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China Policy Must Be About Making Economic Security A National Security Issue

November 20, 2020

By Kenneth Rapoza, CPA Industry Analyst

President Trump helped rewrite the book on China policy. Going forward, future presidents will be hard pressed not to view economic security as a matter of national security. In a recent webinar hosted by former Congressman Robert Pittenger, the importance of semiconductors was called out as the CCP's Greater Bay Area project seeks to replace US, South Korea and Taiwanese manufacturers with home-grown China stars instead.

Dealing with China has one singular focus now: economic security is national security. If there is one issue Republicans and Democrats agree on, this is it.

“We are now at record highs around the world with countries who are very angry about what is happening in China, on issues like competitive trade practices and human rights abuses. It may be the only issue that is shared across the aisle, but it is arguably the most important issue for the US and its economy,” said Roslyn Layton, a researcher at the Center for Communication, Media and Information Technologies at Aalborg University in Copenhagen. And perhaps more interesting to CPA members, founder of the China Tech Threat blog, which looks at ways China tech is permeating the US.

She was part of Thursday’s five-speaker panel on China’s Threat to National and Economic Security of Democratic Nations, run by the Parliamentary Intelligence-Security Forum. The DC group is run by former North Carolina Congressman Robert Pittenger.

Seated in what looked like a cherry oak paneled living room with a fireplace, Pittenger ceded the discussion to the panelists. The main focus was on making economic security a national security issue, something that took root under President Trump.

“Economic security is national security. It was ignored for many years, particularly in respect to China because politicians wanted to help China and businesses wanted to make money. But now policy makers understand that economic security is a national security issue,” said Jamieson Greer, an international trade lawyer at King and Spalding and a former Chief of Staff for Robert Lighthizer.

Utah Congressman John Curtis, a Mandarin speaker who lived in Taiwan for three years, listed a number of bills that are out in the House today that tackle China on any number of issues, from forcing China listed companies on the NYSE and Nasdaq to abide by the same auditing rules as everybody else (China claims state secrets to SOE financials) and making “unreasonable surveillance” a human rights issue.

One of the panelists of interest to CPA members was the Acting Undersecretary for the Bureau of Industry and Security at the Department of Commerce, Cordell Hull. He deals with controls on dual use technologies and the Entity List.

He said BIS is particularly concerned with China Military-Civilian Fusion Strategy. “This allows for the appropriation of technology that can be used by China’s military industrial complex,” he said.

We asked him about multinational corporations such as chipmaker Intel and some defense contractors getting exemptions to doing business with those on the Entity List, such as Huawei.

“A lot of our actions have been unpopular among certain sections of our society,” he said, alluding to companies that are reliant on China, or do not want to lose China business. He said he could not speak about the licensing process that allows companies to bypass sanctions, but that it included input from agencies like the Department of Defense and the Department of Energy. “The big multinationals doing business in China are not running our foreign policy,” he said.

Companies like Qualcomm and others have asked for certain chip sales to be allowed as it would remain a cash machine for them to invest back into the business and advance further in semiconductor technologies.

Semiconductors were the sector of focus during the discussion.  

Commerce sanctioned Semiconductor Manufacturing International Corporation, better known by its acronym SIMC, in September. It's China’s biggest chip maker. It’s not impossible for China to move production to other firms, however. Many of these semiconductor companies are aligned with the China 2025 plan and can count on Beijing's support to help shuffle the deck if needed. The importance of the sector -- and Washington's concern for its growing prowess in China -- was highlighted when Tsinghua Unigroup tried buying US firm Micron in 2015. The Committee on Foreign Investment in the United States did not allow the deal to go through.

US semiconductors account for half of the world’s sales and are experiencing stable growth. Even with BIS restrictions on China imports, China is very much in the market and companies are selling chips directory or indirectly to Chinese defense contractors Yangtze Memory Technologies Co., said Layton. 

“I think it should be restricted. This is a key battlefront,” she said.

China and Asia will remain the center of gravity for that industry for a long time, thanks to Samsung and Taiwan Semiconductor. Companies like Intel have a large factory presence in China. Intel is in Dalian.

With Beijing's important Greater Bay Area strategy, China is aiming to displace all of the US, Taiwanese and South Korean companies with indigenous technologies and Chinese-owned manufacturers. 

Why the focus on semiconductors specifically? Because they go into everything we make and will make as we continue to build a post-fossil fuel, digitized economy. They are used in robots, drones, EVs, 5G, and will be used in telemedicine and in other areas no one considered even five years ago.

China has been trying to be a bigger player in this space since the integrated circuit export boom of the 1970s, a global market Japan and South Korea grew their export base on. Now China is investing heavily in chip tech and the equipment and software to make them in an effort to build a robust, domestic supply chain.

China has lagged in things like wafer design and manufacturing. Huawei can’t do it. They often get the German’s and others to design the software and then get Taiwan Semiconductor to make it for them.

“Major multinationals in China are increasingly consuming chips and they end up importing more than China can produce domestically,” said former director of investment for the International Trade Commission, John VerWey. VerWey left his post in June and is now a business intel analyst at U Group. Here’s the kicker: “China doesn’t like that trade imbalance,” he said about semiconductors. “They consider it a national and economic vulnerability.”

And so should we.

Not just in semiconductors, but also in car battery cells, in steel, in rare earth minerals, in solar cells and panels, in essential medicines and in personal protection equipment used by doctors and nurses.

Panelists touted the new talking point of “working with allies” to solve the China crisis. We asked them why we should give Europe, Australia, Japan or – please, help us, the World Trade Organization – veto power over American national security interests?

Volkswagen is making cars in Xinjiang. Deutsche Telekom seems to be holding onto its partnership with Huawei despite public complaint.

“I don’t think all of our allies are on the same page as we are on China,” said Greer. “When we have taken certain trade actions people grumbled, but other countries eventually followed. We have seen some cooperation on Huawei, but there are business interests in Germany for example that are making money in China and want to keep making money in China and have a hard time managing that relationship. I don’t think the WTO will ever be a good forum for addressing China because they are a member. It’s a challenge. You have to really consider that when thinking about working with allies on confronting China.”

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