More Tech Competition Leverage, Export Controls Needed Against China, USCC Report Says

The U.S. should expand export controls against China and study the country’s efforts to dominate emerging technology sectors, the U.S.-China Economic and Security Review Commission said. In its 2019 annual report, the USCC painted a somewhat grim picture for the prospects of U.S technology competition with China, saying China is committed to maintaining a dominant economic role in trade negotiations and is focused on outpacing the U.S. in the artificial intelligence sector -- a key area of concern for upcoming U.S. export control regimes. To combat this, the commission made several recommendations to Congress to safeguard U.S. technologies, improve foreign market access for U.S. exporters and pre-empt Chinese attempts to undercut U.S. companies and sanctions.

Congress should direct the Commerce Department to extend export controls against China to cover Chinese subsidiaries in Hong Kong, the report said, and should review which technologies are subject to export controls for China but not for Hong Kong. That review should also assess how effective U.S. export controls are in preventing illegal tech transshipments from Hong Kong to China and “other destinations.”

Although the commission said Congress should consider increased export controls, it also warned of potential consequences. Controls on smart chips, for example, may “only accelerate China’s efforts to produce sophisticated chips domestically.” The commission did say, however, that China faces “nearly insurmountable” hurdles in its effort to develop comparable technology to that of the U.S., adding that China’s semiconductor industry “is still heavily reliant on foundational technology dominated by U.S. firms.”

While the U.S. leads in certain technology sectors, China has “accelerated” development of advanced technologies in an effort to decrease foreign dependence. Specifically, China is keenly focused on the AI sector and other emerging technologies, the commission said. Commerce is expected to release a proposed set of export controls for certain emerging technologies before the end of the year (see 1910290062), which is widely viewed as an attempt to restrict Chinese access to sensitive U.S. technologies.

But China’s “robust manufacturing base and government support” may allow it to commercialize emerging technologies before the U.S. does and “at a fraction of the cost,” the commission warned, which could have broad consequences for U.S. exporters. “These advantages may enable China to outpace the United States in commercializing discoveries initially made in U.S. labs and funded by U.S. institutions for both mass market and military use,” the report said.

China is already taking a “commanding position” in commercial satellite sectors. That effort has allowed the country to undercut some U.S. and other countries’ launch and satellite providers in the international market, which could “hollow out these countries’ space industrial bases,” the report said.

The commission urged Congress to direct the National Science Foundation and the Trump administration to study China’s influence in international bodies charged with developing standards for emerging technologies. The study should look into whether the standards are designed to “promote Chinese government interests to the exclusion of other participants,” the report said, adding that China’s “reinvigoration” of its state-driven approach to innovation “will pose a sustained threat” to the U.S. and technology exporters.

Meanwhile, U.S.-China technology competition and trade tensions have placed a heavier burden on U.S. companies trying to access the Chinese market, the commission said. While U.S. companies in China have complained about licensing delays and increased customs checks, the commission said China is employing other “harassment” tactics, such as “unwarranted tax investigations,” unannounced site inspections and uneven regulatory enforcement. As an example, the commission pointed to China’s investigation of FedEx (see 1906030036) after Commerce added Huawei to its Entity List and to China’s upcoming “unreliable entity list” (see 1908220046), which the commission said may target “foreign companies, organizations, and individuals” who took “discriminatory actions” against Chinese companies.

Although China said it is making moves to expand market access for foreign companies, respect intellectual property rights and end forced technology transfers (see 1910290020), the commission has seen little evidence. “China’s government has taken limited market opening steps,” the report said, adding that “these measures have been pursued in terms favorable to the Chinese government as opposed to the market, underscoring that any changes in China’s economic practices will continue to be controlled by the state.”

To better compete against Chinese technology companies and the country’s restrictive market access, Congress should extend a research and development tax credit to encourage U.S. technology manufacturing and innovation, the commission said. The tax credit should apply to “initial stages” of development that increases “the production of final and intermediary goods manufactured primarily” in the U.S., the report said. The tax credit should specifically benefit industrial sectors in which China “threatens the technological leadership of the United States.”

The commission introduced a host of other recommendations, including a congressional directive to the Treasury Department to report on how China’s “Cross-Border International Payment System” could be used to avoid U.S. sanctions. Congress should also raise the threshold for congressional notification of foreign military sales to Taiwan “to the highest tier set for U.S. allies and partners.”