigger unprecedented retaliation by China. On Oct. 7, the Biden administration surprised the world with new export controls that effectively prohibit the sale of advanced American computer chips and chipmaking technology to China. While several nations make advanced chips, much of the technology behind that production is American, which means the Biden ban will impede China’s ability to develop artificial intelligence, supercomputers, advanced weaponry and other crown jewels of the modern digital economy.

“These new controls [are] a genuine landmark in US-China relations,” Gregory Allen of the Center for Strategic and International Studies wrote in a recent analysis of the new rules. “These actions demonstrate an unprecedented degree of US government intervention to begin a new US policy of actively strangling large segments of the Chinese technology industry—strangling with an intent to kill.”

Until now, Biden’s China policy had been fuzzy. He kept in place the Trump tariffs on some $350 billion worth of Chinese imports, without saying whether he might review them as part of a broader strategy or continue Trump’s piecemeal approach to China. What’s clear now is that Biden plans to treat China as more of a military and economic threat than any of his predecessors. Some economic ties will undoubtedly continue, but the US government is now practicing a kind of economic containment strategy—subordinating trade and commerce to national security for the first time since China joined the World Trade Organization in 2001 and became the “world’s factory.”

The growing risks China poses

US relations with China have been fraying since the Obama administration, as China developed an aggressive program of stealing Western technology, using government subsidies to grab market share in key global industries, and building a muscular military able to enforce China’s communist ideology in Asia and beyond. At the same time, it became apparent that the mass movement of factory work to China had hollowed out America’s blue-collar labor force, with little or nothing to replace millions of lost jobs.

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Trump focused mostly on the US trade deficit with China, which economists broadly regard as a misdirected way to address the growing risk China poses. The Trump tariffs were supposed to stimulate new American manufacturing, by raising the cost of Chinese imports and making US production more competitive. But there’s been no meaningful change in US industrial production since the Trump tariffs went into effect. There has been one other notable change, however: Many imports of tariffed goods from China have been replaced with imports of non-tariffed goods from other countries, as Chad Bown of the Peterson Institute for International Studies has demonstrated. That’s just a shuffling of import flows, which doesn’t do anything to boost the US economy or create American jobs.

U.S. House Speaker Nancy Pelosi (D-CA) is flanked by members of Congress as she signs the

In the aftermath of the 2020 COVID pandemic, which revealed an alarming US over-dependence on imported goods from China and elsewhere, Biden vowed to strengthen domestic supply chains for critical products and technologies. The Inflation Reduction Act, for instance, incudes high domestic content requirement for electric vehicles in order to qualify for federal subsidies. It also includes powerful incentives for the domestic development of critical minerals such as lithium, cobalt and nickel.

The CHIPs+ Act, which Congress passed in July, was an unusual bipartisan effort to boost US production of semiconductors. Most Republicans and some Democrats normally oppose such “industrial policy,” deeming it better for private-market incentives to determine who builds what where. But there’s a growing consensus on the need to combat government support for key industries in China and even some democratic nations with similar programs here at home.

In September, National Security Adviser Jake Sullivan gave a speech in which he signaled a change in long-standing US policy on technology exports. “We have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies,” he said. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

Sullivan’s remarks got tech companies’ attention, but nobody was sure what he meant, exactly, until the government announced the new export controls on Oct. 7. Gregory Allen of CSIS detects four main thrusts to the new Biden policy, which broadly seeks to disrupt China’s artificial-intelligence industry: denying access to advanced chips, the software used to design those chips, the equipment used to produce those chips, and the components that go into the production equipment. There's also a restriction on "US persons" working with Chinese companies—as vendors or consultants, say—in the targeted industries.

“In summary,” Allen concludes, “the United States does not want China to have advanced AI computing and supercomputing facilities. In weaponizing its dominant chokepoint position in the global semiconductor value chain, the United States is exercising technological and geopolitical power on an incredible scale.”

'Something significant will happen in terms of retaliation'

The effect has been immediate. US chip suppliers such as Intel (INTC), Nvidia (NVDA), AMD (AMD), KLA (KLAC), Applied Materials (AMAT) and LAM Research (LRCX) have halted deliveries to China as they figure out what’s allowed under the new rules and what’s not. Apple (AAPL) has dropped a plan to use chips made by Chinese firm YMTC in upcoming iPhones, according to Nikkei Asia. Tech giants based in other countries, such as Taiwan’s TSMC, are likely to be affected as well, given close ties with US industry. Tech stocks, which have had a bad year, sold off further after the Oct. 7 announcement.

China will likely respond. “I’m assuming something significant will happen in terms of retaliation, because the impact of this rule is quite significant,” Kevin Wolf, former Assistant Commerce Secretary for Export Administration, said on a recent podcast. China could block US imports of critical minerals from China or punish US companies doing business in China, which would be muscular forms of escalation. It could also target US allies that must comply with some elements of the new US rule, including South Korea, Japan and Taiwan. Chinese President Xi Jinping will likely cite the move as evidence of America's effort to keep China down, perhaps fueling nationalistic sentiment.

There are risks to this economic containment effort. There will still be openings for firms from other nations to fill the gap with their own chip technology, for instance. American officials say they’ll spend the next year or two trying to get allies to join the Chinese chip embargo, but some nations could see it as a chance to turbocharge the development of their own chip industries. China could also defy expectations and make more technological progress on their own than expected.

Politically, however, the new Biden restrictions seem likely to stick, no matter which party wins the White House in 2024. China’s militant capitalism and hostility toward Taiwan and other neighbors have left it with few friends in Washington, and no “soft on China” wing in either party willing to advocate moderation. As Biden has kept Trump’s tariffs in place, the next president will probably cement Biden’s chip embargo, and perhaps look for other ways to tighten the screws on China.

Trade wars aren’t good, but some may be necessary.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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