Export restrictions on semiconductors and other cutting-edge tech have become an important foreign-policy tool, but the long-term consequences could be dangerous for America and the world.

"Last October, the Biden administration unleashed one of its biggest countermeasures to date against China's military ambitions: export controls on, among other things, cutting-edge semiconductors used for AI systems. The new rule restricts not just U.S. companies but any manufacturer that uses specified U.S. software or technology to build their products. As Kevin Wolf, who ran the U.S. export-control regime from 2010 to 2017, put it, foreign dependence on U.S. equipment means that every such chip "on the planet" is now subject to U.S. controls.

The measure has alarmed China. President Xi Jinping blames the U.S. for orchestrating a campaign to encircle, suppress and contain his country, while commentators claim that the U.S. is drawing closed a "Silicon Curtain."

Pundits like Thomas Friedman once cited the semiconductor supply chain as a prime example of the flat world of globalization, in which economic interdependence would produce peace and prosperity. Now the U.S. has weaponized interdependence. American technology, which extends like a fishing trawler's long line through the entire global semiconductor production system, is being reeled back in, with allies and adversaries alike wriggling on the hooks.

At this early stage, it is hard to assess the wider consequences of the new U.S. policy. China is no stranger to such tactics, having long used restrictions on access to its own market and embargoes on strategic materials such as rare earths to punish countries that cross its diplomatic red lines. But a new tit-for-tat is emerging, and as China responds to the turn in American policy, there is a risk that the situation could escalate in a way that hurts both U.S. security and the global economy.

Until recently, American businesses were crucial to helping China advance its technological ambitions, through partnerships, investment and voluntary or forced technology transfer. As Matt Pottinger, Donald Trump's deputy national security adviser, told Nikkei Asia in May: "We saw a baby shark and thought we could transform it into a dolphin. . . . We kept feeding the shark . . . and now we're dealing with a formidable Great White."

Jake Sullivan, President Biden's national security adviser, describes the export control system as a crucial "strategic asset," allowing the U.S. and its allies "to impose costs on adversaries and even over time degrade their battlefield capabilities." But the administration isn't starving the shark altogether. Its export-control strategy of creating a "small yard" with a "high fence" targets as-yet loosely defined key sectors. The idea is to impede China's advances in military AI and advanced weapons while trying to limit the policy's wider economic repercussions.

How the U.S. arrived at such policies is an important story in itself; it is not the result of a well-orchestrated long-term plan. A decade ago, few would have expected export controls to be an important weapon. When Wolf worked in the Obama administration, he joked that export-control regulations were a lot like tax law but without the sex appeal.

Export controls began turning heads amid the chaos of the Trump administration. They got their first push thanks to the blunders of the Chinese telecommunications firm ZTE. Under the Obama administration, the company had been caught flouting U.S. sanctions against Iran. ZTE was put on the U.S. government's "entity list," making it a commercial pariah. Other businesses weren't allowed to provide specified goods to ZTE without U.S. government permission. ZTE got off the list only after agreeing to change its ways, pay a $430 million fine and accept a suspended penalty.

But then ZTE violated its agreement and lied about it. Trump's Commerce Department imposed the suspended penalty, cutting off the company's access to U.S. technology for seven years. This was a likely death sentence for ZTE and led to a political crisis in China. Chinese newspapers started panicking about the dangers of decoupling. A former senior U.S. official recounted to us how Xi kept raising ZTE in phone calls with Trump, asking him to reduce the penalty "as a personal favor." Trump, who desperately wanted a trade agreement with Xi, announced his response by tweet. He was working with Xi to give ZTE "a way to get back into business," because "too many jobs in China lost."

Trump and Xi cooked up a deal under which ZTE would pay a bigger fine but still have access to U.S. technology. ZTE survived thanks to what Trump's national security adviser John Bolton described in his 2020 memoir as the "black hole" of Trump's desire for a trade deal with China, "twisting all other issues" around it. But even if Trump cared more about striking a deal than hobbling China, more hawkish officials saw the possibilities. Bolton, for one, hadn't previously known about the entity list, even though he told us he was "delighted to find this additional tool."

In May 2019, Commerce Secretary Wilbur Ross took the next step, adding the telecommunications giant Huawei Technologies to the entity list on national security and foreign policy grounds. Huawei's founder Ren Zhengfei once told Communist Party General Secretary Jiang Zemin that "a nation that did not have its own [telecommunications] switching equipment was like one that lacked its own military." Unfortunately for Huawei, the U.S. agreed. Officials feared that Huawei's plan to build the world's next generation communications infrastructure would promote China's security goals at America's expense.

Putting Huawei on the entity list alone couldn't stop it from buying semiconductors made by non-U.S. companies. As Pottinger told us, "We didn't think that the export controls would have much bite" without back-up. Trump administration officials found what they needed in an obscure regulation, the "foreign direct-product rule."

They could use the rule to regulate products made in other countries if those products had been made with U.S. software or technology or even with tools that involved that American know-how. Since U.S. intellectual property is omnipresent in the semiconductor supply chain, this move had existential consequences for Huawei. A leaked 2022 memo by Ren warned Huawei employees that the "continued blockade" by the U.S. contributed to making "survival the most important guideline" for the company.

The Trump administration transformed export controls in fits and starts, with drive-by tweets and ordinary bureaucratic rulemaking. Its expanded use of the foreign direct-product rule is now the foundation of the Biden team's action against China and its effort to deprive Russia of certain strategic products. What began with the Trump administration's move against one company has evolved into the Biden administration's campaign to cut off access to key technologies for entire countries.

The U.S. can do this thanks to chokepoints in the global economy. Globalization didn't create a decentralized global marketplace as pundits and politicians anticipated. Instead, it systematically concentrated power in a small number of big firms. In semiconductor production, those companies include ASML, Nvidia, Synopsys and Cadence Design Systems. That's why the new export controls are so effective.

In a 2019 academic paper on "weaponized interdependence," we argued that this gave the U.S. government enormous powers of coercion and surveillance. We warned that this might go wrong, but we never dreamed that our research might help to fuel the phenomenon we were describing. Chris Miller's recent history of semiconductors, "Chip War," describes how an unnamed senior Trump official saw our ideas, in Miller's words, as providing a "game plan" for using the chokepoints in semiconductor production. They told him that "weaponized interdependence is a beautiful thing."

But using economic chokepoints this way has a serious potential downside. For now, China is retaliating against the U.S. by threatening restrictions on key materials necessary for semiconductor production. The U.S. and its allies may find other sources, but China is also looking for other chokepoints that it might use to inflict pain. The risk for both sides is a deepening spiral of action and reaction.

In response to this American pressure, China is also now doubling down on a strategy of achieving technological independence. As Ali Wyne, a senior analyst with the Eurasia Group, has warned, the only thing worse than weaponized interdependence may be no interdependence at all. If China doesn't have to fear Western reprisals, it may be emboldened to attack Taiwan, press its territorial claims in the South China Sea and against India and bid for Asian hegemony.

Other countries might band together with China, or strike out themselves toward greater technological self-sufficiency, fearing that they might be next on the export-control hit list. Even close partners like Germany, which has a big economic stake in China, might find their loyalties fraying if they don't know where America's "small yard" begins and ends.

The Biden administration has considered these and other risks, and its "small yard, high fence" approach may be the best of bad options. But for the policy to be less destabilizing, it can't be so open-ended and haphazard. Adversaries and fence-sitters alike need to see continued value in interdependence. Achieving this will require the U.S. to use one of its crucial advantages over China -- the rule of law -- to set specific standards and appeals procedures to limit uncertainty over its future actions.

The story of export controls, from Obama through Trump and Biden, is one of discovering new possibilities on the fly. It is time for the U.S. to move past improvisation to strategy.

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Henry Farrell is the SNF Agora Professor at Johns Hopkins School for Advanced International Studies. Abraham Newman is a professor at the School of Foreign Service and government department at Georgetown University. This piece is adapted from their new book, "Underground Empire: How America Weaponized the World Economy," which will be published by Henry Holt on Sept. 12." [1]

1. REVIEW --- How the U.S. Stumbled Into Using Chips as a Weapon Against China --- Export restrictions on semiconductors and other cutting-edge tech have become an important foreign-policy tool, but the long-term consequences could be dangerous for America and the world. Farrell, Henry;
Newman, Abraham. 
Wall Street Journal, Eastern edition; New York, N.Y.. 09 Sep 2023: C.4.