Outbound Regime Could Have 'Trial' Year; Export Controls Causing Design-Out of US Tech, Experts Say

The Biden administration could first release its outbound investment screening regime as a trial period and then expand the restrictions to cover broader investments after the initial year, said Anna Ashton, director of China corporate affairs at the Eurasia Group. Ashton, speaking during an April 21 event hosted by the University of Virginia's Miller Center, also said current U.S. chips subsidies will fall far short of making up for lost U.S semiconductor exports to China, while other experts said they fear U.S. chip export controls (see 2210070049) will continue to cause foreign companies to “design-out” American technology and software.

Ashton, a former Defense Department intelligence officer, said it’s unclear how exactly the administration will implement an outbound investment screening program but said it could initially be “very narrowly tailored” with a focus on “monitoring where U.S. outbound investment is going” in China and less about actively blocking those investments. “But there's a good chance that that is going to be expanded,” she said, adding that the first year will be a “trial year.”

After the first year, “there will be a lot of pressure to expand it,” Ashton said. “I can assure you that there will be real political outrage over whatever isn't restricted in this executive order.” Some experts have suggested the administration take a phased approach to screening outbound investments, with the first phase featuring a mandatory notification regime that would require U.S. companies to report certain investments in China (see 2304130034).

Ashton said she has “big concerns” about defensive trade measures, including outbound investment restrictions and export controls, because of their unintentional impacts on industry. “We have a rush, like a race, to promulgate these policies in the name of making the U.S. more competitive and in the name of ensuring U.S. national security, but without really necessarily fully thinking through the spillover effects and consequences of some of these policies,” said Ashton, who previously oversaw the U.S.-China Business Council’s government affairs work.

She pointed to U.S. export controls on the semiconductor industry, which are meant to prevent China from acquiring advanced American semiconductor technology but are hurting the U.S. companies “responsible for the U.S. having that leading edge chip design.” Many U.S. chip firms affected by export controls “derive the majority of their global revenue from the business they do in China,” Ashton said. “So if China can't buy their chips, they have a massive reduction in global revenue, which in turn diminishes their ability to reinvest in their own research and development and stay on the cutting edge.”

The Biden administration has championed its efforts to introduce “offensive” measures to compete with China, such as funding and incentives for the semiconductor industry under the Chips Act (see 2303210026 and 2304050050), but Ashton and other experts have warned those measures aren’t enough (see 2304040048). “The U.S. subsidies are not equal to the market profits that they are cutting off,” she said. “Not even close.”

The U.S. doesn’t have the “industrial policy wherewithal” to compete with China, Ashton said. “I don't think any democratic system probably is going to ever be able to leverage capital and drive it via the state's direction the way that a non-democratic country like China can.” But she also acknowledged the U.S. has “cornered the market” on the most advanced chip technology, and that is “not easy to replicate.”

“China doesn't have the technology,” Ashton said, but it does have the facilities, labor force and an “enormous ability to funnel state capital into this endeavor, far beyond what the United States could ever get both [political] parties to agree to.”

Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, said there is a clear “trade-off” in imposing export controls and other restrictions to remain ahead of China. “The more that building in the U.S. means you can't sell to the Chinese market,” the smaller the “market is for your technology,” he said. “The U.S. is subsidizing you on the one hand, but they're restricting your market on the other, and that makes the U.S. less attractive as a place to build and design the tech.”

Chorzempa also said he’s “worried about the overuse” of export controls, which are causing American companies’ technology and software to “get designed out” of supply chains (see 2304200027). He said that’s already happened in certain areas of the chip design process, including the testing phase.

“The testing, making sure the chips are actually working, that is equipment where the U.S. was competitive, and now they're all designed out,” Chorzempa said. “Because if you use a little bit of U.S. technology, it's now tainted” and subject to U.S. export controls.

But Chorzempa also said he doesn’t believe China is yet on the verge of producing the most advanced chip technologies, saying that could take “at least 10 to 15 years, and it could be just never, because this is not a static finish line.” He added that many of the world's leading chip firms use technology that can be subject to U.S. export controls, pointing to Netherlands-based leading chip firm ASML, which uses lasers produced by California-based Cymer, and Japan’s Tokyo Electron, which also uses “a lot” of U.S. technology.

“Those are two of the top five semiconductor equipment manufacturing companies,” Chorzempa said, with the other three being American firms: Lam Research, KLA and Applied Materials. “So the U.S. has an incredible choke point in this area.”