Former Biden, Trump Officials Say More Actions Expected to Constrain China Tech Advances

Nazak Nikakhtar, acting head of the Bureau of Industry and Security during the Trump administration, blamed the deep state for a lack of urgency in confronting China, during a podcast interview with China Talk. Nikakhtar did not use that term, but said that it was hard for Commerce Department career officials to shift their thinking from promoting exports of goods to restricting exports or investment. Nikakhtar was previously a civil servant herself, working on antidumping and countervailing duty cases and negotiations with China.

She said, in addition to a bias toward inaction, "the other problem is there’s enormous industry lobbying. Industry will always lobby for its own interests," she said. She said that BIS, the Committee on Foreign Investment in the U.S., and other agencies need to regulate despite that pressure, instead of ending up at what she called a "middle of the road approach."

"They should hear what industry says, but not always accept it as true, and do their own due diligence," she said.

She described the bureaucracy's philosophy as: "We don’t want to disrupt too much." She questioned the logic of "small yard, high fence" -- the notion of placing strict export controls around a small set of advanced technologies -- and asked if the government should tackle a bigger yard, given circumvention.

Nikakhtar acknowledged that it's going take an effort to detangle the intertwined U.S. and Chinese economies, but scoffed at the squishiness of the term "derisking," which the Biden administration says is its goal rather than decoupling.

She questioned what the term "derisking" means, and asked whether it includes the practice of gradually decoupling over time from China or other non-market economies, distorting trade.

China Talk host Jordan Schneider, who received a master's degree in economics from Peking University, and is an adjunct fellow on tech issues at the Center for a New American Security think tank, noted that Cabinet members might disagree on what the definition should be.

Nikakhtar responded, "It was really disappointing in the Trump administration to just have Cabinet members fighting all the time." She said the president needs to be clear on what he believes CFIUS should do, including by forbidding mitigation agreements that involve Chinese companies because firms in China are too beholden to the Communist Party's directives.

"We can't just leave these Cabinet members to duke it out," she said. Disagreement on how to achieve objectives is one thing, she said, but she said all too often during Trump's years in office, Cabinet members disagreed on goals.

Podcast guest Peter Harrell, former White House senior director for international economics during the Biden administration, said it's fine for Cabinet members to have different views. "That’s why you need, ultimately, the president to make decisions," he said.

Harrell co-led the work that led to the February 2021 supply chain resilience report, which he argued has produced good progress on semiconductors and large-scale batteries, but less progress on critical minerals and pharmaceuticals and active pharmaceutical ingredients.

While Nikakhtar argued that the president needs to give agencies pretty specific marching orders on how to implement capital flow restrictions, outbound data restrictions, export controls and other tools to maintain American technological superiority -- even specifying priority sectors, Harrell said executive orders need to be constructed with department input.

"You can’t micromanage from the very, very top," he said, and the White House needs to get buy-in from assistant and under secretaries. He also said that after a report that follows an executive order is published, the same officials who worked on writing the report should work on execution.

Nikakhtar criticized the carrot-heavy approach of the Inflation Reduction Act and CHIPS Act, saying that the U.S. also needs to make sure China cannot underprice the manufacturing facilities the U.S. helped to launch with subsidies.

"Unless we signal very seriously to these industries, once you are up and running we are going to protect you from China’s predatory prices, I fear some of these industries won’t grow as quickly as we want them to and some won't grow at all," she said.

Harrell agreed. "We are going to have some barriers, whether it’s tariffs or some other barriers," he said.

Schneider asserted that there are trade-offs in government intervention to address geopolitical risk from Chinese technology, and pointed to licensing data released by BIS in July that showed the agency granted about $335 billion in applications for China-based Entity Listed parties between 2018 and 2023 (see 2407020040).

Nikakhtar said that's a perfect example, complaining that about 18 months after Huawei was put on the Entity List, the administration changed the licensing review approach to a case-by-case evaluation. She said case-by-case approaches historically have approval rates of more than 90%.

She said that the Dutch, whom the Biden administration pressed to stop selling advanced semiconductor-making equipment to China (see 2403270038), were asking: "Do all of your big export control rules have massive circumvention potential?"

Harrell said, "I do agree with Nazak, when we are seen as enacting very tough regulations and then creating lots and lots of loopholes, allies do notice that." He said that makes it harder to get allies to impose export controls that will cost their companies revenue.

Nikakhtar argued that the U.S. should not trade with China at all, because its distortions cause so much damage to other countries' manufacturing sectors. She said if the U.S. "totally decoupled from China," there would be a 5% hit to GDP in the short run, and "enormous gains in the long run" by running supply chains through market economies.

She said she's stunned that people are still reluctant to move their supply chains out of China.

Schneider questioned that estimate.

Nikakhtar responded that there's hysteria "about gradually moving away from China," and argued that she was able to get everything she needed in 2005, before China became such a big player in global manufacturing.

Schneider said, "I hear what you're saying, Nazak, but I also would not want to go back to living in 2005."

"You’re painting a very aggressive vision of what decoupling would look like," he added, and said it would be nice if the gains for firms selling to Chinese consumers and the gains for Americans getting cheap imports aren't wholly lost.

Schneider asked Harrell how the administration should write the rule on outbound investment and whether it should include passive investments. Harrell said it should capture investments of more than $1 million that are considered passive private equity or venture capital, but shouldn't restrict purchases of publicly traded securities of Chinese firms.

"If the U.S. government determines that it doesn’t want investors in company X, use the CMIC [Chinese Military-Industrial Complex Company sanctions list], and I think the Biden administration should be actively using CMIC for that purpose."

The interview was recorded before President Joe Biden said he wouldn't run for re-election, and Vice President Kamala Harris became the Democratic presidential nominee.

Harrell said he is "deeply skeptical" about Trump's proposed 10% tariff on imports from countries other than China, but said no matter who wins in November, he thinks there will be more steps taken in the next administration to manage the economic relationship with China, "to secure our supply chains, to mantain our technological advantage over China, and to build global diplomatic coalitions."