To address its growing demand for critical minerals, the United States has started to deepen its partnerships with the Central Asian republics — Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan. But it is not easy.

The 2022 Critical Minerals List identifies 50 minerals as crucial for the United States, underscoring their vital role across various industrial and technological sectors. Currently, the United States predominantly sources these essential materials from China. This dependency is extreme for certain minerals, with the country relying entirely on China for its supply of arsenic, gallium, graphite, tantalum and yttrium.

But the restrictions imposed by China on gallium and germanium exports in August 2023 have caused controversy. The fact that China has 94 per cent of the world’s gallium resources and 83 per cent of germanium resources poses a particular problem for the United States.

According to the Pentagon’s statement following China’s restriction decision, the United States has not developed the industrial capacity for producing gallium, though they do have some germanium reserves. US officials called for alternative markets to be found, and it was during this period that the United States decided to improve relations with Central Asia.

In September 2023, US president Joe Biden met with Central Asian leaders in New York. During this meeting, the C5+1 Critical Minerals Dialogue was agreed upon and established, operating within the C5+1 Diplomatic Platform. The inaugural meeting of this dialogue was held in February 2024. The main objectives were maintaining the security of critical minerals in Central Asia, ensuring market diversification and increasing the region’s importance in this field.

Since the early 1990s, the Central Asian republics have become increasingly significant players in the global energy and economic markets. This region also holds a critical position in the supply of essential minerals. According to various reports, Central Asia is home to 38.6 per cent of the world’s manganese ore reserves, 30.1 per cent of chromium reserves, 20 per cent of lead reserves, 12.6 per cent of zinc reserves and 8.7 per cent of titanium reserves.

Compared to countries like China, Turkey and South Korea, the United States was relatively late to look to Central Asia. After the 2000s, the United States, which had a more protectionist approach in the security perspective due to the effects of 9/11, was content to watch the growing influence of other actors in Central Asia. Realising the need to formulate a new regional policy after its withdrawal from Afghanistan in 2021, prompted by Russia’s 2022 invasion of Ukraine, the United States administration began to take interest in the region again.

On the other hand, China has been increasingly economically dominant in the region since the early 2000s. Trade with countries in the region grew exponentially, especially after Chinese president Xi Jinping launched the Belt and Road Initiative in 2013. Trade volume reached US$89 billion in 2023, up from US$70 billion in 2022. The China–Central Asia Summit also institutionalised relations in 2023.

Another important partnership China has with Central Asia is in critical minerals. China operates many underground resources in Kyrgyzstan and Tajikistan, and has strong cooperation with Kazakhstan. In addition to zinc and uranium, China’s imports of molybdenum from Kazakhstan have increased by 444 per cent in 2020 compared to 2017.

Under these circumstances, a critical minerals partnership with the United States brings various opportunities and risks to Central Asia. But countries in the region are afraid of being dominated by China and open to offers from alternative actors.

The United States has a favourable reputation in the region, and there is confidence in its ability to fulfill its commitments. But employing rhetoric about competition with China, a nation with established influence in the region after years of neglect from other nations, is not likely to succeed. The United States needs to move forward with a more moderate policy. Already, the large amounts of debt that countries in the region owe to China makes the United States a more attractive partner.

But regional infrastructure problems, leaders’ pragmatic preferences, irrevocable agreements with China and possible disruptions in the critical minerals supply process are all compelling reasons to stay with China, not to mention the sheer geographical proximity.

While there is no guarantee the United States has the will or ability to engage successfully with Central Asia, it could strengthen its position in the region by offering technology and undertaking critical projects that China has not been able to deliver. A shift in focus from purely military security to a broader energy security strategy could be a key component of this new initiative. The United States has no choice but to create a brand new and deeper regional policy if it desires to compete with China.

Mehmet Fatih Oztarsu is Senior Researcher at the Institute of EU Studies at Hankuk University of Foreign Studies, Seoul.

To read the full article as it was published by East Asia Forum, click here.

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Until now, US restrictions on trade with China had been justified on national-security grounds, to prevent the Chinese military from acquiring sensitive technologies. While one could debate whether this policy made sense, it at least seemed to fit into a longer-term strategy. But these latest protectionist measures have nothing to do with China’s military capabilities. Instead, they aim solely to prevent cheaper, often better, green technologies from reaching US consumers.

The connection to the US election is obvious. Biden has been trying to head off Donald Trump by playing to the same protectionist sentiments that Trump, the presumptive Republican nominee, has been stoking for years. It was Trump, after all, who put the world on a new protectionist path when he imposed sweeping tariffs on steel, aluminium and many imports from China. Keen not to be outdone by Biden, he has already said that he would double the tariff on Chinese EVs from Mexico and apply additional ones to an even wider range of products.

Even taken in isolation, such measures are expensive and counterproductive. Tariffs impose higher costs on consumers and reduce competitive pressures, and thus innovation. In this case, they will also impede the transition to a net-zero-emissions economy. There are no economically redeeming features to the policy. Worse, the latest round of protectionist measures is part of an increasingly disturbing and dangerous trend. Step by step, major powers are unravelling an international economic order that delivered enormous gains over many decades through trade integration and globalisation.

These were hard-won gains. The first great wave of globalisation ended with World War I and was followed by trade wars and deep depressions throughout the interwar period. Although trade integration resumed after World War II, facilitating the reconstruction of Western Europe and Japan, its scope remained limited. It was not until the late 1980s and early 1990s that the next great wave of globalisation began, with global trade finally returning to its pre-1914 levels.

The rapid expansion of trade and investment flows over the next three decades would prove spectacularly successful across practically every macroeconomic metric. Roughly one-third of everything that has ever been produced was produced during this period, leading to the rise of a new global middle class. Poverty was dramatically reduced and the gap between rich and poor countries started to close for the first time since the start of the Industrial Revolution.

But over the past decade or so, debates about trade have changed. The new emphasis is on economic security, derisking and supporting domestic industries through massive industrial-policy subsidies. We seem to be going backwards, raising the risk of a return to the trade wars of earlier, darker times.

The International Monetary Fund and the World Trade Organization have both published extensive studies showing that deeper economic fragmentation would reduce global GDP by 5 to 7 percent, with a disproportionately large share of the burden falling on less developed countries. These are huge figures with huge consequences. The Sustainable Development Agenda that United Nations member states champion every year will become more of a grandiose dream than a practical objective. In the absence of a growing, still-integrating global economy, most of the 17 goals will become more difficult, if not impossible, to achieve.

One can easily imagine a better, more sensible scenario in which the United States returns to defending the rules-based global economic order, China rebuilds its credibility by adhering to the rules of the game, and the European Union lives up to its ambition to be a global champion of free trade. In doing so, each would advance its own interests, as well as benefiting the rest of the world.

Yet the trend is moving in the other direction. While Biden and Trump vie to establish their protectionist bona fides, Europe, too, has started to regard Chinese EVs as a threat, rather than as an opportunity to accelerate its green transition. Add to this China’s own talk about creating a self-sufficient ‘dual circulation’ economy, and India’s ongoing subsidies and resistance to trade, and you have the makings of a more radically fragmented global economy.

With these major powers rejecting the principles and policies that previously brought unprecedented economic gains, one must hope that policymakers everywhere will have the courage to step back and consider the bigger picture. History shows what we are risking by throwing globalisation into reverse. We must not go down that path again.

Carl Bildt is a former prime minister and foreign minister of Sweden.

To read the full article as it appears on the Australian Strategic Policy Institute blog, The Strategist, click here. 

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From the end of the Second World War through the end of the Barack Obama administration, the meaning of U.S. leadership on trade was pretty clear: negotiating agreements to open markets in any country that was willing to do so. However, its definition is far from clear today. The administration of President Joe Biden has tried out approaches that put trade in the service of fighting climate change, empowering workers, discouraging monopolies, embracing U.S. allies, sanctioning Russia for its invasion of Ukraine, curbing Chinese influence, and bolstering U.S. manufacturing. But in the election year of 2024, that complex structure looks at risk of crashing from the weight of its own ambitions. 

U.S. trade policy was once fairly simple. Following the powerful insights of British political economist David Ricardo, countries that opened their markets to trade and investment by exporting what they produced best (and importing the rest) saw enormous—and largely shared—gains in wealth. The United States, with a huge consumer market and a slew of competitive multinational companies, considered itself a big winner from trade liberalization and encouraged agreements of every shape and size. As an added bonus, opening the U.S. market to imports helped to strengthen political alliances around the world. The job of American political leaders, therefore, was to keep negotiating trade agreements that provided ever more market opportunities for the United States and for other countries. It was a classic, and rare, win-win. 

One version of U.S. leadership on trade calls for restoring that old model by launching new negotiations in Asia or Latin America that would further reduce tariffs or regulatory impediments to trade. Even if that were politically possible—and with the Republican Party under Donald Trump abandoning its support for free trade it is almost certainly not—the case for restoration is weak. With tariffs already at historic lows, the gains from further market-access negotiations are likely to be small. More importantly, restoration would not tackle any of the biggest contemporary challenges: accelerating the transition to green technologies, lifting stagnant wages, containing the risks of artificial intelligences, and maintaining power balances that discourage conflicts in Europe and Asia. 

Finding balance in Biden’s broad trade agenda

The Biden team should be applauded for experimenting with different formulations in its efforts to restore U.S. leadership that so badly eroded in the Trump years. Those efforts include U.S. Trade Representative Katherine Tai’s worker-centered trade policy, National Security Advisor Jake Sullivan’s “small yards, high fences” approach for controlling technology trade with China, and Treasury Secretary Janet Yellen’s friendshoring strategy for including allies in the clean energy supply chain. All represent serious efforts to build a trade policy for a more complex world. 

But the Biden administration has yet to grapple with the contradictions among those different approaches. Take the recent $14.1 billion bid by Japan’s Nippon Steel to purchase U.S. Steel, the Pittsburgh-based Industrial Age icon. On friendshoring grounds, Japan is a critical ally and blocking the acquisition would seem wholly unjustified. On clean energy grounds, steel companies are struggling to meet new EU requirements, which favor cleaner steel over products made with dirty carbon emissions; new investments from Nippon Steel could help to make the United States a global leader. But Biden has come out against the acquisition on “worker-centered grounds,” the United Steelworkers union opposes the deal, and Senator Sherrod Brown (D-OH), who is in a tough reelection fight in a right-leaning state, says the deal would weaken trade enforcement. 

Or consider the likelihood of new tariffs on imports of solar panels from Southeast Asia. Both the Obama and Trump administrations put tariffs on panel imports from China, which are heavily subsidized by the Chinese government in violation of U.S. trade laws. Those tariffs shifted panel production to several Southeast Asian countries that are important to the United States, including Malaysia, Thailand, and Vietnam. Some of that production is likely Chinese-made panels being shipped through the region, and the Commerce Department last year ruled that those products should face import tariffs, too. 

But the Biden administration has suspended any collection of those tariffs until June as part of a two-year moratorium on new tariffs meant to keep down the costs of solar panels and encourage more Americans to install them on their homes. Solar panels from Southeast Asia (or China for that matter) pose no security threats, help the economies of U.S. allies, and encourage a quicker U.S. transition away from dirty energy. But the lower cost of imports also discourages American manufacturing, costing jobs in panel production (even as it increases jobs in installation). Senator Brown, along with Democratic senators from Georgia—a critical electoral state—are calling for the tariffs to be imposed. The president seems likely to comply. 

All of these scenarios could be seen as the inevitable conflicts that emerge when trying to design new trade policies for a complex world. But one of the requirements of economic leadership is that countries should be seen as at least occasionally paying a price for their principles. In the free-trade era, the United States made politically unpopular decisions to lift import barriers in sectors such as textiles and apparel, and often complied with difficult rulings made by the now-neutered dispute-settlement panels of the World Trade Organization. 

The biggest challenge for U.S. trade policy today is to acknowledge those trade-offs and find consistent approaches to resolving the contradictions. This could be too much to expect of the Biden administration in an election year, especially given the dangerous alternative. But until firmer ground can be found, U.S. claims for renewed leadership on trade will continue to ring hollow.  

To read the full article as it appears on the Council on Foreign Relations’ website, click here. 

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The Allure of Steady States

In introducing his 2022 National Security Strategy, President Joe Biden promised to “win the competition for the 21st century.” But what winning means remains unclear. Indeed, senior officials within the Biden administration reject the notion that the United States should aim for a specific “end state”—which usually describes a situation following the completion of an objective—when it comes to China. Instead, Kurt Campbell and Jake Sullivan have advocated that the United States “seek to achieve not a definitive end state akin to the Cold War’s ultimate conclusion but a steady state of clear-eyed coexistence on terms favorable to U.S. interests and values.” They reject end states in favor of “accepting competition as a condition to be managed rather than a problem to be solved.”

There are three strong arguments against identifying an end state for U.S. strategy on China. First, “solving” the “China challenge” is a misnomer since even a change of governance in Beijing would bring about new challenges. If the Chinese people choose to make fundamental changes to their country’s political structures tomorrow, tensions over Taiwan and U.S. regional presence would no doubt remain. Political science research even suggests that a democratizing China could worsen tensions with the United States. As a result, some experts have endorsed the Biden administration’s focus on steady states, with Center for a New American Security CEO Richard Fontaine affirming that Washington “should manage global problems, not try to solve them.”

Second, bureaucratic disagreements could stymie efforts to select an ideal end state. Although there is growing concern about China in Washington, there remains little consensus on the strategy that U.S. policymakers should adopt. A debate about end states might therefore prove divisive since no single end state is likely to appeal to all stakeholders. Even within the Biden administration, it could be difficult to get democracy and human rights advocates on the same page with environmentalists and economists. Getting Congress on board would be another matter altogether. As a result, it might not be possible bureaucratically to agree on an end state.

Third, even if U.S. leaders could agree on what they ultimately want, doing so might alienate allies and partners. For example, if the United States sought to accelerate the collapse of the Communist Party, few if any U.S. allies and partners would be comfortable with that objective. Conversely, returning to a “new type of great power relations” would leave many worried about a great power condominium. Forcing a discussion on end states might thus weaken rather than strengthen the very coalitions that the United States needs to address the challenges that China poses.

The Necessity of End States

It is entirely reasonable, therefore, that Kurt Campbell has urged turning “the focus from end states to steady states.” Indeed, many in Washington agree that it might be wiser to sidestep the end states discussion, at least for the time being. The question is whether this approach is sustainable. Can policymakers build a lasting China strategy without an end goal in mind? Will the American people and friends abroad support a strategy predicated on an ongoing competition with no ultimate objective? In short, is managed competition a description of the current situation, or is it an actual strategy?

Advocates of identifying an end state counter their critics with three arguments of their own. First, without a clear objective, it is difficult to assess the success or failure of America’s current strategy. The Biden team sometimes says it is aiming for managed competition with China. But this simply implies competition without conflict, which already exists today. Strategy usually requires identifying an objective and then marshaling resources and plans to accomplish that goal. If the objective is simply maintaining the status quo of competition without conflict, then so long as deterrence holds, the administration’s strategy is working. This makes it nearly impossible to assess or measure progress, since the objective is already being accomplished.

Second, without a clear aim it is difficult to explain how the United States should make difficult strategic choices on everything from economic de-risking to deterrence posture to diplomatic engagement. Building political support for costly policies within the United States and among allies and partners requires a clear logic, which demands more than a hazy concept of competition. The vagueness of managed competition can justify almost any policy, from tough export controls and investment restrictions to deep dialogue with Beijing. Identifying an ultimate objective would help policymakers determine how to assess trade-offs strategically.

Third, the Biden team has been effective at describing what it does not want with China, but ineffective at describing what it does want. For example, Chinese media asserts that U.S. leaders committed privately to “four no’s and one no-intention” during last year’s Xi-Biden meeting in Bali, Indonesia. Regardless of the veracity of these claims, senior U.S. leaders have made a wide variety of statements asserting that they:

• “don’t want to contain China”
• “are not seeking a new Cold War”
• “do not see the relationship . . . through the frame of great power conflict”
• “don’t seek to block China from its role as a major power”
• “don’t seek to block China . . . from growing [its] economy”
• “[are] not seeking to decouple from China”
• “do not seek to transform China’s political system”
• “do not support Taiwan independence”
• “don’t want to see the status quo across that strait changed unilaterally”
• “are not looking for confrontation or conflict”

These statements lay out what Washington does not want, without presenting a positive vision. This is one reason that Chinese observers are so skeptical of American assurances—many seem to be substanceless platitudes at odds with American actions. Although the National Security Strategy and Indo-Pacific Strategy articulate some positive goals such as “strengthening democratic institutions, the rule of law, and accountable democratic governance,” these documents say surprisingly little about U.S. objectives vis-à-vis China. This leaves many American citizens, members of Congress, and foreign policymakers unsure about whether Washington actually has a vision for what managed competition entails. For all these reasons, it would be beneficial for the United States to identify an ultimate objective of its China policy.

The Impracticality of a Unifying Objective

Aprimary reason the Biden team has rejected end states appears to be that no single end state is simultaneously realistic and acceptable to two key audiences: the American public and policymakers in ally and partner countries. Administration leaders insist “neither collapse nor condominium are tenable end-states” and note that each suffers from fatal flaws.

The goal of bringing about the collapse of the Communist Party has some notable champions. When he was Secretary of State, Mike Pompeo suggested that “we, the freedom-loving nations of the world, must induce China to change.” Others have insisted that Washington should aim for Xi Jinping to be “replaced by a more moderate party leadership” and for the Chinese people to “challenge the Communist Party’s century-long proposition that China’s ancient civilization is forever destined to an authoritarian future.” Many Americans are tempted by these arguments. After all, the United States brought about its opponents’ downfall in two World Wars and then waited out the Soviet Union during the Cold War. Why should the United States not do so again?

Explicitly attempting to bring about the end of the Communist Party, however, poses numerous problems. Washington has few levers to alter China’s domestic governance model. Worse still, making such an objective explicit could actually strengthen the Communist Party’s hold on power. And a public U.S. goal of forcible regime change would be opposed by most, if not all, U.S. allies and partners. Finally, attempting to remove the Communist Party from power would usher in a zero-sum struggle, which could lead to a heightened risk of conflict. For all these reasons, the Trump White House asserted that its approach was “not premised on an attempt to change the PRC’s domestic governance model.” The Biden team has done the same, with Jake Sullivan noting the U.S. goal “is not to bring about some fundamental transformation of China itself.”

The other end state rejected by the Biden team is creation of what they have called a great power condominium—essentially, an agreement by Beijing and Washington to share global leadership. The basic logic of those who favor such a condominium is analogous to the common understanding of the “responsible stakeholder” concept promoted by Robert Zoellick almost 20 years ago when he was Deputy Secretary of State. He suggested efforts “to encourage China to become a responsible stakeholder in the international system. . . [to] work with us to sustain the international system that has enabled its success.” Along similar lines, Michael Swaine, Jessica Lee, and Rachel Esplin Odell have more recently advocated “ultimately integrating Beijing into inclusive economic and cooperative security mechanisms.”

Unfortunately, this end state is hard to imagine today. Julia Bowie has described the responsible stakeholder theory as resting on “the expectation that China would become a status quo power.” Indeed, Zoellick had asserted, “China does not believe that its future depends on overturning the fundamental order of the international system.” But now even the European Commission has publicly described China as a “systemic rival promoting alternative models of governance.” Beijing’s coercive actions against Japan, India, South Korea, the Philippines, Australia, Lithuania, Canada, Norway, and others have driven a global reassessment of China’s behavior. Over 70 percent of respondents in a July Pew poll said that China does not contribute to peace and stability nor take into account the interests of countries like theirs. As a result, it is difficult to imagine a successful effort at engagement without some fundamental changes occurring in Beijing. The “era of engagement” appears to be over, at least for now.

So neither collapse nor condominium appears to be a practical end state around which to build consensus. They have something else in common: neither seems possible under Xi Jinping. Another concerted American attempt at engagement appears unlikely to shift Xi’s worldview, including his assessment that “Western countries led by the United States have implemented all-around containment, encirclement and suppression of China.” Even if American leaders could change Xi’s views of the bilateral relationship, there is no political appetite on either side of the aisle in Washington to test this proposition. U.S. officials from both parties appear to concur with Orville Schell, who has argued that it was “Xi’s aggressiveness that put a stake through the heart of ‘engagement’ as a viable US or Western policy.”

To say that engagement is now implausible as a strategy is not to imply that diplomatic meetings with Chinese leaders are unwise. The Communist Party is so opaque that American leaders are likely to learn more from their Chinese counterparts than vice versa. Yet, the objective of this diplomacy must change, even if its value remains. Leaders in Beijing and Washington now describe their aims in bilateral dialogues not as seeking to “improve” the relationship but rather to “stabilize” it. This is a much more limited objective predicated on continued competition, rather than an outright improvement in the relationship. In short, few on either side expect that these engagements will lead to any major change in behavior.

The Need for Phased Objectives

If end states are unattainable in the near-term and steady states are unsatisfying in the long-term, does that doom efforts to embrace a well-defined objective for America’s strategy on China? No. There is a third way: a phased approach. The United States could endeavor to maintain a stable steady state in the near-term while awaiting more fundamental change in China in the long-term. Doing so does not require American leaders to choose either collapse or condominium, but rather leaves the door open for either, depending on the choices of the Chinese people. If the United States is going to articulate an end state, this phased approach is the only approach likely to win support in both Washington and key allied capitals.

In the short-term, the Biden administration is right that America’s aim should be to establish a more durable steady state. Many of the administration’s actions have put the United States on a sounder path, particularly efforts to bolster cooperation with U.S. allies and partners while investing in the sources of American strength. Central to these initiatives will be reinforcing deterrence through adjustments to U.S. and allied military capabilities, posture, and planning. Unfortunately, efforts to make measurable progress with China on crisis management mechanisms have been slow going. Nonetheless, the Biden administration is right to try—and be seen trying—to push China to reduce the risk of conflict.

In the long-term, the United States should be clear that it is awaiting substantial changes in China’s behavior or governance. This is not a strategy of forceful regime change, but rather patience until the Chinese people themselves bring about a fundamental transformation in Beijing. Until then, the best Washington can hope for is to manage a risky competition and hope it does not spiral out of control. The Xi Jinping era will continue to be difficult and dangerous, so ultimately the American public and friends abroad should want a more durable end state. If this “patient but firm” approach sounds familiar, it is for good reason—it echoes U.S. strategy in the Cold War. Just as George Kennan foresaw the “break-up or the gradual mellowing of Soviet power,” Washington should hope for the mellowing or break-up of Chinese power. Then as now, waiting for regime failure should not be equated with forcible regime change.

Raising parallels with American strategy in the Cold War is not to suggest that the challenges posed by Beijing today are the same as Moscow’s decades ago. China bears little resemblance to the Soviet Union. Beijing boasts a far larger and more globally integrated economy than Moscow ever had. Yet, the Chinese Communist Party’s governance model is less attractive internationally than the Soviet system was in the early Cold War. Beijing’s political appeal lags far beyond that of the Soviets, who benefited from the communist bloc of aligned sympathizers worldwide. To date, Xi Jinping has also been less willing to use force at scale abroad than Soviet leaders, although U.S. policymakers must be wary because Beijing’s behavior could change over time. Thus, China is far more economically engaged abroad than the Soviet Union was, but is also less threatening ideologically. Containment is therefore inapplicable; Washington should not challenge Beijing abroad in the same way that it confronted Soviet influence globally, particularly given China’s current economic headwinds.

It is ironic that American strategists have spent much of the last few years playing the “Kennan sweepstakes” by trying to develop a phrase akin to containment that might guide American strategy. A better strategy is simply to adopt Kennan’s own phased approach: patience and firmness today while awaiting the mellowing or break-up of the Communist Party tomorrow. This is no panacea. It will have critics in Washington, Beijing, and beyond. But combining these two concepts is not as radical as it might seem. Indeed, Robert Zoellick ended his responsible stakeholder speech by insisting that “We can cooperate with the emerging China of today, even as we work for the democratic China of tomorrow.”

The Biden team has done an able job executing the first phase of an enduring American strategy on China. In fact, the early portion of the phased strategy recommended here might look almost identical to the Biden administration’s approach. Where a two-phased strategy would differ is in the long term. The indefinite maintenance of an inherently risky and increasingly tense competition should not be the ultimate objective of American strategy. As the time nears to hand off the baton to a second Biden administration or a new Republican team, U.S. leaders should be discussing end states. Effective strategies require clear objectives, so it is time to go back to the future and embrace a phased approach.

Zack Cooper is a Senior Fellow at the American Enterprise Institute (AEI), where he studies U.S. strategy in Asia. He also teaches at Princeton University, is a partner with Armitage International, and co-hosts the Net Assessment podcast for War on the Rocks.

This article was co-published with Foreign Policy. To read the full article as it was published by the ChinaFile, click here.

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In two landmark speeches in recent weeks, Treasury Secretary Janet Yellen and National Security Advisor Jake Sullivan articulated the core principles of a new international economic order centered on industrial policy. In this vision, the U.S. government will take an active role in reshaping supply chains to ensure its national security, fight climate change, and reduce inequality. Contrary to common conception, Yellen and Sullivan argued, pursuing industrial policy at home is compatible with an open, fair, and cooperative global economic order.

The two speeches declared the intent of President Joe Biden’s administration to revise the rules and practices that drive global trade and investment. However, a number of questions surround the strategy and vision that Yellen and Sullivan tabled.

WHAT DOES INDUSTRIAL POLICY HAVE TO DO WITH INTERNATIONAL ORDER?

Industrial policy is any intentional government effort to bolster priority industries or create structural economic change. It has been an integral part of climate politics since China pushed to increase its market share of wind and solar manufacturing in the 1990s. Yellen’s and Sullivan’s speeches took industrial strategy global. They expressed a goal of drawing countries into new efforts to create rules and investments that will drive decarbonization and increase geopolitical resilience, among other aims.

Two kinds of global industrial policy are emerging: foreign industrial policy and joint industrial policy. Foreign industrial policy refers to countries using the tools of foreign policy to advance their domestic industrial policies abroad. Joint industrial policy is when countries align their domestic strategies through international coordination. Both varieties were highlighted in the speeches and are currently being advanced by U.S. officials and agencies.

U.S. foreign industrial policy involves using its existing foreign policy apparatus—diplomatic, financial, and trade tools—to friendshore global supply chains. One key goal is to strategically deploy finance so that other countries can contribute to U.S. industrial strategy goals, such as diversifying the battery supply chain. For example, Washington is seeking to focus its overseas financing through the Partnership for Global Infrastructure and Investment, which funds clean energy and semiconductor supply chain projects overseas. And Washington has used the International Development Finance Corporation to make an equity investment in a nickel and cobalt mining facility in Piaui, Brazil.

Institutions and agreements that coordinate domestic industrial policies are the key drivers of U.S. joint industrial policy. Examples include the Global Arrangement on Sustainable Steel and Aluminum with the European Union, the U.S.-EU Trade and Technology Council, the Minerals Security Partnership, as well as a host of bilateral and trilateral initiatives. Such partnerships seek to allow countries to pursue and focus industrial policy at home without driving subsidy competition abroad.

WHY WAS A NEW VISION NECESSARY?

The basic structure of international economic order has been in disrepair since former president Donald Trump’s administration, which neglected the order’s core institutions and challenged its principles. Biden’s administration has taken up a leadership role, but the Inflation Reduction Act (IRA) and other policy initiatives that disregard the World Trade Organization have challenged the trading order anew. The IRA led allies and competitors alike to question whether Washington was turning inward and was only out to bolster its own economy.

The two speeches contested this, arguing that industrial policy at home is compatible with internationalism abroad. If all states engage in smart, fair industrial policy, then active government support for clean energy deployment can create a positive-sum global dynamic. The key premise of the argument is Yellen’s “modern supply-side economics,” in which the government makes strategic investments to expand potential economic output. If productivity increases, then the economic pie increases too—eliminating the need for zero-sum competition.

In addition, the world requires so much investment and innovation to build the global net-zero economy that there is room for everyone in global value chains for clean energy technologies for batteries—whether that’s designing batteries, mining minerals, or assembly the batteries in automobiles. As Sullivan put it, “We’re nowhere near the global saturation point of investments needed, public or private.” But the key is to ensure that everyone engages in smart, fair industrial policy.

Finally, policymakers’ nationalist intentions notwithstanding, firms tend to create what Jonas Nahm, my colleague at Johns Hopkins University, calls collaborative supply chains, in which different countries find niches in complex global production networks. These chains distribute economic value-added across the globe, giving multiple countries an opportunity to benefit.

HOW DO WE DRAW THE BOUNDARY BETWEEN FAIR AND UNFAIR COMPETITION?

The argument for a positive-sum dynamic makes sense in principle. But Yellen’s comments that the United States will benefit from healthy economic competition without seeking “competitive economic advantage” are somewhat confusing. Perhaps what Yellen meant is that the United States will not seek a structural or unfair advantage—which raises the question of what constitutes fair and unfair advantages in a world of industrial policy.

Yellen noted a number of “unfair” practices: aggressive use of state-owned enterprises, intellectual property theft, barriers to market access, and economic retaliation for diplomatic disputes. At best, this is a list of practices that do not have clear boundaries. Even friends are wont to disagree where the lines lie. At worst, this list will seem disingenuous because the United States itself engages in some of these practices, such as economic retaliation.

Drawing the boundaries will require considerable intellectual and diplomatic work, and whatever the principles end up being, they need to be clear and defensible. For example, the United States’ and Europe’s efforts to forge a steel deal that allows green industrial policy at home while creating a shared international market for low-carbon steel are critical. Similarly, a proposal for coordinated production subsidies among certain partners would allow countries to bolster specific sectors without creating subsidy races.

IS THERE ROOM FOR ALL, INCLUDING THE GLOBAL SOUTH, IN CRITICAL SUPPLY CHAINS?

The positive-sum argument can only serve as the basis for international order if all countries, including those in the Global South, can see places for themselves within it.

This will mean different things to different countries, but since World War II, developing and emerging economies’ participation in U.S.-led international order has been premised on the promise of capitalist development. The most effective strategies for development have involved the use of industrial strategy, as in the manufacturing-led drives of Japan, South Korea, Vietnam, Taiwan, and China. If the United States and Europe are seeking to bring manufacturing home, the industrial policy route could appear closed to the Global South. Moreover, African countries have struggled to copy the “Asian tiger” model, since they have more agricultural land and resources than the low-wage labor that Asian manufacturers and exporters capitalized on.

Nonetheless, the proposed U.S. vision must create space for the use of industrial strategy in developing and emerging economies. One key will be reforming the International Monetary Fund and World Bank so that they respect rather than close the political and fiscal space for industrial policy in these economies. Another will be ensuring that new institutions, such as the EU’s carbon border adjustment mechanism, do not kick away the ladder.

Enter, for example, resource nationalism in countries such as Chile, Indonesia, and Zimbabwe. All three seek to use their mineral resources as a means to add value to their economies and secure public revenues, with Indonesia banning the export of raw nickel, Zimbabwe banning the export of lithium, and Chile announcing that the state would play a larger role in lithium projects. Indonesia aims to leverage its nickel resources to increase domestic battery processing, so that more of the highest-value parts of the battery supply chain stay within its borders. By securing foreign direct investment backstopped by the ban on raw nickel exports, Indonesia hopes to achieve technology transfer based on the Chinese and Korean models. Zimbabwe aims to do the same with lithium. Chile’s strategy is to secure stronger state equity positions in the next round of lithium investment.

There are many ways for developing countries to benefit from mining resources, but not all countries can be competitive players in the battery supply chain. This supply chain is mature and dominated by large, sophisticated firms. Only smart industrial policies that target sectors in which countries have a real potential advantage are likely to work.

HOW CAN STATES DESIGN EFFECTIVE INDUSTRIAL POLICIES AND MAKE SMART INVESTMENTS?

The positive-sum vision hinges on countries engaging in smart industrial policies that make good interventions to bolster clean energy technologies. But in complex areas, such as clean energy supply chains, this is easier said than done.

Criticisms of industrial policy are usually posed against an outdated straw man conception of industrial policy as some version of static centralized planning. However, far from being centralized, modern industrial policy involves open collaboration between the government and industry. Moreover, modern industrial policy involves deploying a mix of regulations and investments in a dynamic, experimental way. Setting up a good learning process is crucial to success.

That process starts with specific objectives and clear strategies for building critical industries and supply chains. Those strategies have to be based on a realistic analysis of what is possible for a country to achieve in competitive global supply chains. Both strategy and implementation must be developed as part of a constructive collaboration between government and industry. Involving and empowering independent expertise is critical to success. States will need to invest in the analytical and regulatory capacity to develop effective industrial strategies. However, these very investments have been discouraged over the last three decades of neoliberalism. Reinvestment must begin now.

Each of these questions surrounding the new vision requires intellectual and diplomatic work. But in many cases, they cannot yet be answered in the abstract. Instead, they must be worked out through brave sectoral experiments that show creative ways to forge global coalitions for the green transition, global public health, and more.

Bentley Allan is a nonresident scholar in the Sustainability, Climate, and Geopolitics Program at the Carnegie Endowment for International Peace.

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Most important, when taken as a whole and given its timing just as the 2024 presidential campaign begins, the speech seems to be politically out of tune and picking the wrong targets. It is vigorous if defensive in rebuking the Biden administration’s liberal-internationalist friends for their worries that it may be overreaching in industrial strategy and under-reaching in trade policy. It is premature at best in positing that the administration’s global-economy agenda has achieved consensus status as the “project of the 2020s and 2030s,” and does not recognize — despite warnings from allies as important and close to the subject as Japan — the strength of the Chinese counter-“project.” And while spending lots of time in an argument with the 1990s, it elides not only the recent Trump administration record but the domestic political challenge from the administration’s Trumpist/isolationist enemies — which, in a few months, will seek to end the Biden administration, and with it not only Sullivan’s version of international economics but the 80-year liberal-internationalist legacy the speech rightly praises.

Message and Audience: Sullivan’s message throughout is a defense of three aspects of administration policy against concerns from its critical friends, and friendly critics, at home and in allied governments: that (a) its “industrial strategy” risks trying to do too much by expanding into places that private markets can serve pretty well, (b) its trade agenda is trying to do too little, missing opportunities to promote growth and high-wage employment at home and to build alliances abroad, and (c) its overall approach has veered close enough to economic nationalism to appear at times indifferent to the interest of allies and friends, and to risk damaging the “rulesbased order” the administration ably defends in diplomacy and security. Uniting these strands of argument, with special force in the opening and the close, Sullivan seeks to convince the critics that the approach is recognizably in the liberal-internationalist tradition of earlier Democratic presidencies, though appropriately adapted to meet an extensive list of new challenges. Two passages illustrate:

Opening: “The idea that [Biden administration policy] is somehow America alone, or America and the West to the exclusion of others, is just flat wrong. This strategy will build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere. So today, what I want to do is lay out what we are endeavoring to do.”

Close: “The world needs an international economic system that works for our [American] wage-earners, works for our industries, works for our climate, works for our national security, and works for the world’s poorest and most vulnerable countries. That means … targeted and necessary investments in places that private markets are ill-suited to address on their own—even as we continue to harness the power of markets and integration. It means providing space for partners around the world to restore the compacts between governments and their voters and workers. It means grounding this new approach in deep cooperation and transparency to ensure that our investments and those of partners are mutually reinforcing and beneficial. It means returning to the core belief we first championed 80 years ago: that America should be at the heart of a vibrant, international financial system that enables partners around the world to reduce poverty and enhance shared prosperity. And that a functioning social safety net for the world’s most vulnerable countries is essential to our own core interests. It also means building new norms that allow us to address the challenges posed by the intersection of advanced technology and national security, without obstructing broader trade and innovation.”

China: Some of the specific elements of the speech are very well done. The concise passage on China policy, consistent with Treasury Secretary Janet Yellen’s more detailed April 20th address, argues that the Biden administration’s approach is serious, strict on security-related trade, but also not seeking confrontation and looking for areas of mutual benefit. This clearly explains goals, limits, and methods. Some samples:

Export controls and trade: “We’ve implemented carefully tailored restrictions on the most advanced semiconductor technology exports to China. Those restrictions are premised on straightforward national security concerns. Key allies and partners have followed suit, consistent with their own security concerns. We’re also enhancing the screening of foreign investments in critical areas relevant to national security. And we’re making progress in addressing outbound investments in sensitive technologies with a core national security nexus. Our export controls will remain narrowly focused on technology that could tilt the military balance. We are simply ensuring that U.S. and allied technology is not used against us. We are not cutting off trade. In fact, the United States continues to have a very substantial trade and investment relationship with China. Bilateral trade between the United States and China set a new record last year.”

Summary paragraph: “[W]e are competing with China on multiple dimensions, but we are not looking for confrontation or conflict. We’re looking to manage competition responsibly and seeking to work together with China where we can. President Biden has made clear that the United States and China can and should work together on global challenges like climate, like macroeconomic stability, health security, and food security. Managing competition responsibly ultimately takes two willing parties. It requires a degree of strategic maturity to accept that we must maintain open lines of communication even as we take actions to compete.”

Trade, Tariffs, and the “Projects” of the 1990s and 2020s: Some other sections don’t hold up so well. The lengthier passage on trade policy in fact mixes eccentric history with jumbled policy arguments, and ends with puzzlement about where the administration really wants to go. Here, Sullivan’s point of departure is an ill-grounded sparring match with the U.S. policy agenda of the 1990s, characterized briefly and incorrectly as follows:

“The main international economic project of the 1990s was reducing tariffs.”

As history, “reducing tariffs” might, with some distortion and oversimplification, describe the main trade policy goals (though not the “main international economic project”) of the Roosevelt and Truman administrations in the 1930s and 1940s, or of the Kennedy and Johnson progressivepolicy.org administrations in the 1960s. For the 1990s, it doesn’t work even for trade policy alone. And if the administration feels it must start an argument over policies thirty years in the past, and contrast its own approach with them, it should understand those policies and describe them accurately.

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

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A package of highly restrictive export controls released in early October by the U.S. shook the Chinese and global semiconductor industries. But gauging the impact on both China’s semiconductor aspirations and the collateral damage to the global industry of the U.S. Commerce Department’s Bureau of Industry and Security’s new rules will take time.

Many in key parts of the semiconductor industry were taken by surprise by the lack of any comment period or phase in of the requirements, and by the U.S. persons controls, which led to a panic on social media on both sides of the Pacific among engineers who work or have worked in both China and America. Many have criticized what they see as the lack of a coherent roll out plan that was sensitive to industry realities. The new rules also include specific restrictions on technologies that are not considered leading edge, where there does not seem to be a real national security justification.

It took more than two years for the full impact to register on Huawei of the May 2019 Entity List action and the May 2020 extension of U.S. export controls extraterritorially, essentially crushing the firm’s consumer business, and undermining all of its major business lines. In this case, the biggest impact was created by the so-called foreign direct product rule (FDPR), which cut Huawei off from the manufacturing base for advanced semiconductors for all of its product lines. But Huawei was a single company, while the new rule will impact dozens of firms across the semiconductor industry.

China’s Ministry of Industry and Information Technology (MIIT) has held a series of emergency meetings on the rules over the past week, and some Chinese participants warned that the rules threaten the entire industry. Memory leader YMTC 长江存储 apparently warned that its operations were in jeopardy, though the firm has denied it was summoned to such as meeting, adding to the confusion.

How to unpack these rapid developments? The situation is evolving rapidly and some of the media reporting and speculation on Chinese social media has almost certainly overstated the impact, but it is probably too early to assess the full impact on both the domestic Chinese semiconductor industry, and U.S. and foreign semiconductor firms that are closely integrated into China’s semiconductor supply chains.

Cutting off access to new technology

The intent of the new Commerce Department controls appears to be to try to place strong limits on China’s ability to develop indigenous capabilities to support advanced computing, meaning artificial intelligence (AI) and supercomputing, while at the same time limiting the impact on mature semiconductor production, supply chains, and U.S. companies. It will be critical to watch how the rule implementation and industry reaction evolve as the Commerce Department attempts to thread this needle.

The new Commerce Department package has two major elements:

• Restricting Chinese company access to advanced graphics processing units (GPUs) produced by U.S. market leaders Nvidia and AMD, which are widely used by primarily Chinese commercial companies and research institutes. The GPU portion is also part of a broader set of restrictions on most inputs to high performance computers and supercomputers. The full impact of this ban, if it is carried out (presumably) with a denial of licenses for all end users in China, will be profound and is dealt with in depth here and here.
• The second major portion of the package are new controls placed both on technologies and U.S. persons supporting production of specific types of semiconductors at China-based facilities, both Chinese and foreign owned. The U.S. persons provisions are unprecedented, and as we will see, probably the most important element of the new package, though many questions remain about how it will be implemented.

Since the new rule was released, there has been much discussion, some of it uniformed, about what the rules require or don’t, including claims that the Biden Administration has forced all U.S. persons working on semiconductors in China to choose to resign. These claims are not accurate, but the evolving situation is complex, and people are reacting to how they think the rules will be enforced and what this implies for the future of the industry they are working in.

The technology and personnel controls apply to specific technology nodes for both logic chips — think CPUs and GPUs — and memory chips. The thresholds established in the new rule appear designed to freeze China’s domestic capabilities at nodes determined by the U.S. government:

• 16/14 nanometres (nm) for logic;
• 128 layer for NAND memory;
• 18 nm half-pitch for DRAM memory.

The levels are also designed to target specific Chinese companies:

• SMIC 中芯国际 for logic;
• YMTC for NAND;
• CXMT 长鑫存储 for DRAM.

All of these companies are already manufacturing semiconductors at or above the technology levels specific in the new rule.

The rule is designed cleverly to cut off the companies’ ability to move up the technology added value chain by restricting them from acquiring new equipment. The new controls add 11 new types of production equipment under a new Export Control Classification Number (ECCN) that covers a complex mix of capabilities required for advanced node production. It also applies to specially designed parts and components for such equipment, and software and technology for their development or production. Perhaps most significantly, the new rules also endanger the current operations of Chinese semiconductor firms producing at the targeted technology levels by requiring the U.S. persons supporting the companies’ operations at these technology levels to obtain a license. Why is this important? It is one thing to cut off acquisition of new equipment — SMIC, for example, has been unable to acquire advanced lithography gear for more than two years — and completely another to target the firm’s existing operations via the ongoing support they receive from toolmakers.

What exactly is a U.S. person?

The crux of the matter is how modern semiconductor foundries operate. Every company in the industry operating globally uses U.S. tools in the manufacturing process, and these tools require constant maintenance and support. The reaction of all the U.S. tool makers to the new rule taking effect October 12 has been to pull all support personnel from virtually all Chinese foundries they were supporting. This includes (at the very least) YMTC, CXMT, and SMIC. Over the past week there have been chaotic meetings among the tool makers, most notably Applied Materials, Lam Research, KLA Tencor, and others, with customers, U.S. government officials, and their internal legal and government affairs teams, attempting to determine their obligations under the new rules. Some U.S. tool makers have already released estimates of the impact of the restrictions in 2023. Lam Research, for example, on an earnings call last week estimated losses in 2023 at up to $2.5 billion for 2023.

Some of the confusion arises from the wording of the rule, in the sometimes arcane language of the Export Administration Regulations (EAR). The key new U.S. persons rule, for example, includes confusingly written directives such as this:

In addition, new EAR sections 744.6(c)(2)(iv), (v), and (vi) require a license from the Commerce Department for a U.S. person to (i) ship, transmit, or transfer to or within China; (ii) facilitate such shipments, transmissions, or transfers; or (iii) service any item not subject to the EAR (i.e., a foreign-made commodity, software, or technology) that is also described in an Export Control Classification Number on the Commerce Control List in Product Groups B, C, D, or E of Category 3 that the U.S. person knows will be used in the development or production of integrated circuits at any semiconductor production facility in China, but the person does NOT know whether such semiconductor production facility fabricates integrated circuits are one of the covered types of advanced node logic, NAND, or DRAM.

Since “U.S. person” includes not only citizens and green card holders but also “Any person in the United States,” their application is broad. And the rules appear fairly explicit, in some ways, noting that there will be a presumption of denial (Commerce Department parlance for a very low probability that a license will be approved if applied for) for a U.S. person, individual or corporation, for anyone providing support of any kind to Chinese firm producing at the specified technology levels.

But this is where it becomes complicated. There are dozens of other Chinese semiconductor manufacturing operations, both currently producing commercial products, or under construction. Some of these Chinese firms are also potentially operating within the forbidden zone of technology development, but critically, the Commerce Department rule specifies only a technology level, not specific facilities. So if, for example, a particular facility is doing any work within the forbidden technology zone, it potentially taints the entire operation. In an abundance of caution, U.S. tool makers appear to be deciding to at least temporarily halt all support in China, potentially putting China’s entire semiconductor industry operations on hold. YMTC has asked all of its U.S. persons to leave as it grapples with how to comply with the rule.

The new rules specifying technology and U.S. person controls did not come with an accompanying list of specific facilities that would be covered, unlike the Entity List or other U.S. lists of offending companies, which contain specific names or multiple names, addresses, and zip codes, eliminating any doubt about who is affected or not. In this case, the lack of a publicly available list of targeted Chinese facilities — and there are many — has created a fireball of confusion, with effects that remain unclear. So far, the Commerce Department has not issued any clarifications, and one official explicitly said the department would not issue such a list. Since the rule appears pitched at the “facility” level, companies should probably assume that U.S. persons working at a facility doing any work on the targeted nodes would be covered.

In addition, the U.S. persons rule impacts a wide range of individuals working in China: Tool maker personnel working at customer sites, executives working at Chinese semiconductor firms, and persons working at foreign semiconductor firms operating in China. The latter are primarily SK Hynix, Samsung, and TSMC, all of which appear to have gotten a one year reprieve from the provisions of the rule, with licensing applications being considered on a case by case basis. This, of course, is not much of a reprieve, given the five to ten year timeline most firms use for technology development. For U.S. persons working at any of the covered facilities, their career prospects look to be now caught up in the churn of U.S.-China tech competition, and many have apparently resigned or are considering doing so. A mass exodus of U.S. executives and technicians from Chinese facilities would be a major brain drain putting further pressure on companies already attempting to cope with the loss of technical support and access to hardware and software upgrades. But it is not clear yet that this will happen.

Short-term pain but long-term gain for China’s semiconductor industry?

Chinese firms like YMTC, CXMT, and SMIC were not likely taken fully by surprise by the new rules, though it is likely the U.S. persons piece caught them off guard. These firms have likely all stockpiled certain spare parts for tools in anticipation of a cutoff of hardware, much as Huawei did with advanced semiconductors produced at TSMC before the September 2020 cutoff of TSMC’s ability to support the firm. But the U.S. persons restrictions mean that stockpiling alone may not be sufficient to allow the firms to continue to operate some production lines. Semiconductor manufacturing equipment such as lithography, etching, deposition, process control, and metrology requires constant maintenance, and typically comes with long-term maintenance contracts. One industry executive I spoke with estimated that a company like YMTC could only continue operation for at most three months without software and other updates from tool makers. U.S. tool makers are continuing to digest the new rules and determine which facilities are covered.

The combination of U.S. tool makers pulling personnel, and spare parts and software updates being withheld, and the likelihood that this uncertainty will continue for some time, throws into doubt the future operation of many facilities operated by Chinese national champions SMIC, YMTC, and CXMT. In addition, literally overnight, the U.S. export control package put all semiconductor companies in China in danger by putting a major cloud over their future development and ability to continue to attract investment. Even companies operating at more mature nodes face uncertainty, as there is now a clear glass ceiling to any future upgrade plans. Apple this week announced it was dropping YMTC as a memory supplier, a quick reaction driven by Congressional concern and the reality that the firm is now under a major cloud and is unlikely to be able to continue to innovate at more advanced nodes and keep pace with Apple requirements.

Foreign firms with major manufacturing operations may get a short reprieve, but the writing is on the wall in terms of their long-term ability to continue to use China-based operations as part of their global business model. SK Hynix, which operates a major DRAM facility in Wuxi, was already barred from upgrading the multibillion facility to use extreme ultraviolet lithography gear, controlled on a country basis by the Wassenaar Arrangement. In the highly competitive world of memory, not being able to keep pace with technology development means a rapid decline of market share. Though China-based facilities, including those of SK Hynix and Samsung and others operated by SK Hynix and Solidigm, Intel’s former memory/storage unit in Dalian, and TSMC fabs in Shanghai and Nanjing will remain players in their respective market segments, over time, their inability to move up the value chain will impact their business models and long-term commitment to manufacturing in China. TSMC, for example, is also caught in the GPU focused part of the rule, and late last week suspended foundry services support for GPU major Biren Technology 壁仞科技, another major hit to the Chinese tech industry.

Does Beijing have bigger fire power than rare earths?

Prospects for the U.S. to get key players such as Japan and the Netherlands on board appear dim at present. With the new controls targeting logic chips at 16/14 nm, there is concern that the U.S. is not just targeting leading edge semiconductors, but also more mature nodes that are big revenue generators for tool makers. It’s very likely that the companies most impacted — including YMTC, CXMT, and SMIC — will turn to Japanese suppliers and ASML of the Netherlands to continue supporting production at 16/14 nm. They also have the potential of using existing equipment to go to the more advanced 7nm chips, as SMIC has already done.

The new rules will accelerate a process that started during the Trump era of extending export controls extraterritorially, which compels companies to make designs that are not dependent on U.S. technology to reduce future risks to supply chains. All of this could ironically have the effect of being a short-term pain for China’s semiconductor industry, but a long-term gain, as foreign suppliers adjust to the rules and find ways around some of the controls.

For now, with the global semiconductor industry already reeling from global recession and supply chain disruptions, the Commerce Department moves come at a very difficult time, and the rolling collateral damage of taking out a number of producers in the short term and a large raft of entrants remains unclear. The impact on U.S. tool makers is sure to be substantial, given that China is the most active market for new semiconductor fabs and the big players derive substantial revenue from the China market.

Finally, U.S. officials plan to take the new restrictions to the Wassenaar Agreement in 2023 for broader multilateral approval. This will include the personnel restrictions, and could require other countries to include controls on their citizens working to support development of the covered technologies. Already, Dutch lithography giant ASML has ordered its U.S employees to cease serving China-based customers pending a review, though the number of such individuals is likely low and the firm has also likely ordered its China-based U.S. persons to similarly stand down. ASML in particular has a large exposure in China, including a mix of Dutch, U.S., European, and Chinese employees. ASML has remained bullish on China despite controls on advanced lithography equipment, noting that “China’s semiconductor scene is growing at an unrivaled rate.” ASML and some other tool makers have made initial statements suggesting the impact of the new rule on their overall business will be low, but noting that the effect of the overall controls could mean the hit to their business in China is larger as Chinese fabs are unable to put together production lines without other U.S. tools.

Sorting out who can continue to work on which projects in China will be complex for both U.S., European and Japanese firms going forward, and in an industry with long time horizons, companies will also have to determine the long term risks of allowing workers to support Chinese customers who may eventually want to work on controlled technology, adding further complexity and downsides for Chinese firms.

Finally, the big wild card here will be how Beijing chooses to react once officials have digested the short and long-term impacts of the overall package of controls. Beijing has typically been very reluctant to take strong actions targeting U.S. company operations in China via tools such as the Unreliable Entity List and the Anti-Foreign Sanctions Law. However, with the new restrictions targeting key parts of the Chinese technology sector such as AI and supercomputing, and a broad range of companies, Beijing may be forced to react with stronger asymmetric measures. U.S. officials have likely calculated that any response Beijing makes will cause more pain to China over time than to U.S. interests.

While many have focused on things like rare earths and EV battery minerals as potential areas where Beijing could choose to respond by taking measures such as throttling some exports, there are also a number of key sectors of the ICT and semiconductor industry where China is a key if not the major player: smart device and televisions screen displays, where China based production accounts for a major portion of output, and legacy semiconductors and packaging, where Chinese firms, including SMIC, are major players. Even though an iPhone or AI server in the cloud uses the most advanced processors from Apple, Nvidia, or Intel, a particular device or system also uses dozens of less advanced semiconductors, many of which are produced and packaged in China. Beijing could choose to weaponize these types of supply chains also, once the dust settles on the Party Congress and the new tech savvy Politburo and Standing Committee is in place. As the full impact of the U.S. attempt to freeze China’s semiconductor industry in place sinks in, there are no low risk options that would not also result in damage to the business environment in China at a time when the economy remains in considerable distress resulting from COVID and the global economic downturn.

Paul Triolo is Senior VP for China and Tech Policy Lead for Albright Stonebridge Group. Previously, he worked at Eurasia Group, where he led the firm’s newest practice, focusing on global technology policy issues. He is frequently quoted in the New York Times, Wall Street Journal, Wired, SCMP, the Economist, and other publications, and appears on CNN, CNBC, and other media outlets that follow global tech issues.

Click here to register for the upcoming WITA Webinar: “No Chips for You! America’s New Export Controls on Semiconductors and Their Implications for Global Trade” to hear Paul Triolo and other featured speakers discuss new U.S. export controls on semiconductors sold to China that have dual uses in commercial and military technologies. 

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The massive economic gains and relative peace of the second half of the twentieth century owe much to this post-war global architecture, which includes the UN, the World Bank, the International Monetary Fund (IMF), NATO, the World Health Organization, and the World Trade Organization (WTO). But the upheaval in recent years from the 2008 global financial crisis and the US-China trade war to the COVID-19 pandemic has produced a rising tide of nationalism and protectionism—a kind of global pushback against multilateralism.

Russia’s invasion of Ukraine this year represented a failure of these multilateral institutions to stop a major war. But as organizations such as NATO have found renewed purpose in coming to Ukraine’s aid and punishing Russia, the conflict has underscored the importance of these institutions. On its own, a single nation cannot contain Russian aggression any more than it can take on the other pressing problems of our age, such as climate change, socioeconomic inequality, food insecurity, supply-chain disruptions, or inflation. Solving these problems will require an inclusive global compact that transcends governments, the UN, and specialized organizations.

Here are three places to start:

First, the multilateral system needs to be restructured from closed to more collaborative, with more trust-building cooperation between regional and global organizations. While the UN’s work with the Association of Southeast Asian Nations (ASEAN) is a good illustration of regular and active cooperation, today’s networked world calls for increased efforts. They must be framed within a broader multilateralist discussion that fosters inclusivity and provides a mechanism for regional concerns to be fed into policy decisions. Partnerships like this need to be guided by pragmatism, with each organization building on its strengths. Regional organizations, for instance, have historical ties and can be more capable of implementing global policies due to their knowledge of regional challenges. More interactions between the UN and regional organizations will build trust, maximize efficiency across all UN domains, and establish knowledge-transfer mechanisms. To put this vision into practice, an independent expert body should map out the regional organizations’ capabilities in different areas such as security and conflict resolution. Then, the UN should establish an official partnership with selected regional organizations, which could include regular meetings between the leaders of members of the UN Security Council and heads of the regional organization, or an annual meeting for top UN officials from the Security Council, General Assembly, UN agencies, and all regional organizations.

Second, the Bretton Woods Institutions must utilize their capabilities to enhance investments in global public goods. These are broadly shared, non-exclusive benefits such as the environment, health, peace, security, and technology. In today’s interconnected global economy, climate change, pandemics, financial crises, and regional conflicts create cascading challenges across borders, with the most acute effects often felt among the poorest countries and marginalized communities. Investing in global public goods will compete with traditional financial assistance. However, today’s agenda has shifted from country-specific issues to global ones. This requires multilateral banks to pivot away from their traditional country-focused models and prioritize global public goods investments. This is crucial for promoting the sustainable advancement of poor and rich countries, enabling inclusive economic growth, and reducing poverty and inequality. One way to accomplish this is through enhanced partnerships with regional development banks to facilitate public goods investments in low-income countries.

Third, the new multilateralism must embrace its global role in driving data governance and the digital economy. While data presents incredible opportunities, it also poses risks in terms of misuse and cybersecurity. There are many governments attempting to leverage the global digital economy for domestic economic growth, but dozens of governments have enacted measures that prevent data from flowing across borders. Multilateral organizations such as the WTO should establish data-governance frameworks and common standards to combat the trend of data localization and foster cross-border data sharing and public-private data collaboration. They should also play a role in helping governments maintain a strong national statistical system, develop talent, and foster cybersecurity solutions and data-governance policies. Also, more actions are needed to enable governments to utilize data ecosystems. For instance, the UN Development Program and the Office of the UN Secretary-General’s Envoy on Technology are promoting the concept of open technology, This concept aims to enable the development of solutions that are made available for anyone to adapt. Examples are digital public goods (DPGs), such as open source software, and digital public infrastructure (DPIs), such as payment systems. Moving forward, it is key to further develop country capacity, which requires multilateral actors to come together so that no one is left behind in the deployment of DPGs-DPIs.

The world leaders gathering in New York this week face a world growing more volatile by the day—and they are acting within a system ill-equipped to handle the moment. To meet today’s challenges and take advantage of tomorrow’s opportunities, they must change how they work and rethink multilateralism.

By Yomna Gaafar, assistant director at the Atlantic Council’s Freedom and Prosperity Center.

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Let’s start with whether there really is a big shift in policy here. It is fair to say that “industrial policy” has long been looked down upon by many leading economists. Nonetheless, a wide range of actual U.S. economic policy falls squarely within it: ethanol subsidies, high tariffs on steel and aluminum imports, very long copyright terms, and price supports for sugar are just a few examples of how the U.S. government has tried to support specific U.S. industries. Whether or not people referred to this as “industrial policy,” that’s what it is. Thus, regardless of what leading policy thinkers had to say about industrial policy, policy makers have been very willing to adopt it (often at the behest of the corporations that benefited).

But now people are using the term “industrial policy” more, and expanding the scope of industries covered, with semiconductors the most prominent one. That is a shift, although not an unprecedented one. In the beginning of Bill Clinton’s first term, industrial policy was also a hot topic. And in the 1980s, the Reagan administration pushed its own version of support for the semiconductor industry.

Longtime advocates of industrial policy such as Dani Rodrik say the new CHIPS Act is significant “because it is a sign that we have moved well beyond market fundamentalism and because it shows there is now bipartisan support for industrial policies.” Of course, the idea that we were ever in a place of “market fundamentalism” is contradicted by the facts of actual U.S. economic policy, as noted above, which involved a wide range of economic interventions by the government. Industrial policy advocates are looking to spin these new developments in a triumphalist way, in an effort to demonstrate that their policies are in vogue. But the degree of change is less clear, and it will likely take a few years to gather enough evidence on past and current U.S. government economic interventions to do a proper comparison and make an assessment of how big a shift we are seeing.

The second question is whether new initiatives such as the CHIPS Act will be successful. This law offers more than $50 billion in subsidies to semiconductor companies to build new production facilities in the United States. Will this work? This depends in part on how we define “work.”

One problem is that these companies might just be trying to extract government money for projects they would undertake anyway. Such efforts are fairly common, as companies play governments off one another to extract financial concessions for already planned investments. (This is why Bernie Sanders and others worry that these subsidies are just “corporate welfare.”) So we might see new semiconductor investment in the United States in the coming years, but it will be hard to determine whether it is more than what would have happened without the subsidies.

Assuming that these subsidies do increase investment beyond what we would have seen otherwise, we then run the risk that the industry has been distorted in ways that are unsustainable in the market in the long run. If we incentivize companies so much that they over-produce, it could lead to some companies becoming unprofitable, and then demanding a new round of subsidies to keep then afloat. Once companies become dependent on government support, it is hard to wean them off it.

Underlying all of this is a fundamental question: Is there a problem with U.S. semiconductor production being too low right now? Surely there are some sectors (e.g., military aircraft) where we would not want to be too dependent on other countries. But is semiconductors in that situation at the moment? It can be hard to answer this, because some of the data being used as a justification for the subsidies is misleading. For example, a Washington Post article titled “A new era of industrial policy kicks off with signing of the Chips Act” noted that: “About 37 percent of the world’s semiconductors were manufactured in the United States in 1990 versus about 12 percent in 2020.” But in 1990, China was not an economic powerhouse, and as its consumption of semiconductors in domestic manufacturing sectors grew, it was sure to increase its share of global semiconductor production. It may be that the U.S. industry is performing badly, but commonly cited figures such as these are not convincing evidence of that. The public debate needs an objective assessment of just how many semiconductors the United States needs to produce domestically or buy from friendly countries in order to be secure.

There are many questions about the future of U.S. industrial policy, and it could take years to answer them. Will the CHIPS Act’s semiconductor subsidies have their intended effect? Will these types of economic interventions be extended to other industries? Will the current enthusiasm for industrial policy fade away as it did after an early burst in the Clinton years? And could the sudden prominence of the issue lead to a rethink of any of the long-standing industrial policies in sectors that are much less strategically important? The conversation over industrial policy has started up again, but it remains to be seen where we end up.

By Simon Lester, J.D., Nonresident Fellow, International Economics, Rice University’s Baker Institute For Public Policy

To read the full commentary by Simon Lester, J.D. please click here

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The good news is that everyone is talking about the circular economy, and they are guided by its intuitive basics. There is a growing volume of work on the circular economy that adopts the same simple concept but approaches it with variety. The World Economic Forum and Ellen McArthur Foundation are preeminent conveners that combine the power of different stakeholders to generate action-oriented initiatives already making headway. The European Union is redesigning policies to create an “insular” circular economy based on self-sufficiency and working to convince others to take on that approach. The U.S. EPA announced a National Recycling Strategy in November 2021 as the first stage “to building a circular economy,” superseding a long-standing “Sustainable Materials Management” agenda in which recycling (i.e., the circular economy) is not necessarily the answer to post-use management.

With any policy work, we need a definition.The concept of the circular economy – as it grows in concept, reference and eventually action – seems simple, but there are several definitions (or attempts at definitions) that are true but wordy. Let’s take a look at some of the more prominent definitions:

• The World Economic Forum notes, “The circular economy, which promotes the elimination of waste and the continual safe use of natural resources, offers an alternative that can yield up to $4.5 trillion in economic benefits to 2030.”
• The Organization for Economic Cooperation and Development (OECD) says the Circular Economy “aims to transform the current linear economy into a circular model that would gradually reduce the consumption of finite material resources by recovering materials from waste streams for recycling or reuse, using products longer, and exploiting the potential of the sharing and services economy.”
• The Ellen MacArthur Foundation defines the Circular Economy as “an economy that provides multiple value-creation mechanisms which are decoupled from the consumption of finite resources” and which is based on the three principles that “eliminate waste and pollution…circulate products and materials…regenerate nature.”
• The U.S. Environmental Protection Agency (EPA) – late to acknowledging the Circular Economy concept – relies on the definition in the “Save Our Seas 2.0 Act” of 2020:“an economy that uses a systems-focused approach and involves industrial processes and economic activities that are restorative or regenerative by design; enable resources used in such processes and activities to maintain their highest value for as long as possible; and aim for the elimination of waste through the superior design of materials, products and systems (including business models).”
• The European Union is a major proponent of the circular economy but, not surprisingly, does not have a firm definition. The Circular Economy Action Plan of March 2020 aims to “help ‘close the loop’ of product lifecycles through greater recycling and re-use and bring benefits for both the environment and the economy.”

Over the course of the coming months, we will be dissecting the components of the circular economy and these different approaches to make sure we fully understand what it means but, especially, how we get there. In line with our mission, we are asking questions and developing policy ideas to transform into action under the banner of the Eco2Sec pillar – addressing economic and ecological risk and opportunity to meet the 21st century climate imperative – while also promoting trade policy as an enabler of the Circular Economy (Trade & Industrial Policy pillar). Watch this space and engage with us.

Adina Renee Adler is the Deputy Executive Director of Silverado Policy Accelerator.

To read the full commentary from Silverado Policy Accelerator, please click here. 

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